In
another week of extreme volatility, the broader markets finished on a positive
note and gave you a level to buy against, but there may still be more headwinds
ahead. Among those reasons for the
market sell-off, are a slowing Chinese economy, possible recession in Europe,
free-falling oil prices, analysts concerned about lower guidance, Ebola,
Russia/Ukraine, ISIS, Fed rate hikes and just about anything else you can think
of. My opinion is that there is no
fundamental change in the US economy and I think what you’re going to hear from
the high quality companies is that sales, revenues and earnings are strong and
will continue to be so, and that the higher US dollar is offset by sharply
lower oil prices.
These last three days of trading
were very important, starting with Wednesday. If you remember, that was the day that the Dow dropped 460
points and the S&P plunged 54 points almost instantaneously…only to then
immediately rally back and finish the day relatively strong. A lot happened on that day that
contributed to what I believe was the market capitulation and low for the
move. On Wednesday, there was a
string of bad news that hit the market within a couple hours of each other,
which sent stocks in a free fall.
First, retail sales numbers came in very light, especially when you back
out iPhone sales. That was a
concern because a lot of investors expected consumers to use the money they are
saving on lower gas prices, to go out and buy goods. Then there was news that Abbvie was pulling out of deal to
buy Shire, which would have given Abbvie the chance for a tax inversion. Shares of Shire plunged about 30% on
the news, which caused major losses for hedge funds that bet on a deal getting
done. Losses on that trade forced
those funds to liquidate other assets, sending stocks lower on the open. But what I believe to be the biggest
culprit of the drop was news that another Dallas Nurse had contracted Ebola,
which we later learned had actually boarded plane just 2 days prior to the
diagnosis. The Ebola story broke
at roughly 3:30am CT, which sent the S&P futures down about 32 points over
the next hour. On top of that, I
also saw major capitulation in buying of treasuries as the 10-year yield sank below
2% for the first time since June 2013, only to snap right back and end the day
around 2.10%. Volume on Wednesday
in both stocks and treasuries were at their highest levels in more than three
years. When I look for capitulation,
I look for the market or stock to make a dramatic drop on extreme volume, only
to rally back, usually to end the day sharply higher. While there wasn’t really a follow through on Thursday,
Friday’s price action was encouraging.
Instead of dropping sharply, stocks rallied sharply, with the S&P
closing up 24 points or 1.29%, ending the week almost 4% off the lows on
Wednesday.
The
other market that I was watching this week was crude oil, which I believe has
bottomed out at $80 barrel. Oil
hit a low of $79.78 on Thursday morning, only to gain back 3.1% to close at
$82.25 on Friday. It was no
surprise that once oil bounced off $80, we saw the stock market rally, led by
the energy and transport names that have been so beaten up over that last
month. Off the lows on Wednesday,
Cheniere Energy (LNG) rallied 17%, EOG Resources (EOG) soared 12.5%, Delta
Airlines was up 14.2% and Union Pacific (UNP) gained 10.6%. I believe these two sectors offer the
long-term investor the best risk/reward right now because they have been so
beaten down, mainly due to fears of Ebola. On Thursday, Delta announced better-than-expected Q3
earnings, which sent the stock higher.
But the most important note on the call wasn’t what they did last
quarter, it was more about what they expect going forward. Delta expects fuel costs, which make up
about 45% of their input costs, should drop about $0.20/barrel to $2.70 from Q3
to Q4, prices they haven’t since 2010.
While lower fuel costs are important, the most important thing
management said on the conference call was that they have seen 0 impact from
the Ebola scare. Remember, the
transportation sector had been hurt the most from the Ebola headlines, and when
you have stocks that trade on fear, historically they have been great buys, and
this time is no different. You
know I love Delta, but they do have the most exposure to Africa, so for a more
domestic play, I like Southwest Airlines (LUV). As for energy names, I think you have a great opportunity to
buy EOG Resources and Cheniere Energy, my two favorites. EOG will give you exposure to both oil
and natural gas, while Cheniere is strictly a natural gas play.
Hopefully
you had a chance to buy the stocks that you have been waiting to buy. If you missed out on some of those
names that have already rallied 10-15% from the lows on Wednesday, don’t chase
these names because I think you’ll get another chance. While I do think the low for this move
in, I can easily see the market push lower early next week one last time. The 200-day moving is the key level to
watch on the upside. That was
support on the way down, so it is now resistance on the way up. The longer the market stays below that
level, the more negative it is for stocks. Everyone who was waiting for a correction to begin buying
had their shot this week. I did
some buying and hopefully you didn’t get scared away and bought yourself. This coming week is important for where
we go the rest of the year. We
really need to see the S&P break through the 200-day moving average of
1906; otherwise it could be a rough end to the year.
Just
like it’s bad idea to panic and sell, it’s also a bad idea to panic and buy
thinking that you missed your chance.
Be patient and wait for another opportunity in the energy and
transportation names. If another
negative Ebola headline comes out, you will get another chance to buy. This is the sell-off you have been
waiting for, and if you are in for the long haul, you should have your list of
stocks ready to go. If you already
have enough energy and transportation in your portfolio, look to buy stocks of
companies that report strong quarterly earnings like Honeywell, CSX, Goldman
Sachs, and Alcoa just to name a few.
For full disclosure, on Wednesday,
I added to my positions in KMI, COP and TWX, and added Darden Restaurants to my
portfolio. This week, I will be
looking to buy EOG Resources around $86 or Cheniere Energy around $65.
My current positions: Long
Ford (F), Gilead Sciences (GILD), Starbucks (SBUX), Macy’s (M), Boeing (BA),
Google (GOOGL), Facebook (FB), Coach (COH), Citibank (C), Delta Airlines (DAL)
Biogen Idec (BIIB), Whole Foods (WFM), Wells Fargo (WFC), General Motors (GM),
ConocoPhillips (COP), Kinder Morgan (KMI), Time Warner (TWX), Palo Alto
Networks (PANW), Twitter (TWTR), NXP Semiconductors (NXPI), Lockheed Martin
(LMT), and Darden Restaurants (DRI).
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