We’re just a few weeks into the New Year, and already the
markets are more volatile than just about any point last year except for during
the Ebola scare in October. But despite that volatility, the S&P has shown
its resiliency and is only down 2% since January 1, while oil is down 8.9%,
gold is up 8.2% and the yield on the 10-year Treasure Note has dropped 33 basis
points to 1.84%. US equities have also been hit with weak bank earnings for
JPMorganChase, Citibank and Bank of America, relatively unimpressive retail
sales figures, declined global GDP forecasts and most recently the disaster in
the currency markets led by the Swiss National Bank. Also becoming a major
concern for investors are much-anticipated layoffs out of most oil and gas
companies, who have to cut production because of rapidly falling oil prices. I
said weeks ago that this bull market cannot continue to consistently move
higher until oil finds a bottom and stabilizes. While oil finally had a
positive week, I still don’t see any evidence that a bottom is in. $33.20 was
the lowest price that oil has traded at in the last 10 years, and it really
wouldn’t surprise me one bit to see it trade there again. For me, I need to see
oil trade back above $60/barrel, which represents a 23% gain from Friday’s
close, and while that would be a big gain, is only a level oil traded at just 4
weeks ago. What’s the point you ask? Get used to the volatility until oil claws
back, and don’t expect any major rallies until that happens.
Having said all of that, you probably think that I am
bearish this stock market…well, I’m not.
I’m still a market bull and feel that a lot of stocks are fairly valued
and have a lot of room to the upside. Remember, I am writing this with a
long-term time horizon in mind. However, in the short-term, you should know there
are a lot of possible headwinds that could negatively impact equities. On
Thursday, the ECB is widely expected to begin it’s own round of quantitative
easing, a move that could certainly rock the markets if they say the wrong
thing. The big question on investor’s minds is how large the easing will be.
Anything above one trillion euros will be a positive for equities, but if they
announce a figure lower than that, I expect stocks to sell off and the euro to
rally sharply simply because it wouldn’t be enough to improve the European
economies. Thursday’s ECB decision will likely be the biggest market mover so
far in 2015 so I would not advise buying or selling until after their meeting.
The one thing I will say is that sometimes other markets can foreshadow what
will happen. Gold, which usually moves higher when equities move lower, meaning
when owning equities becomes to risky, has actually rallied sharply since the
Swiss National Bank decided to remove the cap on the franc. When I look at that
move in gold, it seems to be telling me that the ECB will not ease as much as
they should and that the reaction in equities will be negative.
In addition to the ECB meeting on Thursday, earnings season continues
this week will feature reports from a few companies that I think you need to
pay attention to. After a pretty good report out of Schlumberger (SLB) last
week, I am watching Halliburton (HAL) on Tuesday to find out if the drop in oil
is really as bad for US companies as it seems. Halliburton is more exposed to
the drop in prices than Schlumberger, but if they say things are better than
analysts expect, I would look for oil stocks to continue to climb. Halliburton
seems to have put in a short-term double bottom around $37, so use that level
to buy against, if you want to be in the name. IBM also reports after the close
on Tuesday if anybody even cares anymore. I think the last time IBM reported a
strong quarter was when I was 10 years old. The company has been the worst
performer in the Dow over the last 2 years, and I see no signs that it won’t
continue. However, I’m going to go out on a limb and say that expectations are
so low, that IBM could actually beat this quarter, and you could see the stock
rally. Even so, I would stay away. The only other report that I am watching
closely this week is from United Health (UNH) on Wednesday because they will be
the ultimate tell on the direction healthcare stocks head in 2015. United
Health has absolutely exploded since the beginning of last year along with many
other healthcare stocks, and I don’t see any reason that won’t continue. If you
get a pullback in UNH, I would be a buyer.
While earnings are important this week, everything is going
to rely on what the ECB does on Thursday.
If they decide to finally do the right thing and hit that 1 trillion euro mark,
it will be risk on again and I would expect equities and oil to rally. Anything
smaller than that, and it could be another downdraft in the markets. Prior to
the meeting, pay attention to the gold market because it could end up signaling
what the decision will be.
Since my last writing, I did close out my long calls in
Solar City which was a loss, as well as my short crude oil position. At the
same time, I am long the US Dollar, but will be taking half of that position
off prior to the ECB meeting, and long March heating oil.
My current positions: Long
Ford (F), Gilead Sciences (GILD), Starbucks (SBUX), Macy’s (M), Google (GOOGL),
Facebook (FB), Delta Airlines (DAL), 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), Darden Restaurants (DRI), Celgene (CELG), Mobileye
(MBLY), Jack In The Box (JACK), Under Armour (UA), Masco (MAS), long US DOLLAR,
and LONG HEATING OIL.
Jeff Lewison
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