Although oil has rallied 20% in the last two weeks, and with
hiring on the rise, it is no surprise that the S&P is rallying back from
the January sell-off to within just 1.8% of all-time highs. However, I am not
ready to say that we’re in the clear and are headed for new all-time highs. A
key resistance level in the S&P since the year began is 2065, and although
the market traded through that level Friday, on the heels of a strong jobs
number, equities were unable to hold that level and closed down 7 points at
2055. Friday was the fourth time this year, the S&P attempted to close
above that key 2065 level, and is now the fourth time it failed, each time
leading to a sell off of at least 75 points. I don’t see this time being any
different. Most of the big earnings reports are already behind us, the US
dollar continues to rise against most foreign currencies, which is hurting
profits, oil volatility remains elevated and most of the economic data out of
the US has been mediocre. I also anticipate oil prices pulling back again, the
dollar continuing to rise and interest rates heading lower. Until the S&P
climbs above 2065, and holds that level, I foresee the markets to continue to
trade sideways.
One sector that has been hit hard in the last couple weeks
is one area of opportunity in this sideways market. With oil’s recent rally,
airline stocks have been in sell off mode, but I think it’s actually time to be
buying these airlines, not sell them. In the last two weeks Delta is down 11%,
Southwest Airlines dropped 6.4%, American Airlines sank 14.3% and United
Airlines lost 10%. While I believe oil has bottomed (and oil stocks have for
sure bottomed so start looking at those), I fully anticipate that it will push
back down towards $45, which will only move the airlines higher. Each airline
stock that I mentioned hit new all-time highs two weeks ago, and now find
themselves in correction territory. While over the long haul, airlines are
heavily levered to oil prices, short-term rallies in oil should not push you to
sell, but should give you a chance to buy. Some common themes from all of the
earnings conference calls are that ticket prices are not going to get cheaper
just because oil is lower, and capacity will remain stable. If you remember
back when the airlines needed a bailout, they all increased capacity levels on the
back of lower oil prices, and as soon as oil went higher, people stopped flying
and profits sank. This time around, airlines are better run and are not taking
any chances. For instance, Delta announced that they will be using excess cash
to pay down debt and pay back shareholders. If you have been waiting to get
into some of these airline stocks, now is a great time to do so, so have the
trigger ready.
Earnings continue next week with Masco reporting on Monday.
So far, markets have gotten mixed results from the housing industry, but we
should get more clarification once Masco reports. The company is the ultimate
housing play, being involved in everything from cabinets to paint to
insulation, so they are tied to new and existing housing performance. Masco
does have European exposure where the stronger dollar could impact earnings,
but I expect good results from them and would be a buyer on a breakout above
$26.50. On Tuesday, biotech giant, Regeneron reports and while I like the name
long-term, I would not recommend buying before they report. Last week Gilead
reported huge numbers and initiated a dividend and buyback, however the stock
tanked 9% after announcing that discounts for their best-selling drugs may be
steeper than anticipated. Other biotechs like Celgene and Amgen both reported
strong quarters but are also trading below where they were before reporting
earnings. Last time Regeneron reported, the stock fell sharply, only to rally
back a few days later. If Regeneron drops on earnings again this quarter, I
would highly recommend you add them to your portfolio.
A number of headwinds remain in the market. The US dollar
continues to climb against most other currencies and some of the recent US
economic data have not been as strong as expected. Furthermore, stories
continue to come out of Europe about Greece looking to exit the Eurozone, which
still sends US equities lower (the S&P dropped 13 points in the matter of
minutes on Wednesday before the close). Most investors have a sell first, ask
later mentality, so use that to your advantage. Once investors realized that
what is happening with Greece really doesn’t matter, stocks rallied back up as
if nothing ever happened.
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), United Rentals
(URI), long US DOLLAR.
Jeff Lewison
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