Range Bound

3/29/15

There is a lot weighing on the market right now that is keeping stocks from pushing higher. Whether it’s the strength of the US Dollar, expectations of rising interest rates, instability in the energy markets and energy companies, or widespread thoughts that stocks are generally overvalued, equities are having a hard time gaining any momentum. However, over the last few weeks, the technicals are holding up and are giving you a range to trade against if you are looking at a broader picture. The first indicator that I am looking at is a head-and-shoulders formation on a daily chart of the S&P 500. If you look at the chart, the market has a left shoulder with a high of 2094, a head at 2120 and the right shoulder at 2115. On the downside, 2040 has been a level that has held three times since the beginning of February, most recently on Thursday. If the S&P falls below that level, the next support comes at 2020, which would be about a 5% pullback from all-time highs. Analysts are very negative on the market right now, which is easy to be considering stocks are fairly close to their all-time highs, but a lot of the arguments analysts are making, are the same ones that could have been made for months. Instead of looking at these arguments as a reason to stay away, use these arguments as a reason to buy. I don’t see the market trading above 2120 in the next couple months because there just isn’t any catalyst to push it higher. Instead, I see the market trading in the range of 2020-2100, but even though the broader market will range bound, there will still be plenty of stocks and plenty of sectors that will outperform.

At the beginning of the year, analysts expected Q1 earnings to be up 4.20%, however, with the strength of the US Dollar and the fall in energy prices, expectations for Q1 earnings have fallen to -4.6%, mainly due to an expected 64% drop in earnings for energy companies. I believe these lowered expectations are actually what will move the market to new all-time highs by the end of May. I think companies are better hedged right now against a stronger US Dollar and lower oil prices, that Q2 and FY15 guidance will be stronger than expected. As we get Q1 earnings starting in a couple weeks with Alcoa, be ready to buy high quality stocks that offer strong guidance, because those companies are the ones with strong management and balance sheets, and will be able to continue to weather the storm, even during interest rates hikes, which will likely occur in June or September. Healthcare and financial stocks are expected to post the strongest earnings growth; with leaders like Aetna, United Health, Wells Fargo and Morgan Stanley all names to keep an eye on. As earning season kicks off, I will write about the stocks that I recommend paying attention to.

One area of the market that has already sold off sharply but which represents a great area of opportunity is the biotech sector. Since hitting a new all-time on March 20^th, the iShares Biotech ETF corrected 11% last week alone. These are very common moves with the highly volatile biotech sector, and every time since 2008, it has been an opportunity to buy…this time is no different. When I see biotech sell off 10% in a matter of a couple days, given no change in stock, sector or market fundamentals, I look at the move simply being all about profit taking on stocks that have rallied more than any other sector in the market. I have always liked the bigger biotech companies like Gilead, Regeneron, Celgene, Amgen and Biogen, but if you want a broader diversification in biotech, you can just buy the IBB, which is a market cap weighted ETF which gives you exposure to biotechs of all sizes. A lot of these names are still very cheap compared to historical valuations, and unlike during the Nasdaq bubble, these companies have much stronger drug pipelines.

Unless you are dying to own a particular stock, the next couple weeks would be a good time to evaluate your portfolio. If you have losses, look at those stocks and pretend that you are breakeven right now. If you think there are enough catalysts and believe in the company, then keep it. However, if you are holding on only because you don’t want to take a loss, you’re better off selling the position and raising cash for when another good opportunity comes along, and if the stock ends up rallying, you can always get back in. Earnings season starts up again in a couple weeks and will often plenty of opportunities.

For full disclosure, I sold all of my holdings in Ford (F) and Delta Airlines (DAL). I sold Ford to raise cash and I sold Delta with an 18% gain because the airlines stopped trading on fundamentals and are solely trading opposite of crude oil. Additionally, while Delta has the lowest fuel costs among all airlines, they have currency headwinds with a stronger US Dollar, and I will look to buy it back around $40.

My current positions: Long Gilead Sciences (GILD), Starbucks (SBUX), Macy’s (M), Google (GOOGL), Facebook (FB), 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), Regeneron (REGN), Restoration Hardware (RH), Apple (AAPL), and Sanderson Farms (SAFM).

Jeff Lewison