Some Risk For Your Portfolio

5/31/15

Sometimes every portfolio needs to take on a speculative or more risky position in order to reap huge rewards, which brings me to 2 crazy trades that may be just too crazy to pass up. Both of these stocks are going in complete opposite directions, but that could change very quickly. So, if you’re looking for a way to spark your portfolio, consider buying Michael Kors (KORS) and/or selling Shake Shack (SHAK).

On Wednesday morning, Michael Kors reported another horrendous quarter with awful guidance, reporting earnings growth of 15% to $0.90/share vs. already reduced estimates of $0.91/share. At the same time, the company missed on weak revenues estimates, reporting growth of 18% to $1.04B vs. $1.08B. It got even worse for Michael Kors when they reported same-store sales actually DECREASED 6.7%, well below expectations. After I saw that sales number I had to look twice thinking it was an error, but nevertheless, it was no error. Management used every possible excuse they could to blame for the weak sales, saying the miss was caused by a stronger US Dollar and lower tourist traffic, bad winter weather, shutdowns at the ports, etc… Unfortunately for Kors, these are the same excuses that all of their competitors and every other company in world used as their excuse for missing sales, however almost none of them missed as badly as Kors, which leads me to believe that there is something bigger going on here. Another reason to believe that the problems they had last quarter are not behind them is because of the weak FY16 guidance they gave, expecting $4.75B in revenues and $4.45/share in earnings. Those numbers were also well below analyst estimates of $4.70 in EPS and $5.05B in revenues. I also didn’t even mention that operating expenses are rising and due to steep discounts because of excess inventory and weak sales, margins compressed more than expected as well.

So why on earth do I think Michael Kors can rally? I think things at Kors have gotten so hideously bad, that they just can’t get any worse. Fashion trends are always changing and with some changes of their own, Kors could once again dominate the high-end market. This used to be a stock that traded at 50x forward earnings, however with the stock selling of 25% on Wednesday, Kors trades at just 11x FY16 earnings, which is very cheap considering they just reported FY15 EPS and revenue growth in excess of 30% each. Additionally, on a constant currency basis, same-store sales increased almost 12% YoY, with the company seeing big growth in their e-commerce business. While their US business is slowing down (revenues were still up 20%), their international business has seen huge growth with revenue out of Europe and Japan up 70%. Their e-commerce business is where the company can really gain steam. Management has said that will be the focus going forward, committing to in-store mobile and social media presence and introducing Kors concierge, where store associates will have mobile devices to personalize the shopping experience and increase customer engagement. Kors has done a nice job building their balance sheet, increasing their cash position to almost $1B with no debt. They are buying back stock and just authorized an additional $500M buyback through 2017.

On a technical perspective, the stock has dropped so much that you have to look at it from a lifetime perspective, which for Kors, started in 2012. The 23.6% Fibonacci retracement is $41.81, which is a level the stock hasn’t closed below since August 2012. With Kors closing on Friday at $46.50, I would wait until it gets closer to $44 to pull the trigger if you're trading it and use $41.81 as your risk tolerance, so don’t take it much lower than that. For an investment, just buy on Monday and look for a rally back up to $57, giving you about 22% upside.

At the opposite end of the spectrum is Shake Shack. Much like a lot of the IPOs in the last year, Shake Shack is trading at an insane valuation shortly after going public. On January 30, Shack opened for trading at $47 and is up 76%, after being up 106% on Monday, trading to an all-time high of $96.75. Both Mobileye, GoPro, and El Pollo Loco acted the same way when they went public, rallying more than 100%, only to crater soon thereafter. The good new for Shack is that despite its strong earnings growth, its only trading at 552x FY15 earnings with a price-to-earnings growth rate of 20. To give you perspective, Jack in the Box has a market cap of $3.25B comparable to Shack, trading at just 24x next year’s earnings and PEG ratio of 1.73. Even Chipotle, a restaurant stock, often seen as expensive, is only trading at 30x FY15 earnings, with a PEG ratio of 1.7. Each Shack restaurant is worth about $40M, while each Starbucks is valued at just $2.5M. Shake Shack’s management recently announced new expansion plans, however also capped the number of US locations they plan to open at 450. Did I forget to mention that with the company’s current $3B market cap, ] they reported Q1 revenues of only $38M and sales growth of 11.7%? Last quarter, Jack in the Box (again, same market cap as Shack) reported revenues of 10x as much.  

There is already an incredible short interest in Shake Shack with about 40% of the shares held short, so any rally in the stock is only caused by a short squeeze and has absolutely nothing to do with fundamentals. But with that said, this stock can really move sharply higher for no reason, as it’s done all year long and did on Friday. Another reason the stock is so wildly traded is because options have yet to price due to the only 12M shares outstanding. At the end of July, Shack will have a lock-up expiration that will almost certainly lead to significant selling pressure, as you saw with Go Pro, Alibaba, Mobileye and all of the others. There is no question that Shake Shack is a very well run company, with a cult following, great food and long-term expansion plans (with new locations and the recent rumors about the company adding chicken to their menus or opening restaurants named Chicken Shack). However, at the ridiculous valuation that Shack currently trades at, more money can be made selling the stock rather than buying it.  

Shack rallied 9% on Monday for again, absolutely no reason at all, so I recommend waiting until the stock moves back closer to $100 to sell it short. Based on Fibonacci analysis, I don’t see Shack rallying much higher than $105 and if you love shorting it at $100, you’ll love shorting it even more at $105. So if you’re ready for this trade, put half of your position on between $95-$100 and sell the other half if it hits $105.    

My current positions: Long Gilead Sciences (GILD), Starbucks (SBUX), Facebook (FB), Wells Fargo (WFC), ConocoPhillips (COP), Time Warner (TWX), Twitter (TWTR), NXP Semiconductors (NXPI), Lockheed Martin (LMT), Darden Restaurants (DRI), Celgene (CELG), Mobileye (MBLY), Jack In The Box (JACK), Under Armour (UA), United Rentals (URI), Regeneron (REGN), Restoration Hardware (RH), Apple (AAPL), Southwest Airlines (LUV), Dow Chemical (DOW), L Brands (LB), Dr. Pepper Snapple (DPS), Costco (COST) and long UnitedHealth Group (UNH) JUNE CALLS, Mobileye (MBLY) JUNE CALLS, and Apple (AAPL) JUNE CALLS.

Jeff Lewison

Jump Aboard the Friendly Skies

5/25/15

With earnings season winding down, a lot of the focus is going to be put on the daily macro-economic news. Each piece of US economic data is going to be heavily analyzed to determine how it will impact the Fed’s decision to raise rates. As of now, the futures market is indicating a roughly 54% probability that a rate hike will begin in December. That’s important to note because the S&P has priced in a December move in rates. If any data comes out that could indicate the Fed moves sooner, the S&P will surely fall. Although rates will be moving higher, I don’t see this as a reason to worry because the Fed will be smart about this. Janet Yellen has already indicated that just because they begin raising rates, doesn’t mean it will happen quickly. It could take years for the Fed to increase rates to normalization, and they will only do so as long as the economy is strengthening, which would be positive for equities. For now, be disciplined in your stock selection and look for companies that are undervalued.

The big story last week was the decimation of all the airline stocks, with the industry losing $10B in market cap on Wednesday alone. While they all probably should have dropped, none of them deserved to fall as much as they did.  On Wednesday morning, Southwest Airlines (LUV) sent investors running scared, selling any and all airlines, after they announced a slight, and I mean slight, increase in capacity. Southwest announced that they plan to increase capacity from 7% to 8%. That’s right…the 1% increase in capacity was enough send the stock down about 9%, with American Airlines and United Airlines faring worse. Its almost as if Southwest never said a word about 7% capacity expansion this year, and out of nowhere said they would increase capacity by 8%. That news brought back images of when all of the major airlines got ahead of themselves, leaving many to file bankruptcy. When one airline raises capacity, others tend to as well for fear of missing out on customers. That in turn may lower ticket prices, which investors believe will automatically lower margins, reduce revenues and most importantly, reduce earnings. My opinion is that this past week seems to have been one of those situations where investor’s first instincts was to sell and then ask questions later.

I think this sell-off in the airlines gives you a great entry point for not just a trade, but also a long-term investment. Investors are forgetting that airlines were still making a lot of money with oil trading at $100/barrel, and although the commodity has rallied sharply off the low, it’s still only trading around $60/barrel. The lower gas prices and 5.4% unemployment rate is also leading to very strong demand with the industry expecting record traffic this summer, looking for a 5% increase YoY. If ticket demand remains high, which I don’t see any reason it wouldn’t, airlines don’t have to worry about lowering ticket prices to attract fliers, which should keep margins stable. Additionally, fuel costs, which is the largest expense for airlines, has dropped by about 35% over the last year. I understand the reason for worry about airlines announcing capacity increases, but I find it hard to believe that the same airlines that have fought for years to get back to strong growth rates, are going to just go crazy and let all of that success unwind.

There are a lot of airlines to choose from and not all are created equal. My three favorites in the industry are Jetblue (JBLU), Southwest and Delta (DAL), and I believe all three are strong buys right now. Jetblue is a leading low cost airline that flies mostly domestically, which will benefit from the strong US dollar. The stock is trading at just 10x forward earnings and has a PEG (price-to-earnings growth rate) of just 0.24. Like Southwest Airlines, Jetblue has strong customer loyalty with a lot of in-flight perks. On a recent conference call, management cited that they have priced in revenue and earnings growth for $90/barrel oil, so with oil trading at a third of that, the company is poised for continued success. Additionally, the company has shown that it can increase capacity faster than the industry average, while continuing to grow revenues. On a technical basis, the stock sets up well. Since crossing above its 50-day moving average, Jetblue has not fallen below that level, rallying off of it the three previous times. The 50-day MA is $20.01, which had also been previous resistance before the company reported strong earnings on April 28, and now acts as support. With the stock down about 10% from all-time highs, I like Jetblue to rally again.

Southwest Airlines is the only one that I own right now and furthest off all-time highs, falling 22% since the end of January, with 12% of that move coming last week. On Wednesday, the stock dropped 9% on 4.5x average volume, which to me indicates a flush out. At $36.86, the stock is trading above the 50% Fibonacci retracement of $36.32, which I see holding. Like Jetblue, Southwest flies mostly domestic, so it will also benefit from a strong US dollar, sports a forward P/E of 10.13 and a PEG of 0.37. I think you can buy 50% of your position right now, and then wait for a rally to $39, which has been previous support. If the stock gets above $39 and holds that level for three straight days, then buy the other 50% of your position.     

Lastly, the other airline I like is Delta. The company is among the cheapest of all the airlines, trading at less than 8x forward earnings with a PEG of 0.49. While Delta gets more than 25 of its revenue from overseas, they recently announced that they will be cutting international capacity to compensate for a strong US dollar, which should go right to the bottom line. Delta also owns their own refinery business, which gives them a huge advantage with lower fuel costs than their competitors. Delta sets up nicely, closing at $43.18 on Friday. There is a lot of support around this level, with $43.07 being the 61.8% retracement and $43.10 being the 200-day moving average. If that fails, you don’t have a lot of risk, with additional support at $40.60, a level the stock has held since gapping above that price on November 4, 2014. Delta is already 15% off all-time highs so the risk/reward sets up well.

The bottom line is that the selling pressure that we saw in the airlines last week was way overdone and not justifiable. But use other people’s pain for your gain and jump aboard the friendly skies of Jetblue, Southwest Airlines and Delta.

My current positions: Long Gilead Sciences (GILD), Starbucks (SBUX), Facebook (FB), Wells Fargo (WFC), ConocoPhillips (COP), Time Warner (TWX), Twitter (TWTR), NXP Semiconductors (NXPI), Lockheed Martin (LMT), Darden Restaurants (DRI), Celgene (CELG), Mobileye (MBLY), Jack In The Box (JACK), Under Armour (UA), United Rentals (URI), Regeneron (REGN), Restoration Hardware (RH), Apple (AAPL), Southwest Airlines (LUV), Dow Chemical (DOW), L Brands (LB), Dr. Pepper Snapple (DPS), and long UnitedHealth Group (UNH) JUNE CALLS, Mobileye (MBLY) JUNE CALLS, and Apple (AAPL) JUNE CALLS.

Jeff Lewison

Don't Be Greedy

5/17/15

It is very easy to say that a correction is coming when stocks are sitting at all-time highs. And for the last year, every analyst that made that prediction had been dead wrong…and will continue to be dead wrong. I still don’t really see any reason for stocks to drop 10% (the level that defines a market correction), given how well the market has performed even with oil rallying, the US dollar soaring and the US economy stagnant. Having said that, this is the most bearish that I’ve felt during this bull market rally, and over the last couple weeks, I have been raising cash on rallies, preparing for no more than a 5% drop in the S&P down to 2009, which is the 61.8% Fibonacci retracement. That’s not to say that I think the market is going straight down because as I have been writing over the last month, as long as the IBB and IWM hold $133.40 and $120.74, respectively, the S&P isn’t going to fall apart. But I believe it is more likely that we get a 5% drop before getting a 5% rally. When I look at this market, I don’t really see the leadership from anywhere like I have in the past. The Nasdaq is about 1.5% below the April highs, with Apple, Facebook, Intel Microsoft, and the semiconductors all down at least 3.5% from their highs. The aforementioned IBB and IWM are off 5.1% and 3% each and the Spider healthcare ETF (XLV) is still 2.2% from all-time highs. Retail stocks have reported less than stellar earnings blaming everything from the weather, to the US Dollar to the west coast port shut down, so they are not providing any leadership either. Nor are the transports, which get slammed every time oil rallies 1%. I am in the camp that says that treasury rates will pull back from recent levels, which should negatively impact the financials, so I don’t see the leadership coming from them either. Without true leadership that can be counted on to rally this market, I can’t see stocks moving much higher, so it may be a good idea to prepare for a pullback by raising cash to buy stocks cheaper.

Retail earnings continue this week, starting on Monday with Urban Outfitters (URBN). Last quarter, these guys reported a $0.03/EPS beat along with better same-store sales comps and raised guidance, sending the stock up 11%. Since then, along with every other retailer, the stock has pulled back and is just $0.09 higher than when it last reported. Based on the technicals, the stock is no-man’s land and could really go either way. Based on the fundamental story that retailers aren’t seeing the sales lift they expected from cheaper gasoline, and knowing the impact that the poor winter weather and stronger US dollar has on retailers, I would stay away from this one too.

On Tuesday, we’ll get earnings from Dick’s Sporting Goods (DKS), TJX Companies (TJX), Home Depot (HD), and the largest retailer in the world, Walmart (WMT), before the bell. Out of all of these, I actually believe at 16x EPS, Walmart could be the big surprise. The stock is down about 8% YTD and is holding a key technical level of $76.94 (23.6% Fibonacci retracement). I think expectations are so low that all they can do is go higher. I also think their new free-shipping subscription based service for $50/year will allow them to increase online sales and margins. As for the others, Home Depot is best of breed and is a great long-term holding, but I would hold off until after earnings and see if you can get in around $105. I do like TJX, but not enough to buy before they report. I was recently in a Dick’s Sporting Goods to buy a new pair of Reef sandals that I saw online…the only problem is that the only brands they carried in the store were Under Armour and Nike so left empty handed. Avoid Dicks and buy Under Armour and Nike, instead.

Target will report before markets open Wednesday, followed by L Brands when the market closes. Both of these companies are operating extremely well and Target has been red hot. They have a great turnaround going and I expect them to continue to gain marketshare from competitors. Options are looking for a 4% move, so I think you can buy Target prior to earnings. There is a lot of support at $73.01, which is the 61.8% retracement, which gives you a maximum risk of 7% from Friday’s close. I currently own L Brands and will be holding it through earnings, which I recommend you do as well if you own it. The options market is pricing in a 6% move, so I can’t recommend buying the stock prior to reporting, but listen to what management says about future same-store sales and how they view consumer spending going forward. As long as they sound confident and maintain or raise full year guidance, you can be in this name.

For the rest of the week, Best Buy reports on Thursday and Foot Locker reports on Friday. Instead of buying Best Buy, you might as well buy Apple because as Apple goes, so goes Best Buy’s sales. Instead of buying Foot Locker, buy Under Armour or Nike.

This will be another week of important retail earnings. By Friday, we should have a very good idea of how strong the consumer really is. I don’t have very high hopes for retailers, but if I have to pick one going into earnings, I would buy Walmart first and Target second.

Continue to watch the IBB and IWM. Those markets will turn lower before the S&P does, and without their leadership, along with the lack of leadership from tech and healthcare, transports, small caps and biotech, I am recommending taking some money off the table and look for a better entry point, because you can always get back into the stock. If you love the stock that you are in now, ask yourself, “if I sell today, can I get back in at a lower price tomorrow?”

This past week I sold out of my entire positions in Palo Alto Networks (PANW) and Masco (MAS) to raise cash and wait for a better entry point for stocks. I also believe that in order for Palo Alto to continue its impressive run, they will really need to blow out its quarterly earnings when it reports on May 27. I think the stock has gotten ahead of itself but still love the cyber security space, so I will be looking to put some of that money to work in FireEye at $38.

My current positions: Long Gilead Sciences (GILD), Starbucks (SBUX), Facebook (FB), Wells Fargo (WFC), ConocoPhillips (COP), Time Warner (TWX), Twitter (TWTR), NXP Semiconductors (NXPI), Lockheed Martin (LMT), Darden Restaurants (DRI), Celgene (CELG), Mobileye (MBLY), Jack In The Box (JACK), Under Armour (UA), United Rentals (URI), Regeneron (REGN), Restoration Hardware (RH), Apple (AAPL), Southwest Airlines (LUV), Dow Chemical (DOW), L Brands (LB), Dr. Pepper Snapple (DPS), and long UnitedHealth Group (UNH) JUNE CALLS, Mobileye (MBLY) JUNE CALLS, and Apple (AAPL) JUNE CALLS.

Jeff Lewison

Drugs, Burgers and Clothes

5/10/15

Last week played out exactly how you should have expected it to. The IBB and IWM both held their key technical levels while the S&P sold off, which means the market is really well supported. On Friday, the unemployment data came in right where it needed to in order for the market to rally. 223,000 jobs added, along with a lower revision for March’s data wasn’t good enough to indicate a June rate hike, nor was it weak enough to indicate the US economy is struggling. With the S&P 500 closing at its third highest level of all-time, in my eyes, nothing has changed over the last few weeks so until the IBB and IWM breakdown, you can continue to buy and own stocks. It’s important to be aware that the US Treasury market has priced in a roughly 60% chance that the Fed won’t begin raising rates until December, so interviews with members of the Fed or any US economic data indicate a rate rise could come sooner, the stock market will inevitably sell off. As I advised last week, now is a good time to review your portfolio and determine which stocks you don’t really believe in any longer. Use this time with stocks near all-time highs, to raise cash so that you will be ready to buy when the opportunity comes along.  

This is another big week of earnings, which could have an impact on the broader market, but could also lead to a buying opportunity in other stocks. On Monday, a number of biotech stocks that will impact the IBB like Juno Therapeutics, Intercept Pharma and Puma Biotechnology report earnings. As I mentioned last week, heavy selling in the biotech ETF is putting a lot of unjust pressure on the individual companies that are doing really well like Gilead, Amgen, and Celgene, so if the IBB slips on Monday, use the weakness to build positions in Celgene or Amgen. If you are looking for a trade, and not an investment, the IBB sets up nicely to buy at $333.66, a level it hasn’t closed below since February 19^th. Stop yourself out on the downside at $317.76, which is the 61.8% retracement. That gives you a 4% risk on an ETF that could just as easily rally to new $375 and new all-time highs, giving you a 12.6% gain.  

On Wednesday, burger chains Shake Shack (SHAK) and Jack-in-the-Box (JACK) will report quarterly earnings. I have been a huge fan of Jack for a long time and feel that along with its Qdoba business, it is the best-run food chain in the industry. Jack has a history of rallying on earnings, rallying 5% and 7% the last two quarters, but it’s down 7% from all-time highs made at the end of March. I expect Jack to report another strong quarter of sales growth and to be a benefactor of lower oil prices, but given how food services stocks have responded to earnings this quarter, I would hold off until after it reports. Look to pick up the stock around $85 if it drops, if it rallys, then hold of for now. As for Shake Shack, this stock has been on fire since the IPO, but it has gotten way ahead of itself. I like SHAK a lot more at $50 than at its current price of $68, so hold off on this one. These high multiple stocks have been getting punished all quarter if there is the slightest miss, and this one falls into that category. On top of that, it is a heavily shorted stock, without any options available to trade, so the risk reward just instead there to own the stock at these levels.

Lastly, on Wednesday and Thursday, the markets will get a real good look at the strength of the consumer with retailers, Macy’s, JCPenny, Ralph Lauren, Nordstrom, and Kohl’s all reporting. Macy’s (M), Nordstrom (JWN) and Kohl’s (KSS) will be the ones to watch because all three target the different class of consumers. Nordstrom will gauge the health of the wealthy, Macy’s will tell you about he middle-class and Kohl’s will measure the lower-end to middle-class. I don’t expect revenue beats from most retailers this quarter, so I’m more interested in the forward-looking guidance. I also don’t recommend buying any of these companies prior to earnings, nor do I really recommend buying AFTER earnings. Although I own L Brands (LB), the retail space seems troubled. Although economists estimate that it takes roughly 9 months for the lower oil prices impact to show up at retailers, I think consumers are opting to save their money instead of spending it. Negative earnings reports and weak guidance from these retailers could really weigh on the stock market, so be prepared for a sell-off if investors are not happy with what they hear.

 There is a lot of money still on the sidelines, ready to buy stocks on any drop, but the fear of missing out could lead investors to push the market to new all-time highs. My feeling is that it makes perfect sense to raise cash by selling positions you don’t believe in any longer. The IBB and IWM continue to be indictors to watch. As long as the IBB doesn’t close below $133.40 and the IWM doesn’t close below $120.74, there is nothing to worry about. 

This past week I raised cash by selling completely out of Kinder Morgan (KMI), General Motors (GM) and Sanderson Farms (SAFM). I still like all three stocks long-term, but with General Motors, I still see near-term headwinds like a strong US Dollar, and sales weakness in Europe and Latin American weighing on the stock. I like Kinder Morgan because of the dividend but when interest rates begin to rise, dividend paying stocks tend to fall. I think KMI could be bought again around $40. As for Sanderson Farms, I had a quick 6% gain in a stock that seems to be stuck in a trading range and sold out at the high end of that range. If the stock falls back toward $77, I will be looking to get back in.

My current positions: Long Gilead Sciences (GILD), Starbucks (SBUX), Facebook (FB),Wells Fargo (WFC), ConocoPhillips (COP), 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), Southwest Airlines (LUV), Dow Chemical (DOW), L Brands (LB), Dr. Pepper Snapple (DPS), and long UnitedHealth Group (UNH) JUNE CALLS, Mobileye (MBLY) JUNE CALLS, and Apple (AAPL) JUNE CALLS.

Jeff Lewison

IBB and IWM

5/3/15

Although the Nasdaq and S&P, both hit new all-time highs on Monday morning, the focus of the week was how bad of a sell-off both indices had until Friday’s sharp rally. A lot happened last week, which caused this market to sell-off, so take your pick. Whether it is rising interest rates, miserable earnings reports from the high flying stocks like Twitter (more on this later), LinkedIn, and Yelp, a US dollar which fell about 2% (a huge move in currencies) to its lowest level since February, crude oil rallying 3.2% to $60/barrel, or the constant selling pressure that ETFs like the IBB cause as we saw with biotechs getting crushed, take your pick because they can all be blamed. So what happened on Friday that led to the market rallying back?

There are two things that actually occurred on Thursday, which made me feel confident markets would rally on Friday. First, the biotech ETF, IBB (Biotech iShares), which had led the entire market for the last few years, bounced off a key technical level of $331.40, which is the 100-day moving average. The last time the IBB traded down to the 100-day moving average was last October, when it fell below for another 3 days before rallying and never looking back. It didn’t hurt that on Thursay night, Gilead Sciences proved once again that it is the strongest big cap biotech and reported a massive quarterly beat and raise, sending the stock to its highest level since January. The other indicator that I saw on Thursday which made me stay bullish this market was the IWM (iShares Russell 2000 ETF), which has also led the market higher in the last few years, ALSO bounced off the 100-day moving average. Prior to Thursday, the IWM has rallied off the 100-day moving average 3 other times since last December, the last of which led to new all-time highs. The key level to watch in the IWM is $120.74, if the Russell breaks that level, then the broader market is also headed lower because there isn’t any support until around $118. As for the IBB, any close below the $331.40 level will spell big trouble and could lead to another 8% drop in the biotechs. 

For the S&P 500, the level in the sand is 2061, which is the 78.6% Fibonacci retracement and slightly below the 100-day moving average. Until a break below that level, there really isn’t anything to be concerned about. The best way to prepare for a 2% drop from Friday’s close is to do what I plan on doing tonight and Monday. Look through your portfolio and separate your stocks by winners and losers. From there, determine which stocks you truly believe in, with the mindset that you don’t care where a stock has gone, but where it’s going. As long as you believe in the catalyst to propel your stocks higher, you should keep it. Otherwise, use this time to take profits or cut your losers, and wait for another pullback to buy, like you had on Thursday. That thought process brings me to Twitter. Unfortunately, I am long and strong the Twitter because I have to say that I believe it’s a great company and a great product, but it has without a doubt the absolute worst management team in publicly traded company history. On Tuesday Twitter reported a horrendous revenue number and lowered guidance, saying their “new platforms were not as well received by their customers” as they expected. On Wednesday morning, Dick Costolo, the oblivious to reality CEO that he is, showed his confidence by saying it was a “slight revenue miss”. He would be correct if they missed by 1% and not 10%! This was just another of the hundreds of other examples of how Twitter management is so out of touch with reality. Despite all of that, I’m holding on to Twitter because I believe one of two things will happen; the company will be bought by a real publically traded company and will be run by a management team that knows how to monetize and run a business, or an activist investor will come in and completely wipe out the current leadership. Either way, it’s good news for Twitter, so if you own it, I would recommend holding onto it, which you’ll have to do until one of my scenarios plays out. If you are looking to buy it, wait until it gets back above $40 and holds that level, then use $40 as your downside risk.

Moving on to this week, earnings continue on Monday with reports from EOG Resources. EOG is a leader in oil and gas exploration and one of my favorites in the energy space (I also own it). With oil rallying for the last month, a lot of these energy stocks have come roaring back, with EOG up 17.5% since the March bottom in oil. With EOG, I am not really concerned about what they did last quarter, but am more interested in the guidance now that oil has rallied. If they announce an increase in expected oil production, then the stock should rally.  This is a company that has such a strong balance sheet that they can afford to slow or stop production until it becomes more profitable. EOG reports after the close on Monday and then hosts their conference all on Tuesady morning. If you are able to trade in the after hours market, I want you to buy this stock if it sells off Monday night. Last quarter the stock dropped about 9% after they reported earnings and then rallied back the next day after the management conference call to close down just 1.6%.

Disney reports earnings after the bell on Tuesday but I don’t want you to buy the stock beforehand. This name has been absolutely on fire since their last earnings report, rallying 17%. I still like Disney a lot and think it’s one of the best long-term investments you could make, especially with Bob Iger at the helm. However, I think a lot of positives are already priced in and unless they knock the quarter out of the park, it’s heading lower, which would be a good thing because no matter what their quarter looks like, I want you in this stock post earnings, using $99 as your downside risk.

On Wednesday afternoon, we’ll hear from Tesla and Whole Foods. The later has performed horribly since hitting a 52-week high of $57.57 three months ago, having now sold off about 17%. I sold out of my position a couple weeks ago because of how poorly it acted but it’s holding the 50% retracement at $46.83. As long as that level holds, I say pull the trigger on half your position prior to earnings because a lot of negativity is already priced in. As for Tesla, I love the car, but hate the stock…but the daily chart looks bullish. I don’t recommend doing anything with Tesla prior to earnings, but if you’re dying to get in, use call options. Tesla is sitting on a lot of support and the daily chart actually looks bullish. The stock has sold off on earnings in the prior 4 quarters, but I think this time could be different because I don’t see expectations being as high.

Lastly, we’ll get April employment data on Friday with expectations of rebound from last month’s dismal job growth. Economists are expecting that the US added about 225,000 jobs in April. If you’re a market bull or believe interest rates are not rising until late this year or early next year, then you should want a lower number. If the economy added more than 225,000 jobs in April, stocks are going lower because that will increase the odds that the Fed will raise rates in June. The sweet spot would be job adds of 185,000-200,000. A number in the rate would means that the economy is growing, but still slowly, and would keep the Fed’s foot the brakes.

There’s a lot going on in the markets right now, so as I said, take the time to review your portfolio, identify stocks that you don’t believe in anymore and raise some cash for the next drop in equities.

My current positions: Long Gilead Sciences (GILD), Starbucks (SBUX), Facebook (FB),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), Sanderson Farms (SAFM), Southwest Airlines (LUV), Dow Chemical (DOW), L Brands (LB), Dr. Pepper Snapple (DPS), and long UnitedHealth Group (UNH) CALLS and Mobileye (MBLY) CALLS.

Jeff Lewison