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
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