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 19th. 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
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