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
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