I don’t think it’s necessary to recap what happened last
week, because unless you live in a box or were on a secluded island for the
week without wi-fi, you know exactly what happened. The end result of an 1100
point drop in the Dow on Monday, a more than 600 point drop from high to low on
Tuesday, and then major rallies the rest of the week resulted in a more about a
1% gain for all of the major averages this week. Last week, I advised NOT
selling the farm, but that it was okay to lighten up if you really didn’t like
one of your positions. I also said to wait for the capitulation day to start
buying, which is really what happened on Monday morning, which saw the largest
volume in more than 4 years. All hell broke loose; it was pure pandemonium and
panic selling, and hopefully you took advantage and did some buying like I did.
But that was then, this is now. As I mentioned last week,
not a single thing has changed that would warrant the market to drop as it did.
In fact, the economic data from Europe and the US has been pretty strong.
Earlier in the week, European PMI came in much better than expected and on
Thursday, the US economy was said to have grown by 3.7%, much better than economists
predicted. We also got strong housing data throughout the week, which lends
strength to Q3 GDP. If you listen to the earnings conference calls, it’s
apparent that US sales remain robust and consumers are indeed spending. In
rational markets, all of this data would be a positive sign. However, as you
know these are very irrational markets, so the strong economic data is creating
more uncertainty as to what the Fed will do in a few weeks, and the markets
hate uncertainty. I am in the camp that believes the Fed should and needs to
raise rates in September, even if it’s just 12.5 basis points. They should not
be basing their decisions on the stock market, which is not an indication of
the economy. The Fed has said over-and-over that they are data dependant on
when to raise rates, and most of the economic data that has come out over the
last couple months, have been positive for future economic growth. At the same
time, the Fed needs some firepower in case the economy does regress in the next
couple quarters. By raising rates in September, they will give themselves the
opportunity to lower rates back down in an emergency, but I don’t think that
will be necessary. While what’s happening in China seems to be a big concern
for Central Bankers and investors for that matter, the reality is that a
slowdown in the Chinese economy is nothing new…it’s been slowing for three
years and China accounts for a whopping 7% of US exports. Although markets
indicate China should heavily influence the stock price of US companies,
remember this: S&P 500 companies generate almost 70% of their sales from
the US and only 8% of overall revenues come from Asia-Pacific.
While you will likely still have another chance to buy
stocks if you have cash that you want to put to work, I believe the markets
will head higher from here into year’s end. $29B existed the market in just the
past week, the largest equity outflow since 2002, so there is a significant
amount of money that still needs to get back in. Put that on top of all the
money that remained out of the market during this entire bull rally, and what
you have is a floor underneath the marketplace. As stocks sell off, investors
will be looking to get long, and as stocks rally, investors will rush to get
in, in fear of missing out again on the bull market. Additionally, companies are
rushing in to prop up their stock price with massive buybacks, creating
additional support on the downside.
As for the technical levels to watch in the S&P, I am
using new Fibonacci retracements from the all-time high of 2135 down to
Monday’s low of 1867. The first level of support is the 38.2% retracement at
1970, a level that held on Friday, and which was the low from August 21st.
If that fails during the comings week’s volatility, the next support level is
right around 1930, which is the 23.6% retracement, and represents about a 3%
drop. To the upside, the key resistance is at 2000 and 2032, which are the 50%
and 61.8% retracements, respectively.
I did put money to work this week, mostly on Monday as I
took advantage of the panic. I opened a new position in Lockheed Martin (LMT),
added to my positions in Disney, Apple, Facebook, Skyworks Solutions,
Starbucks, Celgene, and FireEye. Then, later in the week, I bought TJX
Companies on the heels of another very strong quarter, got long September call
options in Exxon Mobil (XOM) and sold Freeport MacMoran (FCX), which leads me
to my top SPECULATIVE two trade ideas for the short-term.
Wednesday was a unique day in the markets, not just because
stocks rallied 4%, but also because we may have seen a bottom in oil, at least
a near-term bottom. While oil was actually down about 2% on the day, all of the
energy names actually rallied sharply. The Spider Energy ETF (XLE) was up 3.5%,
outpacing oil by more than 5% on the day. While you can say that they rallied
because of the broader market, I would tell you that is not the case, because
the energy names have not traded with the overall market since oil’s drop began
over a year ago. If you remember back in March, prior to oil bottoming on March
17th at $42.41, the energy stocks never made new lows and actually
began rallying higher on March 13th. Since the energy stocks rally
on Wednesday, crude oil is up 17% and the XLE is up 11.1% compared to the
S&P, which is up only 6.5%. Of course, a lot of this recent move is short
covering, but some of these big energy names with strong balance sheets are
becoming very cheap and there’s anticipation of seeing more mergers in the near
future, lead by Schlumberger’s purchase of Cameron on Wednesday morning. I am
looking for the oil rally to continue into September, so I bought September
call options in Exxon Mobil, as I look for the stock to rally to $79.50, a gain
of 6% in just a few weeks. If you want oil exposure and do not want to be
levered to one specific company, I recommend buying the XLE as I see the
short-term rally continuing to $69.50 by mid-September, which is a 5.7% gain,
and one that will likely outpace the S&P in the same time frame.
My last trade idea is another one that I put on early Friday
morning, on the heels of Carl Ichan announcing his stake in mining company,
Freeport MacMoran (FCX). Freeport Mac explores and mines for copper, gold,
silver, oil and natural gas. As you know, those are the worst places to be
right now, and its stock price reflects that, with the Freeport having dropped
55% YTD. On Thursday morning, the
company announced big spending cuts, which sent the stock up 28%, and after
market close, filings showed that Carl Ichan took an 8% stake in the company,
sending the stock up another 20% afterhours. However, Ichan has an average
purchase price between $16-$17, which means that as of Friday, best case
scenario, he has a 35% loss right now. On Friday, Freeport closed at $10.50,
down 16% from its afterhours high of $12.22. While it’s great that an activist
like Carl Ichan came in and will try to put the company in a better position
for the future, the reality is that Freeport Mac is in the worst business it
could be in right now and the management team has been a major disappointment
over the last couple years. Additionally, unless he is the most powerful man in
the world, Ichan cannot create stronger demand for metals and energy. With a
slowdown in China, these companies cannot rely on the Chinese to stock up on
supplies. Gold has lost its luster with investors, there’s an abundant supply
of oil and natural gas and while there is a US housing recovery going on,
copper isn’t in high demand anywhere else right now. I am short Freeport from
$11.60, with a scratch stop, and am looking for the stock to fall to $8.56,
which represents an 18% drop from Friday’s close. I can’t see the stock going
higher than $11.50, so I recommend you wait for the stock to rally a little bit
and then sell it short, stopping yourself out on the upside at $11.50.
The volatility is here to stay in these irrational markets,
but don’t get caught up in the panic. Stay rational and use any market sell
offs to add to positions in high quality names that have already reported
strong earnings and benefit from a strong US economy, with a focus on mostly
domestic companies. If you are looking to add some speculative positions to your portfolio, look at
buying the XLE for a short-term pop and/or selling Freeport MacMoran for
further downside.
My current positions: Long
Gilead Sciences (GILD), Starbucks (SBUX), Facebook (FB), Wells Fargo (WFC), Time
Warner (TWX), NXP Semiconductors (NXPI), Darden Restaurants (DRI), Celgene
(CELG), Mobileye (MBLY), Jack In The Box (JACK), Under Armour (UA), United
Rentals (URI), Regeneron (REGN), Apple (AAPL), Southwest Airlines (LUV), Dow
Chemical (DOW), L Brands (LB), Costco (COST), Amgen (AMGN), Home Depot (HD), Allergan
(AGN), FireEye (FEYE), Humana (HUM), GoPro (GPRO), Skyworks Solutions (SWKS),
Disney (DIS), Lockheed Martin (LMT), TJX Companies, long Exxon Mobil (XOM) SEPT
CALLS and short Freeport MacMoran (FCX).
Jeff Lewison
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