Fed Week

12/13/15

This is an important week for the markets, not only because we’re coming off the biggest weekly drop for stocks since August, but mostly because oil continues to make new lows, junk bond funds are cutting off redemptions, and the Fed is set to announce an interest rate hike on Wednesday afternoon.

With OPEC’s recent announcement that they will not be cutting any production, it is becoming very clear that the oil industry is becoming a game of chicken, to see who is willing to shut down production first; the US or the rest of the world. So far, nobody has been willing to budge, and will more Iranian oil coming to the market with the reduced sanctions, it’s almost certain that oil is headed lower in the near-term. Lower oil should be good for equities as companies and consumers will reap the benefits of savings, however, lower oil prices tend to be an indicator of a slowing global economy. However, it’s my belief that oil prices are and will remain stubbornly low not because of a demand problem, but because of a supply problem. Global oil production has never been greater so don’t confuse low prices with a poor economy. A great way to play low oil prices is by buying up retailers and restaurants that are doing well such as TJX Companies (TJX), Nike (NKE), Home Depot (HD), Darden (DRI) and McDonalds (MCD).

It’s almost certain that the Fed will announce a 0.25% rise in interest rates on Wednesday, however that is already priced into the market. What will be important on Wednesday is how the Fed positions future rate rises to investors. My expectations are that the Fed will raise rates on Wednesday and will likely not do so again until closer to the middle of 2016, where the hope is that the global economy will be on stronger footing. If the Fed signals quicker rate rises (potentially 3 or 4 next year), then I fully expect the markets to dramatically sell-off.

Monday is going to be a critical day. If junk bond funds continue to disallow redemptions, that will continue to create liquidity issues and I would expect investors will need to raise cash by selling out of winning equity positions. Nothing was immune to last week’s selling, especially not the market leaders like Facebook, Neftlix and Amazon. If you have time today, it’s not a bad idea to review your portfolio and pick out stocks that you don’t see a lot of catalysts ahead that will move the price. I usually do not like to do much buying or selling in the last 6 weeks of the year because you typically have low volume and crazy price action for no apparent reason. This December is a little different, as you have junk bond funds imploding, potentially the first rate hike in years and oil at multi-year lows.

In looking at the S&P 500, I expect the markets to go back down and re-test the 38.2% Fibonacci retracement of 1970, which would be a 2% drop from Friday’s close. Stocks will have to stabilize at those levels or else the S&P is headed right back down to the yearly lows of 1867. I don’t think we’re in jeopardy of a drop back to the 52-week lows, but it’s also very hard for me to see the markets stage any meaningful rally into years end. With that said, you could have some great opportunities in the next few weeks to pick up stocks of companies that are unfairly beaten down because of profit taking and broader market pullbacks. Use the next couple weeks to research a couple stocks that you have wanted to buy, and make sure they are right for your portfolio. Stick with names that are near 52-week highs, have reported strong quarterly earnings and are in a sector that will benefit from low oil prices.

My current positions: Long Gilead Sciences (GILD), Starbucks (SBUX), Facebook (FB), 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), Skyworks Solutions (SWKS), Disney (DIS), Lockheed Martin (LMT), TJX Companies.

Jeff Lewison