Although by mid-day Wednesday it looked as if the world
truly was ending, the stock market managed to finish higher with the S&P
rallying 1.4% for the week. As bad as it seemed, the S&P actually did
exactly as it was supposed to do if you followed the technicals. On Wednesday,
the S&P went crashing through the previous 52-week low, which was the Black
Monday low from last August. A week ago, I wrote that the S&P would fall
and hold the next level of support, which came in at 1821. As the market
typically does, it overshot on the downside to 1812, but then rallied all the
way back to close very strong, only down 1.1% (much better than the 3.7% drop
at the lows). Since that 1812 low, the S&P is up over 5% and has since put
in a weekly hammer technical formation (the stock or market starts the week
trading at the low end of the previous week, trades sharply lower to make a new
low, only to rally and close the week higher near the mid-point of the previous
week’s trading range). The last three times the S&P put in a weekly hammer
was on 10/13/14 (Ebola low), and then last August 24th &
September 28th. The S&P rallied 14.9% to new all-time highs within a few
weeks of the Ebola low and then rallied about 14% within a few weeks from last
September’s low.
My bold prediction of the week is that the S&P will
rally another 14% from last Wednesday’s low, which would put it at 2066.01. If
you do your Fibonacci retracements from the 52-week high (2134) and low (1812),
you get 2065.72 as the 78.6% retracement…almost exactly the 14% gain to 2066.
It’s very possible that you will see 1812 once more before heading higher, but
I also think that the S&P will rally another 9% from Friday’s close over
the next couple months. With the markets rallying so sharply since Wednesday
afternoon, it’s important to remember not to chase stocks higher. Wait for down
days to do your buying and if you are looking to raise cash for the next big
sell-off, then begin selling positions as the market nears the 2066 level.
With that…here’s a look at what this coming week looks like:
MONDAY (MCD)
On Monday morning, McDonald’s (MCD) will report Q4 earnings,
and there are huge expectations for this turnaround story. A number of analysts
have raised their same-store sales estimates recently, expecting McDonald’s to
report about 4.2% global sales growth, on earnings and revenues of $1.23/share
and $6.22B, respectively. That’s less than half of the same-store sales growth
that Starbucks just reported…and got punished for. There is no doubt that
all-day breakfast and favorable weather is helping the company, along with a
revamp of its menu offerings and better management. I have been wrong on
McDonald’s for a while now and I still won’t ever go there for anything other
than breakfast, but I cannot recommend buying the stock. In fact, I would be a
seller. It’s one of the very, very few stocks trading at all-time highs, is
relatively expensive, trading at 22x FY16 earnings and a PEG ratio of 2.95.
It’s redeeming quality for being expensive is that even at all-time highs,
McDonald’s is paying a 3.07% dividend. I believe that almost all of the good
news is already in the stock price, and with concerns that the consumer,
especially globally, really isn’t that strong, and with it being an expensive
stock, which gets punished in this market on any mistake, I would stay away. If
you want to buy the stock, wait until it gets back down between $108 and $113.
TUESDAY (AAPL, LMT, FCX, COH)
All eyes will be on Apple (AAPL), as they report their
holiday quarterly earnings after the close. I really haven’t seen a stock go
from so loved to so hated pretty much overnight. While analyst after analyst
has come out over the last month and lowered iPhone sales expectations, the
average analyst price target is still about $140. Reduced iPhone estimates have
come solely on the basis of what some Apple suppliers have said, which if the
past is any indication of actual iPhone sales, the analysts would be completely
wrong.
Analysts expect Apple to report earnings growth of about 6%
to $3.24/share on revenue growth of 3% to $76.42B. While those are important
numbers to watch, the key items will be how many iPhones they sold in Q1, how
many they expect to sell in Q2, whether margins remain steady or improve, and
what China sales look like. I have no clue what Apple will report on Tuesday,
but my opinion is that if you buy Apple at $100 today, you will look back a
year or two from now and wish you had bought more. The stock is down 25% from
all-time highs, simply on expectations that iPhone sales, Apple’s core
business, is slowing. If you back out the cash, Apple is trading at about 8x
FY17 earnings, making it one of the cheapest stocks on the street, to go along
with a 2% dividend yield. With that said, I would wait until after they report
to be buying Apple. If they disappoint, the stock should sell-off to $92, where
you can buy it then. If it reports a great quarter and rallies, wait until it
gets back down to $100 because you know there will be analysts that find
problems with the earnings, which should send the stock lower.
Lockheed Martin (LMT), and Freeport MacMoran (FCX) report on
Tuesday and the only reason I’m mentioning the later is because it could
represent a trade opportunity. Since Karl Icahn announced his Freeport Mac
position on August 27th, the stock is down 62%. Freeport is in the
worst possible business right now, has a ton of debt and has a terrible
management team. But it’s down so much and you have to believe that all of the
negative news is already priced in, so as a speculative trade only and if you’re
feeling risky, I think you can actually buy Freeport before they report, but
please use a sell stop valid in afterhours trading at $3.48, giving you just
11% downside from Friday’s close. If you get even a tiny bit of good news, you
could see a 20-25% move higher.
Lockheed Martin is one of my favorite stocks and one that I
think could do really well this year. The stock is down just 2.3% this year and
pays a 3.14% dividend, which should support the stock in a down to flat market.
With everything going on in the world, you want to have a defense stock in your
portfolio, and along with Raytheon (RTN) Lockheed is best of breed. The options
market is pricing in about a 5-6% move on earnings, which on a sell-off would
take it right down to the 50% retracement of $204.91, and a perfect entry point
for this core holding.
WEDNESDAY (FB)
While Facebook (FB) and other report on Wednesday, the
biggest news of the day could come from the Fed, who will finish their 2 day
meeting, so come 1:00pm CT, volatility could really pick up. There is 0 chance
that the Fed announces another rate hike on Wednesday, but what is important is
what they say about the economy and what their forecast for how many rate hikes
there will be in 2016. I personally do not believe that the markets are selling
off because the Fed raised rates by 0.25%, but I do believe that part of the
reason markets are selling off is because investors are concerned the Fed will
raise rates 4 times this year, something that I don’t think they will do, nor
did I ever think they would do. But the Fed will have to communicate that 4
rate hikes likely will NOT happen this year, and then you could see stocks
rally.
After the bell, Facebook will report quarterly earnings, and
I expect them to be outstanding as they have been. However, it was one of the
market leaders last year and is a very expensive stock, and if history is any
indication, the stock will sell of again after reporting, as it has 3 the last
4 quarters. I sold my entire position in Facebook a couple weeks ago at $97.22,
and will be buying it back if it gets into the mid $80s. Given how this market
punishes momentum stocks with high P/Es for any reason it can find, I would
wait until post-earnings to buy Facebook.
THURSDAY (UA, AMZN)
Talk about two stocks going in complete opposite directions;
Under Armour (UA) has been making new low after new low, down 33% from all-time
highs, while Amazon is down half that. Under Armour seems to be left for dead.
Most recently, Morgan Stanley sent the stock down 8% when they put out a piece
cutting its price target by about 50% to $62 and calling for investors to sell
the stock. They go on to say that they believe Under Armour’s US growth as
already peaked, showing UA losing market share for the first time in three
years, and forecasting margin compression. I think a lot of this negativity is
already priced in and I believe in CEO, Kevin Plank, so I am a buyer of Under
Armour.
Amazon (AMZN) will report after the bell, and the last two
quarters have been very strong, led by outstanding sales and a strong cloud
computing business. That cloud computing business is what’s actually getting
Amazon profitable. We know Amazon will spend all of the money in the world if
it means acquiring additional business and increasing sales, and investors have
never seemed to care. Why should this quarter be any different? I cannot
recommend buying or selling Amazon prior to reporting, so if you own it, I
would just hold on. If the stock drops in after hours, I would look to be a
buyer around $545 if that level holds, which is the 61.8% retracement. Amazon
has a history of selling off immediately, only to rally back the very next day.
One thing’s for sure, Amazon is taking market share from the brick-and-mortar
stores and no doubt will continue to do so.
Huge earnings are on tap this week, along with the Fed
meeting ending on Wednesday afternoon. There should be no rush to buy or sell
anything right now. Wait for that 14% move to take profits and look for the
pullback to 1812 to begin buying again.
My current positions: Long
Gilead Sciences (GILD), Starbucks (SBUX), 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), Costco (COST), Amgen
(AMGN), Home Depot (HD), Allergan (AGN), FireEye (FEYE), Humana (HUM), Skyworks
Solutions (SWKS), Disney (DIS), Lockheed Martin (LMT), TJX Companies, Altria
(MO), Constellation Brands (STZ), and Bristol Meyers Squibb (BMY).
Jeff Lewison
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