Timber

1/10/16

This is about as bad of a start to the new year as you could have asked for, with the Dow falling more than 1000 points and the S&P sinking 6%. Last year’s winners like Facebook, Amazon, and Alphabet were not immune to the selling pressure as they dropped 7%, 10% and 6%, respectively. It should come as no surprise however, because hedge funds and investors spent all week selling off their big winners and raising cash. The S&P is almost a lock to retest the Black Monday low of 1864, which could happen as early as Tuesday. We’ll get more China data on Sunday night, which will be bad and send Chinese stocks down another 7-8%, which will send S&P futures down another 25 points It will be absolutely imperative that the market holds that 1864 level, which it did multiple times last year, or else the S&P is headed for 1820, which would be about a 15% decline from the all-time high. Since we’ve been in a bull market since early 2009, it’s hard to imagine a 15% drop, however that’s perfectly healthy for the bull market to continue. So the big question is what to do with your portfolio now.

I am definitely targeting the 1820 level to begin buying again, and likely won’t be buying much prior to that. In the meantime, I will be looking to sell some positions on market rallies and as long as I still like the long-term story, I will be buying back at lower prices. Names like Facebook, Starbucks, Home Depot and Costco, which all performed really well last year, are going to continue to sell off due to profit taking.

A couple weeks ago, I predicted that the biotech rally would come to an end, and so far the IBB is down 11% this year, about twice the drop of the S&P 500. While the big cap names like Gilead, Amgen and Celgene all outperformed the biotech ETF, they still weren’t speared the selling pressure and I would continue to wait until these names get cheaper. The IBB could drop another 10 points or 7% before they could be bought. For Gilead, Amgen and Celgene, the key levels are $86, $140, and $104. If you can buy any of those names at those levels, you will own a great stock and will have great long-term gains.

If you own Apple or anything that has to do with Apple, then you are in a world of pain right now. Unfortunately I own Apple, Skyworks Solutions and NXP Semiconductors. Whether its fair or not, every name tied to Apple is getting hammered. I’ve never seen a stock be so loved one day and then immediately be so hated the next. If you’ve been paying attention all week, you know that news from Apple suppliers has been very negative in regards to iPhone 6s and 6s Plus sales, leading many analysts to cut iPhone estimates by 30-35%. Of course, Apple has stayed quite, as they always do. There’s no question that iPhone sales will not be as strong as they have been, but even so, Apple is trading at about 6x FY16 earnings if you back out the cash, with a PEG ratio of just .75, making it one of the cheapest stocks in the market place. Don’t forget about the 2.16% dividend they are paying. I actually think that you can start nibbling at Apple and the semiconductors, but slowly. There is likely more pain for everything Apple related, so you don’t have to buy it all at once, but as long as you have a long-term time horizon, especially in your IRA, 5 years from now you will look back and saying that you’re glad you stepped in to buy. I would be a buyer of Apple against $90 and then wait until they report earnings in a few weeks. You would think that with this 28% drop that all of the negative news would be priced in, however I can guarantee that if Apple disappoints with iPhone sales, even if they report what analysts have lowered their estimates to, the stick will sell off sharply. That will be your next opportunity to complete your position.

There really are not a lot of places to hideout in this market. Just about everything is getting taken down. Oil continues to go lower, and will continue to until more bankruptcies occur. Anything that has to do with China is heading lower and high multiple stocks continue to taken crushed. I wrote a couple weeks ago that I see the market ending the year down at least 5%, and in this type of environment, you can actually do really well hiding out in high quality dividend paying stocks like Phillip Morris (PM) and Altria (MO). I also like defense stocks like Lockheed Martin (LMT) and Raytheon (RTN).

Markets are headed lower, the only question is how much lower. Stick with dividend paying stocks, start dipping your toes in the Apple waters and remember that it’s okay to take profits because you can always get back in.   

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