S&P 1900

3/6/16

On February 11, the market was set for doom and gloom with the S&P trading as low as 1810, oil was sitting around $26, and everyone was talking about 2008 all over again. Since then, there has been a complete reversal in sentiment for no apparent reason, which should give you caution as an investor. If you remember, back on January 24^th with the S&P trading at 1877, I predicted the market would trade down and retest the lows one more time before rallying back up 14% to 2066. I still stick with that prediction, however with the S&P straight up 10.4% in just about 3 weeks, I believe it’s time to prepare for a brief sell-off back down to 1888 before going back up to that 2066 level.

There are a number of factors that go into my thought process.

Reason #1: Technicals

After the better-than-expected jobs data on Friday, the S&P traded to a high 2009.58, which just so happens to be the 61.8% Fibonacci retracement from the 52-week high to low. If this market still had legs, it would have pushed right through that level, but it failed. I think you could see a high of 2020 in the S&P on this move, which is the 200-day moving average. At the same time, today’s close of 1999.99 is almost exactly to the decimal at the 100-day moving average, another key resistance level. The technicals just don’t justify a continuous move higher without a pullback.

An often-used technical indicator, the RSI (relative strength index), is at 63, nearing overbought conditions. An RSI of 70 is the level most analysts use to determine if a market or stock is overbought and last time we were at this level in the RSI was when the S&P topped out in November. 

Reason #2: Oil

Oil has rallied 39% in two weeks despite no global slowdown or freeze in production. Oil continues to remain a supply issue and not a demand issue and there is no evidence of that easing. In fact, this week’s inventory levels showed that supplies are at an 80 year high. If you want to use the spring and summer seasons as a reason to be optimistic that demand will increase thereby decreasing supply, you should think again. The 52-week high in oil occurred on May 6^th last year at $62.58 and then proceeded to drop 29% through the entire summer. In looking at a daily chart of oil, it’s hard to see the commodity trading above $38 in the near-term, especially without any news indicating that oil supplies are going to begin dwindling. From these levels, I see more risk to the upside and believe oil is headed back down to $30…again before pushing higher into the end of the year.

Reason # 3: The 10% rally has been lead by short covering, which is unsustainable

50 companies in the S&P have at least a 10% short interest, and just about all of them have significantly outperformed the broader market since the February low. Netflix has a short interest of 13% and has rallied 22.5%, Freeport MacMoran has rallied 92%, and Transocean is up 66%, just to name a few. In addition to those, look at other energy names like Chesapeake Energy is up 232%, Consol Energy is up 57%, Marathon Oil is up 69% and ConocoPhillips is up 34%. To further prove my point, completely beaten down high multiple names like Mobileye and FireEye have rallied 47% and 53%, respectively. Hell, even Amazon with it’s 9 million P/E is up 18% since February 11^th. These moves are completely unsustainable and while I believe that some of these names were extremely oversold, I believe they are now overbought. I would look to fade the commodity names, especially Freeport MacMoran.

Reason #4: Too much uncertainty

Markets hate uncertainty and there is plenty out there. This Thursday, the ECB will conclude it’s 2 day meeting and indications are that they will announce further stimulus by pushing interest rates further negative than they already are. If they do anything other than that, US equities will sell off. The Fed is set to meet later this month and with the futures market indicating that the Fed will not raise rates this month, anything other than that will send markets sharply lower. In fact, any rate hike this year, despite the fact that I still think they should raise rates and should have a while ago, will send stocks sharply lower.

We are in an election year it is looking more and more likely that it will come down to Trump v Clinton. If it’s Trump, God help us all. If it’s Clinton, you better get out of healthcare and biotech because she’s gunning for each and every company in those sectors.

Reason #5: Jamie Dimon really can’t save the day

What a lot of people are NOT talking about right now is how on that Thursday, February 11^th low of 1810, Jamie Dimon gave investors a vote of confidence in bank stocks by purchasing about $25M worth of JPM stock. What was significant about this purchase is that it came at a time when the stock, along with every other bank stock was getting crushed. JPM was down 26% from last year’s high and 20% for the year. Others like Bank of America, Citibank, Wells Fargo, Morgan Stanley and Goldman Sachs were all fairing just as bad or even worse.

Not only were the banks selling off because of a flattening yield curve due to low interest rates, but banks began to also announce that they are setting aside billions of dollars in reserves to protect again defaults on loans to energy companies. JPMorganChase, themselves, announced a $1.6B increase in reserves.

This by no means is a situation like 2008, given that these energy loans make up just a very small part of bank’s loan portfolios. You may call it just a “tempest in a teapot.” Remember when good ‘ole Jamie Dimon called the London Whale trade a “tempest in a teapot.” After all, JPM has rallied 14% since Jamie’s purchase, and the Bank ETF (XLF) is up 14% as well, both outpacing the broader market. So maybe it is a tempest in a teapot. However, I am more inclined to believe that despite the 2008 collapse, bank CEOs truly don’t know how bad their portfolios will be if more and more oil and gas loans go into default. I also don’t think that the bank rally will or should continue since I don’t see interest rates rising above 2% this year. Without the bank rally, the stock market is headed lower.

There are a whole host of reasons as to why I believe market, at least in the near term, are headed lower. I don’t believe we will take out the previous lows, but if you ask me if we will see S&P 1900 before we see 2100, I am more inclined to say 1900, here we come.

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), 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 (TJX), Altria (MO), Constellation Brands (STZ), Bristol Meyers Squibb (BMY), and LONG June 10-Year Treasury futures.

Jeff Lewison

Retail in Focus

2/21/16

It’s a big of earnings ahead, with a lot of retailers weighing in on the strength of the consumer. We already heard from VF Corp and then Nordstrom, last week, which was beyond disastrous. However, this week should present some nice opportunities.

TUESDAY (M, HD)

MACY’S

Macy’s (M) reports earnings prior the market open and this will be an interesting one. Since hitting an all-time high last July, the stock is down 45%, and rightfully so. Management has not executed well, forcing the company to close stores across the nation and heavily discount excess inventory. Additionally, Macy’s flagship store in New York relies heavily on international shoppers, which means they needs a weaker US Dollar, which they haven’t gotten yet, and may not have consistently for a little while. At the same time, listening to what VF Corp said, who does significant business with Macy’s, it’s not looking good.

Analysts are looking for $1.88/share in earnings on $8.83B in revenues, which would be down 23% YoY. I believe Macy’s can miss those numbers and still rally because it will all be on the guidance. Management has to convince analysts and investors that the worst is behind it and that a turnaround is eminent. I actually do believe that the dollar is getting weaker and YoY comps are going to be easier to beat, which should aide Macy’s in its guidance. But what I don’t believe is that the company is executing well. Every time I walk into a Macy’s, it is impossible to find a sales person, when you do find someone, they typically are not friendly, and frankly, and the stores are usually empty. I am not a fan of Macy’s going into earnings and even if they report a strong quarter, I still believe there are better options in retail.

One thing I will say is the daily chart actually looks positive. There is an almost perfect inverted head-and-shoulders formation since their last earnings report, with the head at $34 (the 52-week low) and the two shoulders almost both exactly at $37.50. If you feel risky, you can buy Macy’s ahead of earnings and use $37.50 as your stop loss only if you can trade in the pre-market. If Macy’s impresses, it will likely open around $46, creating an island reversal, one of the most bullish technical formations. The market is pricing in a 9% move, so if you are looking for a speculative trade, there it is.

HOME DEPOT

Home Depot (HD) also reports prior the open and this is one of my favorite plays on retail and housing. The stock was one of the best Dow performers in 2015, but has suffered for that in 2016, falling more than 20% off the highs, however it has since recovered about half of those losses. Analysts and investors expect a lot of this company so there’s a lot of risking owning it into earnings, but I think HD will deliver. I believe housing and home improvements are still the strength of the US economy and the best place to go when you are looking to the home is Home Depot. Additionally, Home Depot has a continuously improving e-commerce omni-channel business, which further drives in-store business.

There is plenty of downside risk with Home Depot. It sports a loft 23x valuation, was a market leader for many years and is still considered a retail stock. If the US consumer really is struggling, Home Depot will be in trouble. I don’t see that being the case. I think your risk is $114, the 50% retracement and even if it gets there, you should buy it and put it away for the long haul.

WEDNESDAY (TJX)

One of the best and most consistent retailers in the last 7 years is TJX Companies (TJX). TJX owns and operates TJ Maxx, Marshalls and Home Goods, and has done everything right for years. At the same time, they are major benefactors of higher-end retail running into excessive inventory and cost cutting problems. The company’s Home Goods business has led the way over the last couple years along with the housing recovery and there is no sign of that ending.

Analysts expect the company to grow YoY earnings by about 1.1% with full year earnings growth of 4.4%. For the year, management expects same-store sales growth of about 5%, much better than competitors like Kohls, Macy’s and JCPenny. TJX has a strong US presence, so the strong US Dollar will not hurt them as much as their international competitors. A good read through to TJX was that the lone bright spot for Nordstrom last quarter was their Rack stores. Outlet and low price stores continue to prosper in this economy, and that’s TJX’s sweet spot.

TJX is one of the few stocks that is actually trading higher this year, and although it has a lofty valuation compared to other retailers, you should pay up for this consistent out-producer. There are a couple key technical levels to watch. On Friday, TJX traded down to $70.38, which is the50% retracement and 100-day moving average, but turned and rallied from there. On the downside, you have a maximum risk of 6.8%, down to $66.71, the 23.6% retracement and a level the stock has held three times since closing above it last November. I expect TJX to do what they always do, and I could see the stock rallying to new all-time highs above $77.

Retail is the name of the game this week, but there are plenty of other earnings stories, including Cracker Barrel (buy), Salesforce (buy), JCPenny (sell), Palo Alto Networks (buy) and Allergan (buy).

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), 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 (TJX), Altria (MO), Constellation Brands (STZ), Bristol Meyers Squibb (BMY), and LONG March 10-Year Treasury futures.

Jeff Lewison

Utilities. Utilities. Utilities.

On Friday, the market received some relatively positive jobs data, which turned out to be bad news for stock bulls, as it left investors wondering if the Fed really will raise rates 4 times this year. And if this past week proved anything, the market could care less if you report a great quarter and remain optimistic about the future. Take Google and Facebook, for instance. Both report flawless quarters and since hitting all-time highs on Tuesday, both are down 12% and 13%, respectively. Under Armour knocked the cover off the ball and since hitting a high of $86.29, just one week ago, the stock has since sold off 10%.

There are a number of factors working against stocks right now. High multiple stocks are getting taken out to the woodshed if there is any sign of a problem (see Amazon, Netflix, and LinkedIn). If you own any high multiple stocks, well…buyer beware. The second issue is that the market leaders that have been almost impervious to any market negativity, are being crushed by profit-taking and panic selling (see Facebook, Google, Nike, Home Depot and Starbucks). Retailers like Ralph Lauren, Kohls and L Brands all reported disappointing outlooks, which sent a signal that the US consumer really may not be that strong. Big Cap biotech names like Gilead, Celgene and Amgen, while reporting strong growth and remain very cheap, are being sold hand-over-fist due to worries about drug prices. The badly hit semiconductor sector got relief in the last couple weeks as Skyworks Solutions and NXP Semiconductors both blew away the numbers and issued strong guidance, but nevertheless, those post-earnings gains were completely wiped out. Energy stocks? Forget about it. How about airlines, which are reporting record profits on a quarterly basis in the face of low oil prices? Delta, Southwest, JetBlue, American and United are all sitting at or near the lows for the year.

The only things going higher right now are gold, silver, US treasuries and utilities. A few weeks ago, I recommended buying some of those utilities like Consolidated Edison (ED), NextEra Enery (NEE) and Southern Co. (SO). All three of these names are up on the year, with ConEd up 13%, they all have forward P/Es of less than 18, and pay a dividend of at least 2.70%. Other names like Verizon Communications (VZ), AT&T (T) are also working in this market, trading at or near 52-week highs. Both yield a dividend of around 5% and trade at less than 13x forward earnings. Tobacco stocks like Phillip Morris (PM) and Altria (MO) are also up YTD and pay big dividends. If you bought any of those names on my recommendation, I say stick with them. If you are not in any of those names yet, I would wait until they pull back a little before buying. All are at or near multi-year highs, but I think that trend continues throughout the year, as investor money floods out of high growth and into high yield.

I also recommend buying treasuries for diversification through the TLT. I am a believer that rates will continue lower this year, which means treasury prices will rise. The TLT is up about 2% this year, and there’s plenty of room to the upside. This past week, I bought March 10-year treasury futures, in anticipation of a further drop in interest rates. The key level that I am watching in the TLT is $133, which has been resistance twice in the last 5 years. If the treasury market breaks through that level, then it should challenge all-time highs of $138.50, a 7.5% gain from Friday’s close.

Here ‘s a look at a few key earnings reports that I am watching this week:

TUESDAY (CVS, DIS)

CVS reports quarterly earnings on Tuesday morning and analysts expect Q4 profits to grow 26% to $1.53/share on $41.12B in revenues, implying about an 11% growth rate. At the same time, the average estimate for full year earnings and revenue growth is 16% and 10%, respectively. If CVS can deliver, there can’t be a whole lot more to ask for from a company trading at just 16x forward earnings and paying a dividend. Healthcare costs are only going up, with premiums on the rise, which benefits companies like CVS and Walgreens. This is a company that has consistently delivered, and I think they do the same this year. While I recommend buying CVS, I would wait until after earnings. Despite beating estimates the last three quarters, the stock dropped each time it posted earnings. If the same happens on Tuesday, I would look to be a buyer around $90.

Walt Disney will report earnings after the close and this will be a big one. The stock has gotten crushed since November and is down about 11% already YTD. Nobody cares about Star Wars anymore. Investors are acting as if ESPN is going off the air, and now, most recently, an analyst report surfaced saying that Disney theme parks were struggling across the globe. While I like Disney long-term, mainly for the same reasons that people hate Disney (theme parks, EPSN, Star Wars, Frozen, etc…), I can’t recommend buying the stock before they report. It closed on Friday about 3% from 52-week lows, and any slight issue in their Tuesday afternoon report, and the stock is going to get hammered. Although it’s trading at just 16x, investors still see Disney as an expensive stock with declining growth. If you get a sell-off in the name, wait until it recaptures $90 to build a position.

WEDNESDAY (CSCO, TSLA, TWTR)

I’ll be real brief with all four of these names: 1) Cisco (CSCO) is cheap, pays a 3.50% dividend, and has a great balance sheet, but I would not be a buyer. It’s a technology company and right now that’s almost as hated as energy. 2) Tesla (TSLA) and Twitter (TWTR) are toxic assets. I have been adamant that Twitter is arguably the worst run company in America, and I maintain that view. Management has no clue how win users, monetize their platform and grow the business. Twitter is probably a $10 stock. As for Tesla, it’s trading at its lowest level in 2 years, falling through key technical support last week. It’s incredibly expensive (on par with Netflix and Amazon and look what happened to those stocks), has lost its luster (nobody talks about Tesla anymore) and frankly, doesn’t have a true identity. Is it a tech company or automotive company? Nobody knows, nobody cares. Don’t be a buyer.

Stick with names that are working in this environment: High yielding, low multiple utility stocks. Add some US treasuries for diversification and continue to sell positions you don’t LOVE on market rallies.

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), 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), Bristol Meyers Squibb (BMY), and LONG March 10-Year Treasury futures.

Jeff Lewison

As Biotechs Go, So Goes the Stock Market

1/31/16

Stocks finished a really bad January on a high note, with the S&P rallying 2.50% to end the month down about 5%. The Nasdaq fared far worse; finishing January down about 7%, led lower by Apple, Amazon and biotech. Despite strong earnings from Celgene and Amgen, it wasn’t enough to turn the biotech sector around as the IBB dropped a staggering 21%, led sharply lower by Gilead Sciences and Regeneron, among others. The Nasdaq is going to go where biotechs go, and it’s my belief that where the Nasdaq goes, the entire stock market goes. Luckily there is strong support in the IBB at $247.35, another 7.4% from Friday’s close. That would put the ETF at the 52-week low and 38% off the all-time high from July. But without the big cap biotech names turning around, there will be much more pain for investors.

With that, here’s a look at some stocks that will be on the move this week:

MONDAY (GOOGL)

Google or Alphabet (GOOGL) or whatever they’re called now will report earnings after the bell. The company is on the verge of overtaking Apple as the largest company in the world by market cap, and has traded really well this year, down just 2%. Trading at just 21x FY16 earnings, Alphabet isn’t that expensive. The last few quarters have been outstanding, leading to sharp rallies, and given what Facebook reported on Wednesday, you have to expect Alphabet will be just as strong. The stock has already rallied 11% from last week’s low and 6.7% since Facebook reported Wednesday afternoon. I think Alphabet will report another strong quarter, but I also believe a lot of that was priced in over the last couple days. I would much rather wait to see if you could pick it up at $700 (where it was just last week) on another market sell-off, then buy it on Monday before they report. If you miss it, you miss it, but I believe the risk is to the upside. There is strong upside gap support at $695.81, which is also the 61.8% retracement and a great level to begin building a position.

TUESDAY (CMG, GILD)

Burrito chain, Chipotle (CMG), reports Q4 earnings after the bell, and the average analyst estimate is calling for earnings of $1.86/share on revenues of about $1B. The company already warned that Q4 sales were going to take a significant hit due to the e-coli outbreak, so I’m not too concerned about what their Q4 sales were, but I’m more concerned about what management forecasts going forward and what trends they are seeing thus far in Q1. If you have a long-term time horizon, Chipotle isn’t a bad risk/reward “buy” going into earnings. Establish half of your position Tuesday morning and then wait for the stock to gain some momentum to buy above $485, a level I can see it hit if the company issues better-than-expected sales guidance. However, with that said, I think you’re better off buying Jack In the Box (JACK), which owns Qdoba and should be a big benefactor of the Chipotle e-coli outbreak.

On Tuesday afternoon, Gilead Sciences (GILD) will report, and this is going to be a big one. Gilead has been taken out to the woodshed and more since hitting an all-time high last July, falling 33%, and 18% this year alone. Things didn’t get any better on Friday, when the company announced that CEO, John Martin will be stepping down and taking over the role of Executive Chariman, being replaced by COO, John Milligan. That sent the stock down about 5% on a day when the broader market rallied 2.5%. Gilead has also been a major target, more so than most biotech companies, of presidential candidates, as high drug costs are becoming an important part of each presidential debate.

Gilead is also in a world of pain technically, It hit a new 52-week low on Friday, gapping down below the Black Monday low, which had been previous strong support, and you probably don’t have any additional support until $63. Putting additional stress on the stock press is a congressional hearing that will take place on Thursday regarding drug prices. The problem is that these politicians don’t really understand why certain drugs are priced so highly. Years and years and years of research goes into creating this drugs and in the case of Gilead’s Hep C drugs, you pay a high price for a short-term treatment, which will end up saving hundreds of thousands of dollars avoiding surgery.

While I think there will be pricing pressure on Gilead, they continue to have a strong drug pipeline, a ton of cash, pays a dividend, trades at a ridiculously low valuation of about 7x FY16 earnings and has a PEG rate of 0.46. I cannot recommend buying the name prior to earnings, but if you’re already in then stay in. Gilead is a strong long-term buy, so on weakness, you can be in this name.

All week of earnings will lead us into Friday’s unemployment number, which will likely be the biggest market driver of the week. I am still calling for the S&P to rally to 2066 before finding major resistance, but I still urge caution in buying into rallies. Wait for the market to pullback when oil or China takes us down.

 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

Apple, Facebook, Amazon, Fed & More

1/24/16

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 24^th & 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 27^th, 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

Earnings in Focus

1/17/16

The selling pressure didn’t let up last week, as the S&P got off to it’s worst opening 2 weeks of the year ever. The S&P is down about 8% YTD and is 12% off all-time highs, having taken out the lows from last August. From a technical perspective, the S&P is completely broken down, so if 1864 can’t hold, then the next level of support is down at 1821, which would be a 15% drop from all-time highs, and the low from 2014…and a level to where I see the market going. It’s hard to picture the market dropping much further than that because I honestly don’t believe the fundamentals warrant it. But it is also hard to see the market rallying very much, other than a brief bounce higher before continuing lower.

While there are a plenty of reasons to be a market bear, ranging from the rapid drop in oil prices to slowing growth in China, there are still reasons to be bullish or at least neutral, which is my stance. In the long-term, low oil prices is a net-plus for the US economy and the also the stock market. Energy stocks make up just about 6% of the S&P 500, compared to about twice that amount just a few years ago. Additionally, low energy prices are good for the consumer, which in turn, is good for companies. Another reason why I don’t see 10% downside like a lot of investors predicted this week is because investor pessimism is near all-time lows. It’s impossible to go a day without hearing someone making comparisons to 2008, when the global economy was in free fall, corporate balance sheets were filled with debt and housing (the biggest component to economic growth) was crashing. In a recent survey investor survey, only 17.9% of those polled believe the S&P will trade higher in the next 6 months, making it the worst sentiment since 2005. When I see investor sentiment that low, I tend to take the contrarian view.

Earnings kicked off last week, led by the banks, and will continue this week with some big reports that could not just move the individual stock, but also the market.

DELTA

Prior to the market opening on Tuesday, Delta will be the first airline to report Q4 earnings and a lot is expected out of the largest airline by market cap. Analysts are again expecting record profits led by lower fuel costs and increased domestic traffic. However, the key metric for airlines is PRASM (passenger revenue per available seat mile). Delta forecasted PRASM to be down about 1.5%, so anything better than that, will be positive for the stock. The guidance is also going to be key for Delta. Investors need to see capacity growth remaining flat this year, reducing pricing pressure and increasing PRASM. Unless you get that, Delta and the rest of the sector will be in trouble.

Despite oil prices sinking about 17% this year, the airline stocks have not been immune to the market sell-off, with Delta falling 12% already YTD. Despite that drop, Delta is still about 29% above its August low. $43.50 has been key support for the stock, which is about the 50% retracement from the 52-week low to high. Delta is actually one of the stocks I like going into earnings, and while you won’t be able to buy it prior to that, you should certainly look at the stock if it can hold $43.50, post earnings. I like Delta long-term, especially if oil continues lower and stays low for years to come, as many analysts and economists predict.

NETFLIX

Ordinarily I would say that Netflix is in no way a market mover, however with Netflix being one of a handful of stocks that led the market higher, Tuesday afternoon’s report will be a big one. If Netflix disappoints, it will be bad news for the other momentum stocks like Facebook, Amazon and Google, which will then be even worse for the broader market. For those who have followed me, you know that I have never been a fan of Netflix. The service itself, save for a few random shows, leaves a lot to be desired and the stock is way overvalued. Netflix is down 9% this year, in-line with the broader market, but I believe there’s more downside to come. Netflix is currently trading at about 434x FY16 earnings and these high momentum, high P/E stocks are going to get punished in this market if there is any hiccup in the earnings report.

Netflix is expected to report a roughly 65% drop YoY in earnings, with Q4 profits coming in at $0.02/share and revenues increasing 23% to $1.82B. Netflix greatly disappointed last quarter in US growth, with most of the subscription growth coming internationally, at the expense of profits. I believe expectations are still too high for subscriber growth. In addition, Netflix is spending more and more on original content, which is a concern if subscriber growth doesn’t beat expectations. I also feel that they are, and will continue to lose the content war to the likes of Time Warner. I think Netflix has to show subscriber growth of about 3.55M in order to move higher, a number I don’t see it hitting.

If you are looking to take a position in Netflix, I would wait until after they report since $95 has been good support for the stock. That would be about a 9% drop from Friday’s close of $104.04. Whether it gets there or not, I still don’t like the stock and prefer you to be in HBO’s Time Warner, which is actually up 7.7% YTD and looks like it’s finally bottomed out.

STARBUCKS

On Thursday, Starbucks will report after the close. The last couple quarters, Starbucks had been trading at or near all-time highs heading into earnings, which meant that they had to produce a blow out quarter to continue higher…and that’s exactly what happened. While other companies have been struggling in China, Starbucks has been growing. To show how confident CEO, Howard Schultz, is in the Chinese consumer, he announced last week that they would be opening up 500 new locations in each of the next 5 years. The company is also enjoying very strong US same-store sales growth, led by an increase in traffic and check size at the hands of its mobile app. Starbucks will look to continue is streak of 5% or more same-store sales growth.

Starbucks has been doing everything right for years and I see that continuing. Starbucks was up 46% last year and has been an out-producer this year, down only 3.3% YTD. The problem right now is that Starbucks is pricey, trading at about 27x FY17 earnings, so as usual, they will have to report another ridiculous quarter to move higher. Despite its high multiple, Starbucks remains one of the best operators, with one of the best management companies and one of the best and consistent stock performers. If there is any weakness after earnings, I want you in the name. If you’re relying on hope, then you should hope it sells off to $53.04, which is the 50% retracement. Although Starbucks is one of my largest positions, I intend to buy more at $53.

These are difficult markets to navigate right now. Just about everything is vulnerable to dropping except for US treasuries (TLT) and gold (GDX). But down at these levels, I think you can start buying some dividend paying stocks with strong balance sheets. Utilities like Consolidated Edison (ED), Southern Company (SO), Verizon Communications (VZ) and NextEra Energy (NEE) are all paying big dividends and have held up well this year. At the same time, names like Coca Cola (KO), Kellogg (K) and Clorox (CLX) are paying nearly 3% and have outperformed YTD. Those are stocks that you should be looking to add when the market sells off, and those are the names that should do well in a sideways to lower market.

This past week, I sold out of my entire position in Facebook at $99.87 and will be looking to buy it back around $86. At the same time, I added yield to my portfolio by taking positions in Altria (MO) and Bristol-Myers Squibb (BMY). Altria is in a recession-proof business of cigarettes and pays a 4% dividend and Bristol-Myers pays 2.4%, has a strong drug pipeline and has been a strong buy on every sell-off. Lastly, I started a position in Constellation Brands (STZ). On January 7, Constellation reported a monster quarter, beating just about every metric and raising guidance across the board, which sent the stock up as much at 7%. Just like Altria, the alcohol business is nearly recession-proof and with Constellation trading below where it was prior to earnings, it’s becoming a steal.

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), 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, Altria (MO), Constellation Brands (STZ), and Bristol Meyers Squibb (BMY).

Jeff Lewison

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