Weekly Outlook: The market started to show some green shoots to finish the week as one of the many crises hitting the market started to clear up to the end it. Politicians meeting in Washington spoke very positively on getting a deal done to avoid the fiscal cliff. Both sides of the aisle seemed ready to make necessary deals to avoid the December 31 fiscal cliff. If that situation clears up, the market should have a nice catalyst to rally. That situation should continue to clear up this week.
The other major dilemma for this week is the situation in Greece. Greece needs more money to shore up continuing fiscal issues on debt, and the country has an extremely important date coming on November 20th. That date will mark when European finance ministers are expected to decide on what to do with the Greek situation. The ECB has commented that the country will need aid through 2014, and the eurozone has a major decision as to how to help the nation coming this week. The market will be lighter on volume this week with the holidays, but it is an important week for the market moving forward.
Despite the shortened week, there are some interesting economic data reports to watch this week. Monday will bring us Existing Home Sales and NAHB Housing Market Index to start the week. Housing data has been very strong, but expectations are for Existing Home Sales to consolidate for October. The housing data continues on Tuesday with Housing Starts and Building Permits. Data finishes up for the week on Wednesday with Jobless Claims, Crude Inventories, and the Michigan Consumer Sentiment Index. Housing stocks have gotten hit hard as of late, so some good reports from the housing indicators will go a long way to helping this group of stocks and the market.
Europe will probably be the most important indicator for the success of Thanksgiving week. While the market may look forward to Black Friday sales and some potential movement forward on the fiscal cliff, the November 20th meeting is the moment of the week. If eurozone finance ministers cannot help fund Greece, a default is inevitable for the country, which will create significant market weakness. If the eurozone does help Greece with more funding, it should help move the market higher. The Greek situation is not going away, and the market will have to deal with it this week. We do not believe the market has priced in a Greek default yet, so it will be a weak moment for the market if the meeting goes poorly. Some contrarians believe that we should just get the default over with since it is inevitable, but that situation could create enough weakness in market to severely injure the market for a considerable period of time.
For earnings, we have a lighter week of reports. There are some intriguing reports, however, from Hewlett Packard (HPQ), Deere (DE), and Salesforce.com (CRM). HPQ has been very weak as of late, and it will be interesting to see if the company has any ideas/surprises on how to get the company moving. Expectations are solid for DE as the high price of crops should have helped it. Cloud companies have been coming back to earth throughout 2012, and this report from CRM is important to see how that situation is progressing.
The Federal Reserve may play a role in the market in December if the organization makes any changes to the length or size of the latest QE plan. The only potential role they may play this week is a scheduled speech from Chairman Ben Bernanke on Wednesday to the Economic Club of New York, which will be parsed for potential signals of future easing.
So, where are we headed this week?
The relief of fiscal cliff, for now, is met with the Greece issue this week. If funding is not given on Tuesday, the market faces a hefty selloff when it returns from Thanksgiving break. For this week, we should see housing data play a role as well as a couple important earnings. Volume will be light, and we would not expect a ton of major movement to start the week. Black Friday data at the end of the week will also play a role about the state of the consumer. All in all, it comes down to Greece and the eurozone this week.
Stocks To Trade:
Right now, we like the looks of CL and MA. Safety stocks (low beta, consumer staples) are going to start to see cash flowing into them for their strong dividends and strength during weak markets if the stock market continues lower, which could easily be the case if the Greek situation unravels. Right now, CL has been holding up very well, and the stock looks like it could break out if its able to get back over its 50-day MA around 106. The stock has held great support at the 103-104 area, and we believe that it will be an outperformer if the market weakens. If the market strengthens, CL should see a technical breakout over the 50-day MA. We believe moving into safety stocks like CL and other consumer staples will be very positive for portfolio positioning. Mastercard has continued to hold up an upward channel, and as we move into the holiday season, credit card companies should shine. Recent weakness is an opportunity to sell premium on a bull put spread as the company had great earnings in its latest reporting season and should outperform the market even if it weakens. Support for the market at 430 is very solid where the 200-day MA is sitting. The 430/425 bull put spread is worth 12% currently.
Trade #1: Long, CL
Breakout: Break of 106.00
Trade #2: MA, Dec22, 430/425 Bull Put Spread
Max Gain: 12%
For bearish trades, we like the looks of Union Pacific and Baidu . UNP is looking like it could make a severe breakdown if it fails the 200-day MA below it right now. UNP is an economic bellwether company and tends to follow the market. If the market has a major breakdown this week, a lot of stocks will suffer. UNP, though, is already testing key support, and it could make a strong move to the downside. The company has been in a strong downward channel and been weakening since its earnings report did not give a lot of support to the market. Watch the 115 line. If that breaks, we would short UNP. BIDU continues to look very weak, and it is showing no signs of bottoming still. Qihoo 360 (QIHU) releases earnings on Monday, and we believe those earnings will be very solid. If they are, it will give even more credence to a weak move for BIDU as competition is starting to rise in the Chinese search market. The company is seeing a lot of weakness as well as cash flows out of high beta names on market risk. That risk is not going away anytime soon as the fiscal cliff is still far from being solved. The company is underperforming a weak market, and we believe they are perfect for a bear call spread. The major resistance lines are sitting at 110, and we like looking above that level for a spread.
Trade #3: Short, UNP
Breakout: Failure of 115.00
Trade #4: BIDU, Dec22, 110/115 Bear Call Spread
Max Gain: 5%