2 Stocks To Buy, 2 Stocks To Sell: What's Next For The Market

Includes: CAT, CLF, ETN, LEN
by: David Ristau

Weekly Outlook: The market got some better news last week out of Europe only to be met with some struggles from the fiscal cliff situation. Earlier conversations from political leaders were very positive and seemed to suggest positive movement, but this past week, politicians seemed to move back on their positive outlook. The fiscal cliff deal is the most important issue in the market right now, and we would expect this week to be no different.

The market will be paying close attention to movement towards or away from a potential deal. We should continue to see posturing from both sides of the aisle until we get near the deadline, and the market will have several other issues to watch this week. It is a non-farm payrolls week for the market as well. Employment issues/relief will definitely also influence the market this week. Expectations are fairly low due to Superstorm Sandy. There are plenty of other market influences to watch that will be discussed below.

One of the most important aspects of the market this coming week will be economic data reports. It is a busy week with a lot of crucial reports to watch. Things get started on Monday with three key reports in the ISM Index, Construction Spending, and Auto/Truck Sales. ISM Index is expected to drop in November due to Sandy, but that report will set the table on Monday. On Wednesday, we will be looking at key reports from ADP Employment Change, Factory Orders, and ISM Services. The ADP data will be the first look at employment information for November, so look for a strong reaction from that report. Thursday continues employment data with Challenger Job Cuts and Initial Jobless Claims. Finally, we end the week with the all-important NFP report as well as the Unemployment Rate. There is a lot of data on display this week for the market to react to which should be a solid complement to fiscal cliff conversation.

Europe will take a backseat to data and the fiscal cliff this week after the crisis with Greece has been averted for the time being after Greece received funding from its Eurozone partners. For this week, European markets will most likely be following the lead of American markets.

Earnings are always crucial to market movement, but we have a pretty light week of earnings as well. The major companies reporting are AutoZone (NYSE:AZO), Toll Brothers (NYSE:TOL), and H&R Block (NYSE:HRB). None of the three can move the market alone, but they can all impact their given industry on reporting days. The most interesting report may be TOL as the housing industry has been strong this year. TOL though is an East Coast exposed housing company that may have seen some strong impact from Sandy, so we are curious to see how they will be affected.

The Federal Reserve is out of the news this week with no reports expected and no major speeches. So where are we headed this week?

Europe is quiet. Earnings are limited. The Fed is not expected to report anything. It all comes down to data and the fiscal cliff this week. If we see strong data figures, the market should continue to see some strength. At the same time, Sandy will have a fairly negative impact on most manufacturing and employment data points, so we will see just how much impact the storm had on the economy. The cliff is definitely up in the air. We would not expect much movement so far from the deadline, which will definitely limit any upside.

At the same time, we should not expect any major weakness if politicians stall further as we are still far from the deadline. The market has been stronger as of late, and we would expect a continuation of some buying off these bottoms. At the same time, stocks are starting to look slightly extended in the short-term, so we need a catalyst to break higher. Data seems to potentially have the most likely day-to-day impact this week.

Stocks To Trade:

The four stocks we are looking at this week are Lennar (NYSE:LEN) and Eaton (NYSE:ETN) for longs and Caterpillar (NYSE:CAT) and Cliffs Natural Resources (NYSE:CLF) for shorts.

We are liking the looks of LEN and ETN right now as both stocks are very strong and could move higher. LEN looks like a great breakout candidate this week, while ETN appears to be a solid stock for a potential bull put spread. LEN is right at a multiple top right now, and if it breaks this key resistance area, the stock could make a major move to the upside. The company has seen consistent resistance at $39, and if that line breaks, LEN could take off. The catalyst would be earnings from TOL and economic data. Employment figures are key for the housing industry, and if they come out positive this week, the housing market could move much higher.

Additionally, TOL will be a good signal for the housing industry of what it may be seeing in the last three months. If those beat expectations and the company guides well, the housing market could lift off. The nice thing about waiting for the breakout is that we can wait on LEN to show it has the strength to break those levels as it will only happen on strength.

ETN has also been looking very solid and continues to move within a strong uptrend. We do not see any reason for ETN to break lower anytime soon unless we get a serious market breakdown. ETN has been moving very well since its last earnings report, and that level is a great place to look at for a major support level. Those earnings were not extremely solid, but the company also acquired Cooper Industries (CBE) at the same time, which we see as a positive as it reduces competition and adds a solid name to the Eaton lineup. Further, they have been benefiting as one of the companies that would see a lot of sales from Sandy as companies and consumers replace electrical units. We like the company for a bull put spread below the earnings/Sandy breakout that occurred.

Trade #1: Long, LEN

Breakout: Break of 39.00

Trade #2: ETN, Jan19, 46/44 Bull Put Spread

Max Gain: 8%

For bearish trades, we like the looks of Caterpillar and Cliffs Natural Resources. Our main worry for CAT is that the company could see significant weakness if the fiscal cliff deal is not done and has been weak as of late. CAT has been flat since its earnings report in mid-October, and we are not sure where the catalyst comes from for CAT. As a bellwether for the economy, CAT should most likely be held in check until a fiscal cliff deal is done, and if no deal is done, CAT would see some significant pressure.

Additionally, Chinese construction companies continue to expand into international markets, which threaten CAT as the Wall Street Journal commented last week. The level to watch for CAT is the 20-day MA. If that level is lost, we could see some near-term weakness. After that, $80 is the other key to level to watch. If that level breaks it will be the first time since July and could lead to some significant weakness for the company.

The other company we are looking at for weakness is CLF. Cliffs has been extremely weak since it gapped down after its late October earnings, and it has not recovered since that report. The problem for CLF is that it has become a stock that has gotten dogged by the market for so long that it will take a very significant catalyst to get the stock going again. We are not sure what the catalyst will be.

With about 20% short float now in the stock, a catalyst would push a strong reversal...yet earnings are not until January. The stock will unlikely get back to its breakdown point of 40 before earnings or a fiscal cliff resolve, so we expect weakness to persist. We can still make 6% on the 37/39 Jan19 bear call spread, which would require a 30% jump in CLF price not to work.

Trade #3: Short, CAT

Breakout: Failure of 20-day MA

Trade #4: CLF, Jan2013, 37/39 Bear Call Spread

Max Gain: 6%

Chart courtesy of finviz.com.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The Oxen Group is a team of analysts. This article was written by David Ristau, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.