Weekly Outlook: The market was held in check from any massive gains by the continued dispute in Washington, DC over the fiscal cliff scenario. No progress was made during the week on the situation, and that issue caused the market to be unable to rally on the back of solid employment news, retail sales, and Chinese data. Over the weekend, however, Speaker of the House John Boehner commented that he was willing to now increase taxes on the wealthy, which is a big step in the process. While he did not say how much he would be willing to increase taxes, his change in attitude gives a lot of potential for an agreement to occur before the fiscal cliff scenario would occur on January 31st.
At the same time, politicians are still far from accepting any deal, and that will loom large for the market. In addition to the fiscal cliff, the market has some very important earnings to watch this week as well as important economic data like GDP and housing data. With the market moving towards the holiday season, volume should also dry up, which means some volatile moves as less people are involved in trading.
The coming week is packed full of economic data. While the fiscal cliff will dominate, we should watch for movement off of some key reports during the week. Economic data reports get started on Monday with the Empire Manufacturing report. Tuesday will start the housing data with the NAHB Housing Market Index. Wednesday will be a big day for the market with Housing Starts and Building Permits. Housing data has been impactful on the market all year, and we see no reason for that to stop this week. Expectations are for housing starts to come in at 850K vs. 894K from last month, so the bar is set low due to Superstorm Sandy.
An even bigger day for the market will be Thursday with Initial Jobless Claims, GDP for Q3, Existing Home Sales, Philly Fed Index, and Crude Inventories. The market should see some big movement off these reports especially GDP. The market wraps up on Friday with Personal Income/Spending, Durable Orders, and Michigan Consumer Sentiment. All three reports will also be impactful. Look for the market to be held in check by the cliff, but it will definitely see some reaction off these reports throughout the week to direct the market's movement each day.
Europe has not been as intriguing for the market since Greece got its bailout and the fiscal cliff situation arose. We expect more of the same for Europe again this week. Those markets should mostly follow the American markets and developments surrounding the fiscal cliff. There are no major stories breaking right now to move the market this week, but we should look for some movement off Bank of Europe minutes on Wednesday and Great Britain GDP report on Friday.
For earnings, we do have a fairly important week of reports to watch that will be important to the markets. Earnings reports this week include Oracle (NYSE:ORCL), Accenture (NYSE:ACN), Nike (NYSE:NKE), Walgreen (NYSE:WAG), Carnival (NYSE:CCL), FedEx (NYSE:FDX), Discover Financial (NYSE:DFS), and General Mills (NYSE:GIS), among many others. This week's reports are definitely fairly important as they will give the market some perspective of business climate in October and November especially in relation to Sandy. The key reports include ORCL, NKE, WAG, FDX, and GIS.
All five are bellwether stocks that we believe should give some interesting perspective for the market. ORCL gives us a strong look into technology and cloud networking. NKE and WAG will also give us a great look into retail markets, and GIS will give us a nice look into consumer staples. FDX is probably the best perspective into holiday sales, which will be key to the market as well. Watch for these reports to have a key impact on the market, but they still will pale in comparison to the fiscal cliff scenario.
The Federal Reserve reported an extension of Operation Twist this past week, which will extend the purchase of Treasury Bonds through the new year. That decision is somewhat bullish for the market, but the continued extension of free cash to the markets is having less and less effect on the market. For this week, the Federal Reserve will be out of the picture, but the Operation Twist extension will have some continued impact on the market -- mostly creating some solid support for the market rather than catalyst.
So where are we headed this week?
While there are some crucial earnings and data reports this week to watch, the market has to deal with the fiscal cliff. Boehner's acceptance of a tax hike is a positive step, but the market needs more positive steps to continue higher. Without a move towards a plan, the market should see a lack of upside catalyst. Additionally, the market will be looking at the key data and earnings reports throughout the week that will be important. The key earnings reports this week along with large amount of economic data will make for a very interesting week in the market.
Solid surprises in either direction can impact the market on a daily outlook, but the general movement of the market will be nearly completely impacted by the fiscal cliff. We would say the market will be tolerable at the beginning of the week of Boehner's announcement, but by Wednesday, more progress needs to occur or the market faces some tough realizations.
Stocks To Trade:
We are liking the looks of C and BK as part of a financial rebound in the stock market. Both stocks look very solid and could break out. Citigroup looks very solid for a potential breakout this week, while we prefer BK for a bull put spread. The level to watch with C is $38. That level has been resistance all year for Citigroup, but if the stock can break that level on strong volume, it could get moving. What will allow for this breakout? Citigroup will be a major beneficiary of any resolution in the fiscal cliff scenario as financial companies will benefit greatly from a deal. an increase in taxes and spending cuts will hurt banks significantly as it could impact the ability for consumers to pay back loans as well as for banks to take on new loans. Additionally, financial markets will be hurt, which will impact Citigroup's investment business negatively.
Banks have a lot to gain from a resolution, so steps taken towards a potential deal could be the catalyst C needs to break over that $38 resistance level. This is a trade to watch rather than a blatant long call. If C gets over 38, has volume, and has good reason for it, we like the stock a lot for upside. With an 8 future P/E, Citigroup has tons of value as well and is ready for a big move.
Additionally, we like BK. Unlike C, Bank of NY Mellon is in a solid upward channel and looks more solid as a consistent long rather than breakout stock. BK has been in a strong upward channel since June and has some upward catalysts since their latest speech at the Goldman Sachs Financial Services Conference, which highlighted some very attractive cost cutting measures the company is undertaking. The company looks very solid heading into their January 18 earnings report as well. BK is expected to see around a 3% increase in revenue but a 40% increase in earnings. The company's continued earnings increases and better margins is very enticing. The stock has great support at $23, which has not broken in months. Additionally, the 200-day MA is at 22.50. We like this area for a bull put spread for the January expiring options.
Trade #1: Long, C
Breakout: Break of $38
Trade #2: BK, Jan19, 23/22 Bull Put Spread
Max Gain: 11%
For bearish trades, we like the looks of Under Armour and VeriFone. While financials are looking solid, retail companies are looking quite weak. UA has dropped below its 200-day MA and failed an upward channel it was in earlier. The stock has solid support at $45 that should hold up in the mid-term, but in the near-term, it looks very weak. The problem for UA is that it still has such strong overvaluation with a 32 future P/E even with such strong moves to the downside as of late. JP Morgan recently rated the shares as Underperform, commenting that the company will see smaller growth levels in 2013 - 2014 as the company begins to set up international expansion efforts and increase its athletic shoe exposure.
The problem is that the company needs very strong growth levels to maintain such strong valuations, and without that growth, UA cannot maintain its strong levels. Until the company shows growth levels of more than 25% in earnings again, we believe UA will continue to consolidate. The line to watch is $48 where the company has near-term support. If that line breaks, we believe UA will be at $45 in the near-term.
Another stock that looks weak is PAY. The company announced some weak earnings last week, and we believe they look solid off a bear call spread after that report. The company guided weaker than expected earnings at 0.70 - 0.73 while analysts were expecting 0.75. The company guided revenue at $490M - $500M versus analyst estimates at $499M. Both guidances dropped the stock considerably, and we believe that weakness will remain for the company moving forward. The stock dropped from the $33 level, and that looks like resistance until broken. We like looking at that level for resistance moving forward. The 33/35 Jan19 bear call spread offers 11% potential return.
Trade #3: Short, UA
Breakout: Failure of 48.00
Trade #4: PAY, Jan19, 33/35 Bear Call Spread
Max Gain: 11%
Chart courtesy of finviz.com.