It was a solid week for the market to start off 2013, but where will the market head next? The resolution of the fiscal cliff, combined with some solid unemployment data, let the market increase nicely. Unemployment numbers showed non-farm payrolls growing by over 150K, along while the unemployment rate ticked up to 7.8% from 7.7%. The coming week for the market will see a fairly light number of data points for the market, but the market will kick start earnings season as a handful of companies release Q4 earnings. The important reports from Alcoa (NYSE:AA), Wells Fargo (NYSE:WFC), and Monsanto (NYSE:MON) will give the market some insight into the health of Q4. Most of the major reports do not begin until next week, but this week should help to set the table.
Of the limited economic data, here are the reports to watch. Consumer Credit will be released on Tuesday along with Crude Inventories on Wednesday. The major reports of the week on Thursday will be Wholesale Inventories and Initial Jobless Claims. Finally, we finish up the week with the Trade Balance and Import/Export Prices on Friday. Trade Balance is the most important data point for the week, but it appears that, for the most part, that data will have a very limited impact on the market.
Since the fiscal cliff issue began to create extensive drama in the stock market, Europe has been very quietly making lots of gains. The lack of issues there has helped limit the market's downside risk. What can we expect from Europe in the coming week? The major development to watch is the Bank of England and European Central Bank rate decision on Thursday. The Bank of England is expected to hold current rates as well as the European Central Bank, but the decisions are less important typically as the tone and language used by the banks. Any signs of positive developments in Europe or the reverse will definitely help move the markets. Watch for that on Thursday. Other than that, though, Europe should remain pretty quiet.
Earnings are definitely the key to the week. Most of the week's talk will be speculation for the season, but we do get some tangible data from Alcoa, Monsanto, and Wells Fargo. Those reports will help give the market insight into materials, agriculture, and finance. AA and WFC are better economic bellwethers than MON, but all three will be very important to watch. AA is expected to show a nice swing to profits year/year but see around 6% decline in revenue. MON is expected to see 61% growth in earnings as well as 8% growth in revenue. Finally, WFC is expected to see a 22% increase in earnings along with a 3% increase in revenue. WFC may be the key to the week on Friday, as financials are expected to see solid growth in the new year.
The Federal Reserve put a damper on the upside this week after stating that they would not buy bonds past 2013. The market did not seem to react too negatively, as recent programs have had much less positive impact on the market as of late. This week, the Fed is quiet, however, with just a handful of speeches at the end of the week--though none are from Fed Chairman Ben Bernanke.
So, where are we headed this week?
The week is more limited in announcements, but we should start to see some movement surrounding earnings speculation. The continued talks surrounding spending in the government will be in the background, as well as economic data. Europe could be important this week if anything important comes out from Bank of England and European Central Bank. All in all, though, we expect another solid week for the market as long as AA, MON, and WFC do not show any very strong earnings issues.
Stocks To Trade:
We are liking the looks of MMM and CMCSA this week. Both blue chips are looking very solid, with 3M breaking out and Comcast looking very solid for a bull put spread. 3M looks very solid right now after it broke a key resistance line at $95, which had been tested on two previous occasions in the past three months. The level was broken as the stock is benefiting from some ideal market conditions as well as some positive expectations for 2013.
First off, the stock is cheap. Its future PE is below 14. Below 15 is the level that we look for value, and the company is expected to see around 5% growth in sales in 2013, which is a strong level for a large conglomerate like MMM. On top of that, we like the company's 2.5% yield as well as their growth/value potential. Look for 3M to continue higher as it looks very solid breaking over that $95 line, and we like it as a buy.
Another blue chip we are liking is CMCSA. The company is in a great bull put spread right now, and it should continue to move higher and limit downside moving forward. CMCSA is looking very solid for 2013 as the company is expected to see another 15% growth in earnings in the new year. Additionally, the company is looking solid as well from an announcement over the weekend that the NHL and its players agreed to a new collective bargaining agreement, which is great news for CMCSA. The company has a deal with the league to display games through the company's NBC Network for sports. We believe that decision can help give the company a nice tick higher this week. The company's next earnings report is on Jan24, and the company is expected to see about 12% growth in earnings and 6% growth in revenue, two solid numbers. We believe the solid results should help the company to see limited downside, which makes a bull put spread for February attractive. Right now, we can make 11% selling the 36/34 bull put spread. 36 is a great support level, and CMCSA is in a very strong upward channel right now.
Trade #1: Long, MMM
Breakout: Break of $95
Trade #2: CMCSA, Feb16, 36/34 Bull Put Spread
Max Gain: 11%
For bearish trades, we like the looks of EMC and GLD. EMC has looked very weak as of late. The company has been breaking down since the company started to look weak in mid-December. The stock started to break down with the rest of the market as we neared the fiscal cliff, but it did not benefit from the government's avoidance of the cliff. The stock has continued to decline while the market rallied higher. The reason was the company got hit by an Oppenheimer note that they expected EMC to miss its Q4 expectations due to channel checks that showed slower growth than expected. They commented as well that they expected the same to be true in the first half of 2013.
The issue for EMC is that the company has continued to look weak as it missed expectations in Q3 as well. The stock has stayed weak since that report, and we believe that the stock could see a further breakdown heading into earnings on January 29th. The line to watch is 23.50 then 23.00. 23.50 is the bottom of the company's current wedge where they have had good support. 23 has been long-term support. We recommend shorting on a break of 23.50 and then 23.00 even more.
Another equity looking weak is gold ETF, GLD. The commodity-based ETF has an issue because gold prices look weak moving forward. The Fed's announcement of their decision to suspend bond purchases past 2013 means that yield on bonds should start to move higher to attract buyers in 2013. The move means bonds become an attractive hedge to the market again, which means that gold may lose some of its safe haven and bond alternative position it has had for the last few years. Additionally, the Fed's decision to take out liquidity of the market should lead to a higher dollar as well, which will hurt the commodity as well. Gold has a lot of headwinds right now, and with the Fed pulling the plug on free money, the upside on gold seems limited. We like them for a bear call spread as the long-term outlook for gold looks weak now. We can make 11% selling the 167/169 bear call spread on GLD.
Trade #3: Short, EMC
Breakout: Failure of 23.50
Trade #4: GLD, Feb16, 167/169 Bear Call Spread
Max Gain: 11%
Chart courtesy of finviz.com.
I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.