Weekly Outlook: The market (SPY) continues to show no signs of declining but has been limited in upside as well. On this shortened week, what will be in store for the market? The market should be reacting to a number of developments this week including a fairly large slate of economic data, more developments around government sequestration, several key earnings reports, and some interesting developments overseas. The market, at some point, needs to cool off somewhat, but the questions is will the cooling be what we have seen the last couple of weeks with mostly flat market movement or a stronger decline. Some of the key developments this week could help to decipher that question.
Economic data will mostly revolve around housing data this week. It will be the first readings on housing for 2013, which should definitely influence the market this week. Housing was very strong in 2012, but can the recovery continue in 2013? We start the week on Tuesday with the NAHB Housing Market Index, expected to come in at 48 vs. prior reading at 47. Wednesday will be a busy day with Housing Starts, Building Permits, Producer Price Index, and FOMC Minutes. Housing Starts are expected to come in at 910K for the annualized rate for 2013. January is a slow month for housing so this first reading will not make or break anything, but a beat could help power the market higher. The FOMC Minutes will also be interesting on Wednesday as investors/traders look to see what the Fed may do next. Thursday, the market will get a large slate of data including Initial Jobless Claims, Consumer Price Index, Existing Home Sales, and Philly Fed Index. All four reports will be important to Thursday's movement, and there are no data reports for Friday. Economic data will play a crucial role for the market, and if housing data shows weakness, it could lead to some correcting.
Outside of the USA, Europe and Asia have an interesting week of economic data. On Tuesday, we will get the German ZEW Survey, which is typically an important sentiment indicator for Europe. Wednesday will bring British jobless claims and monetary policy minutes from the Bank of England (BOE). Additionally, eurozone consumer confidence comes out Wednesday afternoon. Finally, we finish up the week on Friday with German GDP and a large slate of German surveys about business climate there including German Exports, German IFO Business Climate, and more. It's a quiet week for China and not as significant for Europe, but we should continue to watch Italy as it nears elections. An election of former PM Silvio Berlusconi would be hurtful to the more conservative economic policies and likely raise yields on Italian bonds.
Earnings have been very solid all season, and while earnings season has mostly wound down, we do have some interesting retail reports to hear that should give some insight into spending habits in January as well as what different retailers are seeing for 2013 trends. Reporting this week are Wal-Mart Stores (WMT), AIG (AIG), Express Scripts (ESRX), Dell (DELL), and HP (HPQ). In addition to retail, we have key reports from AIG, ESRX, and PC makers DELL and HPQ. AIG will be an interesting report as many are expecting the company to begin to show a true turnaround and potentially see some type of share buyback or dividend after this report. DELL and HPQ will likely continue to show weakness in PC demand.
The Federal Reserve will be releasing minutes from the last FOMC meeting on Wednesday as well as the Philadelphia index on Thursday. The minutes from the meeting will definitely be an important headline as many look for direction on what the Fed's next move will be. We doubt much will be uncovered this week as no major plans are being considered for the Fed currently.
So, where are we headed this week?
As we can see, it's a short, lighter week for the market that will likely be directed by some key earnings and housing data. If those are solid, we should see the market continue to move higher. At the same time, weakness in those numbers and earnings weakness could spell trouble. With a market without a trend, we should see light movement continue based on headlines. Things are starting to look quite toppy in the near-term, and we would not be shocked by a 1-2% decline this week.
Stocks To Trade:
United Technologies is looking quite solid right now and should continue higher. UTX has been doing well since November, and the company's last earnings report at the end of January seems to have helped keep the stock pushing higher. We like UTX a lot as it combines good value with low beta, a solid dividend, and decent catalyst for more upside. As far as value, UTX shares trade at just a 13 future PE, which is below the key 15 level we look at for value. That value can be seen even further by the company's 1.4 price-to-sales ratio, which is well below the 3 level we look at for value. Does the company have future prospects of growth, however? It does. UTX is expected to grow by 13% in sales this year as well as more than 15% in earnings. Shares are undervalued, though, due to the company's hefty restructuring charges they are taking on this year as they acquire new businesses and sell-off others. The company is selling wind turbine divisions and recently acquired Goodrich. The best part of UTX, though, is its diversified manufacturing including elevators, air conditioners, and aircraft engines. With lots of diversification and industrial machinery strength, the company has low volatility. On top of all this, UTX claims a nearly 2.5% yield. In the near-term, we believe that the company's recently announced plan to buyback up to $5B in shares is going to create a bullish scenario. With that buyback, the company can buy back nearly 7% of all outstanding shares, which creates even more value for the company. With UTX due for a comeback later this year, buybacks on the way, and a recent break of key resistance at $90, this company looks solid!
Trade #1: UTX, Long
Buy Point: Over $91
Another stock we like long is Pfizer. The large drug manufacturer looks very solid right now. The stock has been in an amazing upward channel since last summer and there is no reason to expect a stop to its grind higher. The company, like UTX, possesses value along with growth as well a great dividend. PFE is currently trading with a future PE at 11.6. P/S, on the other hand, is just over 3%. The positive for PFE is that they are expected to see 5-6% growth in earnings. Further, the company operates with a 3.5% yield. With low risk, good earnings, and a solid dividend, PFE looks great. The company has a solid pipeline with nearly 80 companies currently in the pipe. Just fewer than ten are awaiting registration, and the company has two new drugs ready to make their own way. The company has two new drugs, one in leukemia and one in rheumatoid arthritis that are currently in production. Bosulif, the leukemia drug, is expected to bring in nearly $200M in sales in 2013. Along with Bosulif, the company just got approved for Xeljanz, which is an arthritis treatment costing nearly $25000. The treatment is expected to bring in around $2.5B in sales. The future of PFE looks very promising, and we think they are perfect for a bull put spread as the stock offers some very solid upside but should be owned on any dips. The bull put spread will allow us to own shares at a lower price or make money if it goes nowhere or up further. Currently, we can make around 11% on a 26/25 spread.
Trade #2: PFE, Mar16, 26/25 Bull Put Spread
Max Gain: 11%
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.