Welcome to a holiday-shortened trading week…
In the US, Memorial Day weekend serves as the unofficial beginning of summer - which typically means lower trading volume, and sleepy action. This is the week when Wall Street portfolio managers start to escape the city and head for the Hamptons, and retail investors focus on travel plans rather than trend lines.
But this year, the summer investment environment is a bit different. While US traders used Monday as a chance to take in a ball game or fire up the barbecue, traders in Europe continued to handicap the debt crisis with Spain now challenging Greece for the most sensational headlines.
On Friday, S&P downgraded 5 Spanish banks, as losses from the country's property bust continue to mount. While Prime Minister Rajoy continues to claim that the country will NOT need a bailout, Spain has been urging the ECB to lower borrowing costs so they can roll debt obligations and still manage to keep up with interest payments.
To be sure, the European debt crisis isn't new news. It seems that the continent has been in the slow train wreck process for years now - and there is still plenty of motivation to continue to prop up failing banks (and countries) in order to avert the inevitable crisis.
But the problem is that investors are losing faith when it comes to the "crisis averted" statements - and with a more skeptical global investor base, comes the risk of massive capital withdrawals, from both deposit institutions as well as global equity markets.
So heading into the new trading week, there's certainly a possibility for the traditional slow-sleepy trading environment, but we also see plenty of opportunities for sharp price dislocations and significant trading action. It just depends on how the chess pieces in Europe are played - along with traders' responses to the political maneuvering.
Looking at the recent action in US equities, it's pretty easy to make a bearish case for stocks. All four of the major indices (Dow Jones Industrial Average, S&P 500, Nasdaq Composite and Russell 2000) have broken below key support levels and then consolidated or drifted higher.
Considering the bearish patterns for the major market indices, it's no surprise that there is a large number of bearish trade setups in the queue. Below are a few of the areas we are particularly interested in for the coming week:
Luxury Retail Sentiment Drops
Luxury retail stocks are taking it on the chin as investors adjust to slower growth expectations. The group weathered a challenging domestic economic environment relatively well as US and European consumers reined in spending. But now that emerging markets are also reporting decelerating economic growth, the group's prospects are becoming much less attractive.
In last week's View From the Turret, we made a bearish case for the retail apparel group as a number of key constituents offered disappointing outlooks. Luxury retailers are following the same pattern with stocks breaking down as executives outline a distressed environment for selling to high net worth shoppers.
Tiffany also said spending by financial sector employees has continued to slow while "substantial competitive discounting" remains a problem.
Meanwhile, shoppers balked at entry-level silver jewelry after Tiffany raised prices to offset the rising cost of materials, from precious metals to diamonds.
While visitors from abroad still drove sales in the Americas, Tiffany said it saw a drop in sales, especially to European tourists, at its New York store.
In China, sales have slowed, echoing remarks made by such European counterparts as Burberry and LVMH. Still, Tiffany said its store growth plan there remains on track.
A worldwide slowdown in luxury spending could set up some tremendous trading opportunities. This month's 21% decline in Sotheby's (BID) along with Tiffany's ominous warning has set up some sharp breakdowns that are now giving way to consolidation or drift patterns.
HPSS, our swing trading advisory currently in beta, has a pending short trade for Coach Inc. (COH) as the stock has completed a rounding top pattern and is now poised to continue the bearish action with any help from the overall market environment.
Facebook Faceplant Creates Social Media Opportunity
It's hard to overstate the importance of the Facebook Inc. (FB) IPO just over a week ago.
Not only did the transaction mark the culmination of literally years of hype, the deal was also completely botched by both Morgan Stanley (MS) - downgrading the stock ahead of the offering - and Nasdaq OMX (NDAQ) - screwing up executions on the most highly anticipated IPO in years.
As noted in last week's Strategic Intelligence Report, the fun is just getting started. The actual IPO transaction had the unintended consequence of sucking capital out of the economy, and then when the IPO started trading lower it created a cascade effect across the entire social media group.
This week, we're keeping a close eye on social media candidates as the initial breakdown which coincided with the Facebook transaction should lead to a continuation pattern and further bearish action.
Homeaway Inc. (AWAY) looks particularly vulnerable as the stock has tried repeatedly to break above its $27 IPO price, but has met significant resistance. A fresh breakdown, in conjunction with more weakness from the group, could be the first step for a much more significant drop.
And considering the premium multiple investors are currently paying for the stock, there is plenty of room for lower prices before value investors would start getting interested in supporting the stock.
Gaming Rests Hope on Faltering China
For the gaming industry, Las Vegas is just another city…The true growth for casino operators comes from China's Macau province, where gambling is legalized and throngs of affluent Chinese visit for both the gaming and atmosphere, shops and restaurants. Problem is, with the Chinese growth engine decelerating, investors are starting to worry about the growth expectations for the gaming industry in Macau.
Of course, the industry isn't going to evaporate or turn unprofitable overnight. In fact, we expect profitability to continue to grow over the next few years - but at a slower rate than investors have become accustomed to.
But as China's economy approaches stall speed, and economists debate whether the country will experience a soft or hard landing, Chinese consumers are likely to pull back on how much they travel, on their level of luxury spending, and even on how much they wager at the baccarat tables.
Gaming stocks have already completed major topping patterns with capital flowing out of stocks like Wynn Resorts (WYNN) and MGM Resorts International (MGM). Las Vegas Sands (LVS) has completely reversed its first quarter breakout, and has spent the last week etching out a narrow wedge pattern. A break lower would confirm the bearish trend - in a sector that has already established a bearish pattern.
While US equity markets were closed on Monday, Globex futures markets were relatively active with the S&P contracts advancing marginally and precious metals inching slightly higher.
Modestly bullish action would not be a surprise, given the light amount of economic data and the absence of catastrophic news out of Europe. We're keeping our risk points relatively tight in case we get another euphoric "all clear" signal out of Europe. But the majority of our pending setups are on the bearish side of the ledger as we continue to respect the price action and the risks associated with the darkening macro picture.
Trade 'em well this week!