Market Recap: Well it's here ... QE3. Surprise, surprise. At some point, we all knew that the Fed would turn to another round of bond-buying to help continue to supply free money to the market, prop up this market on stilts, and move it higher. The FOMC minutes surprised many with how near the Fed is now to QE3, and the Jackson Hole meeting at the end of the month may be the perfect chance for them to announce a new round of bond buying. If that occurs, it will give the market more fuel to move higher, increase commodity prices, and drop the dollar. Additionally, we got decent news out of existing home sales today as they rose month-over-month but did miss expectations slightly. Housing data continues to be very strong in the market, and it has really provided a nice spark to the market this year. The market now has a very strong floor with QE3 confirmation so downside may be limited moving over the next couple of weeks.
Going into tomorrow, we should probably see some nice upside off the QE3 news, but it will be intermixed with a healthy dose of other data points from overseas. If Europe moves well tomorrow, we could be in for a big day, but at the same time, we should keep expectations in check until we get confirmation of QE3.
Stocks To Trade
For an earnings trade, we are liking the looks of a bear call spread on Redhat (RHT). The company is sell-rated by us, and we have struggled to understand the 70+ PE and 40+ future PE the company possesses. Expectations are for little to no growth over next two quarters, little growth for the FY, and about 10-20% growth in the next FY. Yet, RHT possesses one of the highest valuations in the application software industry. While we are fond of the company, the valuations seem drastic. Last quarter, the company could not keep up with valuations and dropped 10% on earnings. This quarter, we expect to see weakness into earnings. The stock has not been able to break 62.50 since March, and that area appears to be a great place to enter a bear call spread.
For longs, we like Amgen (AMGN) and Walgreen's (WAG). AMGN is mostly a technical trade, but the company looks very good to breakout above the $84 area. The stock is in a strong upward channel that is not showing any signs of stopping. The company has been rallying since June and just gapped up on another fantastic round of earnings at the end of July. The company, further, has great value. Its future PE is 12, but the stock is expected to see EPS growth of 20% this year and 10% next year. 84 has been resistance since earnings and this second test could be a breakout point. Walgreens has really been a winner since its ExpressScripts deal, and that deal has put in a bottom on WAG at 34. We believe that on any weakness one should sell $34 puts. The company has earnings coming up next month that should keep a floor under the stock with the latest deal. Additionally, the company has fairly low volatility, so it's a nice hedge against any shocks to the market as well.
For shorts, we like the looks of Dow Chemical (DOW) and Waste Management (WM). Dow Chemical has started to turn lower, and we like shorting the stock as it has now been rejected at the 50-day MA three times in the past couple months. The company's last round of earnings was disappointing, and with the strong European connection, upside is limited until things become rosier there. The stock has a declining 50-day MA and is in a strong downward channel. We believe they are headed lower from here. Waste Management looks great for a bear call spread over $35. The company had a strong drop recently on a Barron's story that talked about the company's 10-15% risk to drop as the company has little growth potential right now as well as slowed their dividend increases, which was their big draw. The company has a strong double top at $35.50, and we believe that line will hold without some big news from the company.
(click to enlarge)
(click to enlarge)
(click to enlarge)
(click to enlarge)
Tomorrow's Outlook:
The market will obviously be reacting more to the QE3 potential, but it will also be getting some interesting data. Jobless claims and new home sales are due out tomorrow for the market, but what may be even more crucial is a slate of overseas news that could set the stage for the trading day tomorrow. How will international markets react to the QE3 news? We get the following data from international markets: HSBC Manufacturing Flash PMI from China, German GDP and eurozone Consumer Confidence. The Chinese data is probably the most important report for tomorrow as some good news out of China could do the entire market some definite good. Additionally, European consumer confidence is crucial. On the earnings front, we will also get reports from HP (HPQ) and Guess (GES).
Our Moves/Holdings:
We had a nice day in the market as we were able to exit half of our Whole Foods (WFM) long for a 1% gain as well as our eBay (EBAY) long, Kroger (KR) short pair trade for a 2.5% gain. We also closed a long American Eagle (AEO), short Dell (DELL) pair for an 8% gain from our earnings portfolio. We did, however, take a loss on the second half of our Monster (MNST) short for 2%. We added a long in Amgen as well as pair trade in EXCO Resources (XCO) long and Tempur-Pedic (TPX) short. We also added a bear call spread in RHT to Earnings Alpha.
We have the following positions:
In our Short-Term Equity Portfolio we are long EXCO, Whole Foods, Pepsico (PEP). We are short Tempur-Pedic and Omnicare (OCR).
In our Options Portfolio, we are long Priceline.com (PCLN), Google (GOOG), Yum Brands (YUM). We are short Safeway (SWY) and Coach (COH).
In our Earnings Alpha Portfolio, we are long Lennar (LEN), Ulta (ULTA), Francesca's (FRAN). We are short RedHat . We have a reverse iron condor in Abercrombie & Fitch (ANF).
In our Goldman Sachs Up/Down Paper Portfolio, we are long Coca-Cola (KO).
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.
