Market Recap: Wait a second, we though QE3 was supposed to be a catalyst. In fact, the market has actually dropped on both announcements of QE1 and QE2, so the market may not be off track as much as one might think. The market dropped hard today giving back a lot of recent gains on the back of lack of buying on QE3, weak earnings continuation from HP (HPQ), and a miss on initial jobless claims. All in all, though, the movement was a bit extreme for a slight miss on jobless claims and earnings that were never expected to be good from HPQ. That leaves us with QE3. Why would the market drop so much on the bond buying announcement? Well, it looks like it was a classic sell the news. QE3 is coming because we are not in good shape, and the market seemed to realize that today. More downside may be in the cards, but at the same time, QE3 and Europe bond action will be a benefit to markets eventually so a general floor to the market should exist.
Going into tomorrow, we should probably see some more downside follow through as we have a fairly light day of news, data and earnings. The market has now done two down days in a row, which does set up a pattern of bearishness, and that cannot be ignored now.
Stocks To Trade
For an earnings trade, we are liking Equinix (EQIX). We have a Buy rating on the company with a price target of $228. The company has been holding up tremendously despite the market trending lower from here, and we believe that the company has upside into earnings. They are growing very strongly right now, and the company is looking like the old days of Salesforce (CRM) and F5 (FFIV). The only difference is we believe the company has a better balance sheet, better management, and more attention paid to what pays ... profits. Their last report was very solid, and we expect more of the same for them going into their next report. We like the 175/170 bull put spread for an earnings play in EQIX moving forward.
For longs, we like Tibco Software (TIBX) and Williams Sonoma (WSM). TIBX broke over key resistance at 29 today, and the stock looks ready to make more moves higher. The company was green on a strong down day, and they lacked any major news to do that. The company is showing a lot of great relative strength, trending higher, and has been on a roll since their last earnings were very strong. We think they have great value with a future PE at 21 despite over 40% EPS growth this year and around 20% next year. The stock has resumed a strong uptrend and looks ready to move to 30 easily. We also think WSM is a good place to park some cash during this market pullback. The company had fantastic earnings in the last report, gapped up, and held the $42 line the day after earnings despite a weak market. Right now, you can park some cash in the 39/38 bull put spread for around 12% gain possibility for less than a month of holding. Goldman Sachs reiterated Buy, and they seem to have a nice floor now.
For shorts, we like the looks of Nike (NKE) and Deckers (DECK). Shoe companies were one of the bright spots in the last round of earnings, but these companies were not part of that. NKE had the worst report of the industry, and despite DECK's pop on earnings, the report did not really show anything to be excited about - they lost less money than the market thought. The truth is that the glory days of DECK are over. Uggs made their splash and now will be something that continues to make some revenue but is not a sustainable business like shoe retailers NKE or WWW. We like a bear call spread for DECK as the stock broke today. The $52.50 line looks like resistance. If the market turns, DECK will go with it as they do not have the strong business line to hold on here. NKE is also looking quite weak. We like NKE for the long haul, but the stock is testing its 10-day, 20-day and 50-day MA at 95. The stock held above that line today, but a break below $95 would be detrimental to the stock. Earnings were not good, and if the market rolls over, they may see some shorts come into play as well as traders sell it.
The market will obviously be reacting to more of the QE debate, and with a lack of data, we should see a follow through in the market to the downside. There is no major data out tomorrow. Durable orders will be released, but it's not a major report. Overseas, we get a new conference from the Spanish Cabinet that could provide some movement for European markets as well as British GDP. Additionally, Merkel will be meeting with Greek Prime Minister Samaras tomorrow, so we do get some more attention drawn to Europe. There is definitely the formula there for more downside tomorrow, but at the same time, QE puts a floor on the market. Earnings are sparse with Salesforce and Autodesk (ADSK) leading the way.
We had another fantastic day. We bought back Francesca (FRAN) puts for a 22% gain from $25 puts we sold at the beginning of the month. We also bought back half the bear call spread on Safeway (SWY) we talked about on here for a 21% gain today. We also took half off of a Tibco long, Dow Chemical (DOW) short for a solid 1.5% gain. We made a slight gain closing long Carnival (CCL), short Omnicare (OCR). We did, however, take a loss on EXCO (XCO) long, short Tempur Pedic (TPX) of 2.8% and closed Whole Foods (WFM) at entry to average out for a slight gain. We added the pair in TIBX, DOW today as well as bull put spread in WSM to Goldman Portfolio.
We have the following positions:
In our Goldman Sachs Up/Down Paper Portfolio, we are long Coca-Cola (KO) and Williams Sonoma.
Chart courtesy of finviz.com.