Market Recap: It was another lackluster day in the markets as consumer confidence data was weak while Jackson Hole/QE3 prospects are keeping everything in check. Consumer Confidence came in very weak this morning at 60.6 vs. 65.7 estimates and 65.4 for the prior month's reading. That number was weak, but weak data does have the effect of pushing the prospects for QE3 higher. At the same time, the market did weaken on the news. The news was also balanced out by the Case-Shiller Home Price Index, which came in at 0.5% growth vs. -0.5% estimates. The housing market continues to remain a bright spot in the market. Jackson Hole is what the week is all about, and we have continued to stress that most moves will be small into the report.
Going into tomorrow, we have a very healthy slate of economic data on the docket that will move the market. The one question, though, is does weak data mean we rally as it signals QE3? Additionally, we should see some more focus on Europe tomorrow with some key German data to be released, which could have an adverse effect. Additionally, how does Republican hopeful Mitt Romney play into this market? (discussed below)
Stocks To Trade
For an earnings trade, we are liking F5 Networks (FFIV). The company had a solid report in the middle of July and built a strong base at 90. We have a $110 yearly PT on the company, and we expect the company to move back to that level by its next report. The $90 line is a great place to sell a bull put spread for the Oct20 expiring options as it plays on the strong $90 double bottom support. F5 for awhile was sell-rated by us due to extreme overvaluation, but future PE has come down below 20 for a company that is growing EPS by around 50% this year and 20% next year. The company is solid growth, and we believe that they are at a nice growth point into earnings. Other similar companies in application software like Salesforce (CRM), Oracle (ORCL) and IBM (IBM) have all shown good growth in their latest reports.
For longs, we like Home Depot (HD) and Cree (CREE). Home Depot continues to be a solid company right now and coming out of its last earnings, it is looking very solid. They guided well on their last report and seemed to have a very solid growth model coming through from the remodeling business. The company looks destined to break out if it can break over $72 as it has built a solid base after earnings, and we will be buying on a break of that level. CREE, additionally, has built a nice base off of its last round of earnings that we think provide some solid looking option plays. The company has built a nice base at $28, and we can still make 22% selling the 27/26 bull put spread. 27 has not been penetrated since the beginning of the month, and it would require a break of the 20-day MA to occur. We believe that the market is liking the value and growth potential with CREE that has definitely turned a corner since their weak 2011. Future PE is very solid around 15-16.
For shorts, we like AmBev (ABV) and Delta Airlines (DAL). ABV is a great short below $37. The company has built a downward moving triangle with some near-term support at $37, and the stock has looked weak as beer companies have had a rough go as of late. Drinking habits have been moving to hard liquor, craft beers and ciders this year. ABV has not been able to move into those departments as strongly as we like, and we see the market giving the company continued discounts without a near-term catalyst. A lot of European exposure does not help, and we would short on a break of $37. Delta ... yikes. The company broke very key support at $9 on the back of continued weakness since Delta's last report in mid-July. The company had held $9 since nearly the beginning of the year, and it was a giant support level for the company. With oil prices looking stronger and most airlines continuing to struggle, we believe DAL is a great candidate for a bear call spread. We like the 9/10 spread on them for a nice 20%+ gain.
The market has quite a busy slate for tomorrow to use for direction. We start out in Europe where markets will be reacting to German Consumer Price Index, which will be pretty key to those markets and the euro. At home, we have the GDP report, Pending Home Sales, Crude Inventories, and Beige Book. GDP and Pending Home Sales are definitely very crucial economic data, but with Jackson Hole pending, most attention should go to the Beige Book. Weakness there may signal more potential for QE3. We would not expect it to say anything different than moderate growth but concerns are there. Either way, the Fed report attracts attention and could raise volume. No major earnings are to be released. There could be some buzz surrounding Mitt Romney and the RNC tonight that could translate into some gains for the market, but we think it should be outweighed by more important headlines.
We had a nice day in the today as we sold our pair trade long Tibco (TIBX), short Dow (DOW) for a 3.2% gain. We also were able to exit the first third of our long-term Nike (NKE) position from the Extended Value Portfolio for a 10% gain. We did, however, take a slight loss of 0.5% in Pepsico (PEP) for our second half of that position as it refused to break out. We added long in F5 and a short in AmBev along with bull put spread in Whole Foods Market (WFM).
We have the following positions:
In our Earnings Alpha Portfolio, we are long Discover Financial (DFS), Smith & Wesson (SWHC), Lennar (LEN), Ulta (ULTA), Francesca's (FRAN). We are short Red Hat (RHT). We have a reverse iron condor in Abercrombie & Fitch (ANF).
Charts courtesy of finviz.com.
Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.