The market continued its slight retracement on Wednesday as the market is selling off highs on the back of European fears. Spain's issues continued for another day as their bond prices increased and stocks decreased. The Euro continued to drop, rising the level of the dollar. That move was key to a gold and oil sell-off. Equities were also hurt by the rise in the dollar, but their weakness was more likely caused by a drop in the annualized rate of New Home Sales. Expectations were for that number to rise to over 380K, but the number dropped month-over-month to just over 370K. That news sent residential construction shares down significantly, and weighed on the market. The retracement we are seeing right now is healthy and necessary. Typically, there have been drops in the market after QE announcements, followed by strength. We believe this retracement is setting up for a solid Q4 and is a healthy part of any market.
Here are some stocks we like moving through the week and beyond:
Stocks To Trade
For an earnings trade, we like the looks of a bearish position in BWLD. The company missed on earnings in its last report, and for a company with a PE near 30, high growth is needed. For BWLD, however, the company is expected to report a drop in EPS from 0.61 to 0.60. The company was rejected fairly strong at the $85 level, and we like adding a bearish options position for October expiration as we believe weakness will continue for the company. The company has been hurt by rising chicken prices, and we believe that heading into earnings (with a weak market) BWLD will continue to stay weak. We like adding a low-risk bearish position to hedge our "long" intensive Earnings Portfolio.
Trade: BWLD, Oct20, 90/95 Bear Call Spread
Max Gain: 11%
For longs, we like the looks Seagate Tech and Philip Morris. STX looks ready to break out. The stock is in a great upward channel with strong support below it, and seems to be putting in a bottom after weakness from Western Digital's (WDC) downgrade of revenue. STX's revision down has been priced in and is actually less than many were expecting. If the market recovers at all, STX will likely break its 31.40 resistance line that is above it, and we believe it would be a bullish play on that break. PM continues to be a solid company, and it too is in a great upward channel with very strong support. We like PM as this market starts to show signs of weakness. Consumer staples get very positive cash flow during market downturns and outperform. If the market continues to weaken, we may see a lot of cash flow come into strong stocks like PM. We like them, therefore, for an options spread that will give us income as long as PM does not decline below 87.50
Stock Trade: Long, STX
Breakout Point: $31.40
Options Trade: PM, Oct20, 87.50/85 Bull Put Spread
Max Gain: 14%
For shorts, we like the looks of Green Mountain Coffee and JC Penney. GMCR broke through its 50-day MA today, and the stock dropped below it. Right now, GMCR's fundamentals are weak. Starbucks' (SBUX) Verismo brewer is ahead of sales forecasts, and any positive there is a weakness for GMCR. The company has a definite black eye, and it will continue to drop until sales/earnings start to become more attractive. JCP, additionally, is looking weak. The stock broke to the downside of a downward wedge. As we get closer to earnings, JCP will most likely see some weakness as their last report was a disaster. The latest comments from the company have not been bullish, and the idea that the company is not taking shape in actual earnings yet.
Stock Trade: GMCR, Short
Breakout point: Failure of 50-day MA
Options Trade: JCP, Oct20, 28/29 Bear Call Spread
Max Gain: 10%
The market seemed to have found some support at 13400 on the Dow Jones, and the downside was not as strong today. At the same time, a general retracement seems to be in effect. We would not be shocked if the market bumped back up a little tomorrow as buyers come back from holiday, and shorts start to unwind positions to end the week. Friday will probably give us some more update on Apple (AAPL) sales as well, which could help. We also get some important data with jobless claims and GDP tomorrow that will definitely be important. The market is definitely still in a selling mood, but watch for some slight gains tomorrow to potentially happen.
We have the following positions:
In our Short-Term Equity Portfolio we are long Las Vegas Sands (LVS).
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.