Weekly Outlook: The market had a rough week as several weak data points in addition to European fears caused "risk-on" trading to occur. Housing data for New Home Sales and Pending Sales came out weaker than expected while GDP expectations for Q3 were severely lowered from 1.7% to 1.3%. Additionally, the Chicago PMI contracted below 50. Europe was also creating weakness as the Spanish markets saw weakness throughout the week as bond yields rose. The euro dropped in relation to the dollar throughout the week, creating weakness in commodities as well. As we head into this week, the market will be continuing to keep a steady eye on Europe, watching a Monday speech from Bernanke about QE, and continuing to digest data as we near earnings season.
Its another busy week of economic data that will shine more light on just why QE3 seemed necessary to the Fed, starting on Monday with the ISM Index as well as Construction Spending. The ISM Index is key, but if its anything like the Chicago PMI, the number could be a bit weaker than expected. Tuesday will bring the market Auto Sales, followed by ADP Employment, Crude Inventories, and FOMC Minutes on Wednesday. Thursday will continue the employment data with Challenger Job Cuts, Initial Claims as well as Factory Orders. Finally, we finish up on Friday with the all-important Non-Farm Payrolls. Last month was quite disappointing with sub-100K reported, and expectations are for 120K. Based on some better jobless claims, we may be able to reach that number. There is a bevy of data to watch this week that will be a major sticking point.
Overseas, the dominant country continues to be Spain right now that is creating risk. The market will be watching that situation develop closely this week as well as looking at some interesting data points. Things start on Monday with the eurozone Unemployment Rate as well as a key Japanese manufacturing figure from Tankan. Wednesday will be highlighted by eurozone Retail Sales. Some say that retail is showing a bottom there, but we are skeptics based on recent earnings. Thursday is the big day with the ECB Rate Decision as well as BOE Rate Decision. Good news our of Europe would go a long way to giving the market some nice support.
Earnings are gearing up for reports coming in a couple weeks, and so we are still in a lull. We got some interesting reports last week from Nike (NYSE:NKE) and Discover Financial (NYSE:DFS). One showing retail is still struggling while DFS showed that credit companies have made it back! This week, we gear up for some important reports from Monsanto (NYSE:MON) and Mosaic (NYSE:MOS) as well as Yum! Brands (NYSE:YUM) and Marriott (NASDAQ:MAR). MON and MOS will give a look at chemicals especially agricultural, while YUM should give investors a nice insight just into how the Chinese market is doing on the consumer spending side of things.
The Fed has FOMC Minutes on Thursday, but there will not be any big announcement after the latest QE3/rate decision. Bernanke, however, is scheduled to defend QE3 on Monday as unrest is growing about its effectiveness. There are several other speeches this week, which could give more insight into what other Fed presidents are saying about the plan. Overall, the Fed is likely done for taking major action for the rest of the year.
So, where are we headed this week?
It looks like the majority of the market's potential is based on economic data and developments in Europe. If we get good jobs data, the market will rally. If Spain gets closer to a bailout, we will rally. We are at a very nice support level on the market right now, but we have not started the move back up. Another bad week could make us lose that grip on upside and end up making us breakdown more significantly. Jobs and Europe are the name of the game, so watch them very closely.
Stocks To Trade:
The four main stocks we like this week are Linkedin (NYSE:LNKD), Visa (NYSE:V), Kohls (NYSE:KSS), and United Parcel Services (NYSE:UPS). We like LNKD and V for long/bullish positions and KSS and UPS for bearish/short positions.
Right now, LNKD continues to remain as one of the strongest stocks on the market as they have seen a number of positive catalysts. For one, their company is growing at a great rate and is turning profits at a higher rate, which stands out against many other online companies. A lot of money that was in Facebook (NASDAQ:FB) also seems to be moving into LNKD. While we do believe that the stock is a bit overvalued at this rate, it should not lose its footing until earnings, which are not until the beginning of November. The stock has not failed $100 since the August earnings, so that line looks very strong. For a conservative play, we like the 100/97.50 bull put spread for a 4% max gain. More aggressive traders can play the $110 line, which was the breakout place at the beginning of September. We also really like the looks of Visa for an equity breakout. V has been consolidating below 135, but it has not been able to breakout from 135. We believe that the stock will make a nice move if it can get to 136. DFS had great earnings last week, and the company reports at the end of this month with around 15% expected growth in earnings. We like this stock to continue higher from here.
For bearish trades, we are fans of Kohls and UPS. KSS looks to be breaking out to the downside right now after it failed a key support line at $51 on Friday only to close just above it. A failure of it again could signal a breakdown. The company could get a major catalyst on October 4th when same-store sales are reported. The company has been declining without a lot of reason and catching support at $51. If those numbers are bad, the stock will lose that support and could really see a large decline. When will UPS be able to come back? Probably not until their next earnings report, which won't be until October 23. The stock has been hit hard since their last report was weak, dropping about 10%. The stock continues to weaken and has not broken the 50-day MA since its last report. We believe that line continues to hold moving forward and like using it for a bearish play. The 75/77.50 Bear Call Spread is offering about 5%, while the 72.50/75 spread is offering about 25%.
We have the following positions:
In our Earnings Alpha Portfolio, we are long Goldman Sachs (NYSE:GS), Alexion (NASDAQ:ALXN), Costco (NASDAQ:COST), Polaris (NYSE:PII), Crocs (NASDAQ:CROX). We are short Buffalo Wild Wings (NASDAQ:BWLD).
In our Goldman Sachs Up/Down Paper Portfolio, we are long American Water Works (NYSE:AWK), Walgreens (NYSE:WAG), Apple , Manitowoc (NYSE:MTW), and Netsuite (NYSE:N). We are short Transocean (NYSE:RIG).
Chart courtesy of finviz.com.