Weekly Outlook: The market received a number of fairly positive data points this past week including better employment figures (unemployment rate dropped to 7.8% and ADP employment change better than expected). Yet, despite quite a bit of positive economic data points, the market still did not move to the upside with any fervor. Upside prospects seem limited until the market gets a better feeling for how earnings are going to be this quarter as well as if the European situation can make any major changes. While the latter seems a far way from any resolution, signs of progress will be very positive to the market's confidence to move higher. At this point, though, the overall market seems pretty toppy. The coming week will be highlighted by the start of earnings season, economic data and developments in Europe. Upside will be most tied to what a handful of the first reporting companies say about earnings.
Economic data will take a backseat to earnings this week, but there are still some key reports to watch for this week. Data does not get started until Wednesday with Wholesale Inventories and the Fed's Beige Book. The Beige Book is always important to the market's movement on its report day, but we believe it takes a more limited impact this week as the Fed's QE3 was just announced and limited action is expected over the next several months. Thursday brings us Initial Claims and Export/Import Prices, and we finish up on Friday with Michigan Consumer Sentiment and PPI. The Sentiment is the only other extremely impactful report to watch for this week.
Along with earnings, Europe will play a key role in the week's progress. Special attention will be paid to Spain and their developing bailout dilemma. European finance ministers meet to start the week, and the group is expected to flesh out more plans for the European Stability Mechanism. Many are expecting around 500B euros to be pushed to the Spanish banking community to shore up significant issues there that could spell a lot of trouble for the European marketplace if they spill over. Spain has been in talks with ministers about that plan all week, and developments there would be key to the market. Failure to act this week could weigh on the markets. In addition, the ECB will release their monthly report this week.
It will officially start earnings season this week, and the market is not expecting much for this season. After a strong couple years of growth, a lot of companies are looking at flat growth this quarter if not negative growth as European slowdowns, Asian concerns, and currency strength in the dollar could weigh on earnings. Yet, with little in the way of expectations for the market, we could actually see some interesting reports that surprise traders/investors. This first week will be key for setting the stage. The market gets things started on Tuesday after the close with Yum! Brands (YUM) and Alcoa (AA). YUM will give the market its first glance at Asian growth, which is very important to the market. Other key reports include Costco (COST) on Wednesday and JPMorgan Chase (JPM) and Wells Fargo (WFC) on Friday. Those series of reports will have a large impact on the market this week, and if they come out very weak, we could see some strong profit taking occurring.
The Fed's Beige Book will be interesting on Wednesday as a test to see if the Fed's conversations with business leaders is showing the same strength we saw in employment statistics this past week. Additionally, the Fed will give several speeches this week that will be important. All in all, though, the Fed will be in a backseat role as the market digests earnings.
So, where are we headed this week?
It looks like the majority of the market's potential is based on earnings this week, and if they disappoint, the market looks ready to correct. Expectations are low though, so beats do set us up to rally nicely. Additionally, developments out of Europe can easily offset earnings issues/successes. Its definitely a wait and see week with a lot of volatility possible. We would lean more carefully this week as the market seems to want to correct itself a bit here, but at the same time, we could see some solid reports from YUM, COST, and WFC that could skew things this week.
Stocks To Trade:
Right now, we like the looks of AMT for a breakout trade this week as well as believe now is a great time for options in SBUX. AMT is in a strong ascending triangle in its chart and has earnings coming up that look like they will show very solid growth for the company and could be a breakout catalyst. The stock has had major resistance at $73 and not been able to breakout from there, but we believe that a move above that line would signal a breakout for the stock. The stock is projected to see a nearly 1000% growth in EPS along with just under 15% growth in sales, and we believe the growth mode is still strong with mobile markets continuing to strengthen and grow in demand. SBUX has been hit hard as of late on the back of really no bad news. Verismo seems to be going well, and the company is working with Coinstar (CSTR) on their new venture into the coffee market. The company is in a very strong growth mode and is positioning themselves excellently. We believe the downside is limited from here, and like using the recent weakness as a way to get nice premium on writing puts.
Trade #1: Long, AMT
Trade #2: SBUX, Nov17, 44/43 Bull Put Spread
Max Gain: 15%
For bearish trades, we are looking at GLD and SWY. Gold has been on fire since the announcement of free money both from the ECB and Federal Reserve, but it has a lot of risk of topping out this week with the European finance ministers meeting. If things go sour at this meeting, the dollar will skyrocket and gold could see a lot of weakness. 172 has been a very strong resistance area for GLD, and we are worried that its near a top. Gold will drop if the market slips a bit, and we would be sellers on a drop below key support at the 20-day MA. Additionally, we think SWY is good for option bear call spreads as the stock nears its next round of earnings. Safeway's last report was an absolute disaster, and the stock will not be able to breakout or even see much strength as its next report nears. That report is due out this week, and we like adding $16 puts to start the week as it should weaken into the report. Expectations are for slight gains in earnings and sales, but we believe that profit taking will occur and a bevy of shorts will add for trades to start the week.
Trade #3: Short, GLD
Breakout: Failure of 20-day MA
Trade #4: SWY, Oct20, $16 Puts
We have the following positions:
- In our Short-Term Equity Portfolio we are long Panera Bread (PNRA) and Freeport-McMoRan (FCX). We are short Cooper Industries (CBE).
- In our Options Portfolio, we are long Amazon.com (AMZN), Intuit (INTU), Williams-Sonoma (WSM), Apple (AAPL). We are short iShares Russell (IWM).
- In our Earnings Alpha Portfolio, we are long Disney (DIS) Travelers (TRV), Goldman Sachs (GS), Alexion (ALXN), Costco , Polaris (PII), Crocs (CROX). We are short SPDR S&P (SPY).
- In our Goldman Sachs Up/Down Paper Portfolio, we are long Apple , Manitowoc (MTW), and Netsuite (N). We are short WR Berkley (WRB).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.