Weekly Outlook: The market saw a very weak past week as the market moved lower on the back of "risk-on" trading as traders were fearful of earnings and Europe. Earnings are expected to be weaker this quarter, but thus far, earnings were not so bad. JP Morgan (JPM), Alcoa (AA), Wells Fargo (WFC), and Yum! Brands (YUM) all beat their expectations for earnings last week. Despite that, Alcoa was cautious about China, and JPM only saw a good beat due to a loan-loss reserve.
Coming into this week, the market is sitting at technical support right now with the S&P 500 and Dow Jones Industrial Average sitting at its 50-day MA. With a huge slate of earnings coming this week, the market can either use this area as a support line or we may see a major breakdown in the market. Earnings are the key to this week. The first round was not as bad as many expect, and if we see a lot more beats this week, the market could be ready to rebound.
Economic data will take a backseat to earnings this week, but we do have some important data to view this week that can move the market as well. We start out on Monday with Retail Sales and the Empire Manufacturing Index. Retail Sales are expected to decline from 0.9% rise to 0.7% rise, and a beat there would help to start the week off on the right foot. CPI and Industrial Production will be released on Tuesday. Wednesday will bring us some key housing data in Building Permits and Housing Starts. Housing has been one of the keys to the success of the year, but data seemed to top off last month. A rebound in that data would also help this market. Thursday will bring us Initial Jobless Claims and the Philly Fed Index. Finally, we get Existing Home Sales on Friday.
While Europe has stayed out of the headlines for a couple weeks, we are expecting Europe to start to play a bigger role again in the market. The continent may be out of the picture to start the week due to a bevy of earnings and data, but at the end of the week, the EU Council will meet on Thursday and Friday. That meeting may push the envelope on Spain to ask for a bailout to the ECB. If that occurs, we believe the markets would rally as it would alleviate fear in the market. Other than that, there are some key economic data points to be released like the EU ZEW Survey of confidence and EU Consumer Price Index.
With all of that to be released this week, the most important aspect of the week has to be earnings. While the rearview mirror look of earnings/revenue from Q3 are important, the market is going to be more interested in what companies are saying about Q4 and FY2013. How is Europe affecting the company? Is there a slowdown in China? Those key questions will be what truly matters. If we see a fair amount of beats and lack of outlook revisions down, it would be a win for the markets for sure. Expectations are very low, so it would not be hard to outperform, which could be a signal of some positive potential off key support lines in the market.
The final aspect of the market to always be aware of is the Federal Reserve. The Fed will probably remain pretty quiet through the end of the year. The QE3 decision has definitely put a floor on the market, and we believe that is another reason to expect support at these key levels. There are several Fed speeches this week as well as the Philly Fed Index on Thursday.
So where are we headed this week?
The market is facing a make-or-break type of week. If earnings are weak or disappointing, the market will fail a key 50-day MA. At the same time, the MAs held last week and could be a perfect buying opportunity. There is not a lot of confidence in the market right now, so it will take some important announcements this week to get things moving in the right direction. Housing data and retail sales will also play an important role as well. Failure of the 50-day MA could be very detrimental to the market, so it's an important week. We believe that the first round of earnings were actually fairly decent, and if the rest state similar results, it could be a nice week for the market.
Stocks To Trade:
Right now, we like the looks of Mckesson and Visa. MCK looks like a breakout stock while Visa looks like a perfect stock for options. MCK has been building a very strong base on the $89 line after a strong break higher from $86 to $90 after the company announced that they will buy Med3000. The stock has been holding up very well despite a lot of market weakness, and if we start to get some more positive movement in the market, we believe the stock will take off over $90. Additionally, the company last week renewed their contract with Rite-Aid (RAD) well before expectations. A lot of positive catalysts are working for MCK, and we would not be shocked to see them move well over the next couple weeks.
Visa is also looking strong right now. Credit card companies have been releasing encouraging data, and the latest earnings from Discover (DFS) show that consumers are using plastic often. Additionally, the $6B fee settlement that Visa got in their class action lawsuit was better than expectations and is a win for V. The company has earnings on October 31, and we believe they will maintain their upward channel until that time. We like playing the stock long along with a conservative options spread to hedge.
Trade #1: Long, MCK
Trade #2: V, Nov17, 125/120 Bull Put Spread and V, Long
Max Gain: 6.5%
For bearish trades, we are looking at Duke Energy and Under Armour. Surprisingly, DUK has been quite weak as of late. During bearish markets, utilities tend to be strong, but DUK has been weakening as of late. The company is barely holding onto its 200-day MA right now, and we believe that it could be a potential breakdown point if it fails. The problem for DUK has been that the company may be suffering from margin decline. While expectations are for some strong revenue growth in the coming quarter of over 50%, earnings are expected to shrink. Further, at the end of the week, the company asked for North Carolina residential rates to be increased as the company said that it has become more expensive to serve those customers. The failure of that line would be very detrimental to DUK.
UA continues to be a stock that we have identified as a Sell with a $54 price target. The stock has become drastically overvalued. While we acknowledge solid growth, we have priced in very strong growth in that PT, and the stock at some point is going to come back to reality. With a lot of momentum stocks suffering this year, UA should see some profit taking into earnings on October 25. The company has failed its 20-day and 50-day MA already, and we like using the 60 line as a place to start to consider a bear call spread.
Trade #3: Short, DUK
Breakout: Failure of 200-day MA
Trade #4: UA, 62.50/65 Bear Call Spread, Nov17
Max Gain: 14%
Chart courtesy of finviz.com.