Weekly Outlook: The market ended the week on a very sour note as a set of weak earnings struck the market down on Friday with McDonald's (MCD), General Electric (GE), Google (GOOG), and others reported weak earnings. Despite a strong start to the week with good earnings and some solid housing and manufacturing data, the market gave back all of its weekly gains to end another week on its 50-day MA support line. The coming week is now another very key week because losing that support line will be very hurtful to the market.
We have a lot more earnings to digest, and the market can only be hopeful that companies reporting this week will play a better tune. Data is going to be a limited this week, but developments in Europe may start to come back into the spotlight to complement earnings.
Economic data has been fairly solid as of late with housing data coming out better than expected and manufacturing data better than expected as well. This week, however, data will be more limited. The first main reports for the USA will not be released until Wednesday with New Homes Sales and the FHFA Housing Price Index as well as the FOMC rate decision. Thursday will be Initial Claims, Durable Orders, and Pending Home Sales. We finish Friday with GDP and the Michigan Consumer Sentiment Index. Housing data has been very solid, and we imagine this data will continue to be solid. At this point, though, the housing data is not able to move the market any longer. Additionally, we have the GDP announcement. The first report of 1.3% was disappointing, so if that can tick up could be a nice catalyst as well. Overall, though, earnings will continue to be the key to the market.
Europe will continue to be important to this market, but all in all, Europe has really not been a factor over the past couple weeks. The market seems to be waiting for a potential Spanish bailout to occur. That looming deal has kept those markets in check for several weeks, and if that deal does occur, it will definitely allow for the market to see some "risk-off" trading and increase in value. Other than that pending deal, Europe has a quieter week ahead. Thursday brings us Great Britain's GDP, but otherwise, it's a light week for Europe. Spain is the only potential development we can expect to move the market.
Earnings will be the key to the market this week. They were decent at the beginning of the week, but MCD, GE, and GOOG definitely shifted the market to end the week. It will take some very good reports to get things back on track, and the market has a lot of reports this week. The reports to watch this week are Caterpillar (CAT) and Yahoo! (YHOO) on Monday. Tuesday, we will be watching United Postal Service (UPS) and Facebook (FB). Wednesday will be important as it gives us AT&T (T) and F5 Networks (FFIV). Thursday will be the key to the week, however, with Apple (AAPL) and Amazon (AMZN) set to report. Finally, we finish things up on Friday with Comcast (CMCSA) and Merck (MRK). It's a very important week for earnings, and if the market does not start to get some solid reports, it will lose the 50-day MA support line. The AAPL report is the big one obviously, but reports from CAT, AMZN, and UPS may be better bellwethers.
The Federal Reserve will release its FOMC rate decision that will not create much market movement we would expect. The Fed should be done with any more QE for the year or major announcements. Other than that, we have the Richmond Fed on Tuesday, Chicago Fed report on Wednesday, and Kansas City Fed report on Thursday. Overall, it should be a light week for the Fed, and they will not have much impact. It's always important to keep them in the big picture, however.
So where are we headed this week?
Last week, we wrote "the market is facing a make-or-break type of week." Not to sound repetitive, but we feel that way again this week. The market needs some better reports from earnings or it will lose its 50-day MA. Data and Europe are light, and they will probably not be able hedge the market's attention to earnings. The first major week was mixed in our opinion with good reports to start the week and bad reports to end the week. Overall, we believe the market will suffer this week if it loses that 50-day MA. The market strongly priced in earnings weakness on Friday, and it may have overdone it. Our expectations, though, are for more weakness at this point as the market appears to be rolling over.
Stocks To Trade:
Right now, we like the looks of RIG and DIS for long plays. RIG performed well on Friday despite the market correcting. The reason? We believe RIG is looking very solid into its earnings report on next Monday, October 29. The company is expecting to see an earnings per share growth from -0.20 to 0.66. The growth is definitely very solid for the company, and we believe it still has a lot of value with a future P/E under 11. The stock broke out of a wedge last week, and we like it to remain strong into the next report next week. We believe it can outperform the market right now.
Additionally, we like DIS headed into its next earnings report and believe it can continue to hold the $50 line into earnings. Earnings should be strong as the company continues to benefit from its Avengers line and the movie "Brave." The company is expected to see solid earnings growth YoY of at least 15%. The stock has been strong all year, and we believe it should continue to hold the $50 line, which has not been penetrated since the stock broke out from $50 in late August. DIS can continue to perform well in tougher markets, and we believe that it is great for a bull put spread into earnings.
Trade #1: Long, RIG
Trade #2: DIS, Nov17, 50/45 Bull Put Spread
Max Gain: 11%
For bearish trades, we are looking at Monsanto and Dollar Tree. MON looks like it could be on the verge of a major breakdown if it loses support at its 50-day MA. The stock broke its upward wedge last week, and things are consolidating right above that MA. Earnings were at the beginning of the month, and the stock has not been able to breakout since then. Losing that MA would be a technical level to watch and could signal a lot of weakness for MON.
At the same time, Dollar Tree has looked very weak since its last report, and while the stock may start to flatten out, we believe it is a perfect stock for a bear call spread. Despite the market correcting, money flow has not moved into dollar stocks. They are going through a tough correction period after a couple years of strength. No catalyst is in sight until December for DLTR. The level to look at for a bear call spread is 42.00 where the stock lost support after earnings.
Trade #3: Short, MON
Breakout: Failure of 50-day MA
Trade #4: DLTR, 42/43.75 Bear Call Spread, Nov. 17
Max Gain: 18%
We have the following positions:
In our Short-Term Equity Portfolio we are long CBRE Group (CBG).
In our Earnings Alpha Portfolio, we are long Allstate (ALL), Michael Kors (KORS), Disney , Continental Resources (CLR). We are short Polo Ralph Lauren (RL). We have a reverse iron condor in Chipotle (CMG).
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.