Weekly Outlook: The market started to show some signs of bottoming last week on the back of some better economic data, signs of job additions, and earnings that came in slightly better than expected. Yet, the market had a weak finish to the week as the election looms. The election will be the big story of the week and definitely be the most impactful aspect for the week.
Without the election looming, the market may be ready to move higher as data is looking stronger. Additionally, the market is holding some key technical levels with the 50-day MA for the Dow Jones and S&P holding up right now. What the election will mean for the market is still to be seen, and we believe that it will be extremely impactful...so stay tuned.
Economic data has started to look decent for the market, and we believe that without the election looming it could be a nice catalyst for the market to rebound. Employment data was solid last week, and this coming week, we get some more data to watch. Monday will give us ISM Services, and we will get Consumer Credit and Crude Inventories on Wednesday. The important reports do not come until Thursday with Trade Balance and Initial Claims. Finally, we finish the week with Michigan Sentiment and Export/Import Prices. None of this data is terribly impactful compared to last week, and with the election, we do not need to worry about the early reports. The Trade Balance and Michigan Sentiment reports will be the key to the market.
Europe continues to remain quiet as we await some news from Greece and Spain for signals. The election will put Europe in the rear view mirror, but if we get some news out of Spain or Greece that is impactful, it can play a role in the week. There are no expectations of any more news out of either country this week, so anything that occurs will be unexpected. Thursday is a big day for Europe with the Bank of England and European Central Bank rate decision. The ECB decision could be a big day for Europe if it is equipped with any important news surrounding Greece, Spain, or other markets. At this time, though, the market will be more worried about Obama and Ryan than Europe.
We do actually have some important earnings reports to watch this week that could play a key role in the up or down extremes off the election season. The most important reports to take note of are Qualcomm (QCOM), Walt Disney (DIS), News Corp (NWSA), Groupon (GRPN), and Time Warner Cable (TWX). QCOM will be the key tech report of the week and Disney for consumer reports. NWSA and TWX are bellwethers, and GRPN will be key for new IPOs and growth stocks.
The Federal Reserve plays an important role in the market this week due to its relationship to the election. If Obama is elected, it's speculated that the Fed will continue to have the power to do quantitative easing and have a solid role in forming the type of policy that will be active in the market. Romney is speculated to limit the Fed more. Other than that aspect, the Fed has no reports or major speeches.
So, where are we headed this week?
For quite an interesting week, the market held up some despite a very tough set of news to start the week (superstorm Sandy). The market has continued to hold some key technical levels, but heading into the election, the market will have a key moment this week to rise/fall. Will it rise if Obama or Romney is elected? There is speculation on both sides, and it is hard to tell. Romney seems to be more attractive to investment bankers and market makers. Obama, however, has helped the market rally to 13000 and has been helpful to Fed plans that have positively impacted the market at least as far as allowing for equity prices to rise.
Either way, we know the market will have a strong reaction to this event, and it will be the key event to the market. We believe different sectors will really be the key way to play these elections as some will benefit from Obama while others from Romney. It's a key week for the market, so strap in for a wild ride.
Stocks To Trade:
Right now, we like the looks of Whole Foods and Comcast longs. Whole Foods is showing a nice bottom and outperformed the market to end the week positively. WFM, further, looks very solid heading into earnings. The company is expected to report 40% growth in earnings and 20%+ growth in sales. The company's last earnings report was a major gap up and sign of strength. The stock should rally into this next report as earnings are expected to be very solid and should see short selling into the report. The upward channel the stock is currently in has been holding, and if it can break its 50-day and 20-day MA holding it back, it will rally more into earnings.
Additionally, we like the looks of Comcast. The company has been very strong, reported strong earnings, and has been strong despite weakness in the market. We think they look solid for a bull put spread. Right now, the points of of support for CMCSA appear to be the 20-day and 50-day MA, which have not broken since June. We like using those lines for a bull put spread as a conservative long play. At this point, there are really not any question marks surrounding CMCSA, and we do not believe the Sandy storm will impact them very negatively.
Trade #1: Long, WFM
Breakout: Break of 50-day and 20-day MA
Trade #2: CMCSA, Dec22, 35/33 Bull Put Spread
Max Gain: 11%
For bearish trades, we like the looks of CSX and Altria. CSX has been quite weak since its last earnings report, and the company is showing no signs of strength right now. Since earnings, the stock broke a large upward channel, has been rejected at its 20-day MA, and is lacking any strong catalyst. The stock seems to follow the market fairly strongly right now, and we like them as a short vehicle if they break below 20.50. The company continues to see small coal hauls, and until that part of the economy returns, it will continue to hurt CSX.
Altria has looked very weak as of late as it is in the midst of a downward wedge and has broken below the bottom support on that wedge. The issue for MO is that the market was not satisfied with the company's earnings report or share buyback plan. Their drop below very strong support at 32.50 is very important. Now the stock is toying with the 200-day MA. A clean break below that would intrigue us to short.
Trade #3: Short, CSX
Breakout: Failure of 20.50
Trade #4: Short, MO
Max Gain: Failure of 200-day MA
We have the following positions:
In our Goldman Sachs Up/Down Paper Portfolio, we are long CSX and Expeditors International (EXPD).
Chart courtesy of finviz.com.