Weekly Outlook: The election came and went bringing about a second term for President Barack Obama. The market did not respond very positively to President Obama's re-election. Fears of a "fiscal cliff" started to emerge on Wednesday last week and are currently dominating the stock market. In addition to Obama and the fiscal cliff, the market was reacting negatively to European fears.
Despite the passage of another round of austerity measures for Greece, the country is being delayed on new funds from the rest of the Euro-Zone. The country had commented that they were nearing a potential default on loans, so this issue is very important. Late Sunday, Greece passed a new budget as well. With that measure passed along with the austerity, a new capital injection seems likely this week, but the situation is still very fragile. Between Greece and the fiscal cliff, there is a lot of risk for the market this week.
With such a strong amount of other news to break about Europe and the fiscal cliff, economic data will most likely take a back seat to the rest of the market. The key economic data does not get started until mid-week. On Wednesday, we will get key Retail Sales, FOMC Minutes, and Business Inventories. Retail sales have been strong so far from individual companies, and this report could be a bright spot in what may be a tough week for the market. The Fed may actually come into play this week to see if they will increase the length or size of QE3. There has been some speculation that the Fed will make this type of move before the end of the year.
On Thursday, Initial Jobless Claims, Philly Fed Index, Empire Manufacturing, and Crude Inventories will all be released. Jobless claims have been solid over the past few weeks, and more strength there could help. Additionally, the Philly Fed and Empire Manufacturing will both be strong barometers for our economy. We finish the week with the Industrial Production. Data pales in comparison to the European situation and fiscal cliff issues, but these reports can help to determine the size of up and down moves.
Europe will be very crucial to the market's movement this week. The Greek situation is looking dire, at best. The country said they will start to run out of money this Friday before they passed their latest austerity bill. That passage will help them get a bit further, but they need another capital injection in order to shore things up. They are going to raise some money on the market on Tuesday with new bonds. If the country can get another loan from the Euro-Zone, it will drastically help the market here at home. If they fail to secure more funding, the market could be in store for a very serious moment of correction. The passage of austerity and the budget was a promising sign for the country, but there is still a lot of worry for these markets.
For earnings, we do have some interesting bellwethers to report this week. We will get reports from Wal-Mart (WMT), Home Depot (HD), Cisco (CSCO), Target (TGT), and Viacom (VIA.B). The most important aspect of the reports from WMT, HD, and TGT will be what type of reaction/impact they are having from Superstorm Sandy. Many believe the impact would be positive for HD, but wonder how WMT and TGT have been impacted. CSCO will be the key report for the Nasdaq, which has been in freefall. All these reports are important, but they may not be able to compare to the importance of the fiscal cliff and Greek situation.
The Federal Reserve may actually play an interesting role in the marketplace this week. They have the release of their minutes on Wednesday. The market will be looking to see if there is any signal that QE3 may be extended. Additionally, with Obama's election, the prospects for more QE is more likely now. Other than their minutes release, they have the Philly report on Thursday. Additionally, they have a number of speeches from President Fisher and President Lacker throughout the week, which will definitely be parsed for any signals as well.
So where are we headed this week?
The market starts and stops with the fiscal cliff. Throw in Greece, some important earnings and data, and the Fed question, and we have quite a week for the market. The fiscal cliff issue seems to be taking on a somewhat more positive light. A lot of positive comments have come from both political parties, and both sides appear to be ready to take the necessary action to ensure that the cliff does not happen. With that said, fear is being priced in for the market, and if there is not necessary action taken, the market will suffer greatly even more.
The Greece situation creates trouble, and the data/earnings are unknown. We could see the market showing some slight gains this week if the Greece situation takes a positive light and progress appears to be being made on the fiscal cliff. At the same time, issues in Greece could boil over at any moment and create a lot of weakness.
Stocks To Trade:
Right now, we like the looks of First Solar and BHP Billiton . Solar is one of the industries that will benefit from the election of President Obama, and thus far, FSLR has been performing strong since the election. While the market has weakened, FSLR has strengthened. The company looks very close to being able to breakout as they have been testing the 25-26 level. The stock has been weak as they moved operations out of Europe and have struggled to turn profits. Yet, the company's latest earnings showed some potential. The company upped their FY12 EPS view, and the extension of tariffs on foreign solar panels helps as well. The stock could be ready to make a solid move to the upside if it breaks above 25.
BHP has been very strong during recent market weakness as well. The company is in a very positive upward channel, and it has a lot of positive support below it. The company has remained strong due to potential sales of a number of smaller copper mines that are not producing well for the company. We like them for a bull put spread as we believe they will remain strong due to good value with a 12.8 P/E ratio and very strong support. We like the $65 line for a bull put spread.
Trade #1: Long, FSLR
Breakout: Break of 25.00
Trade #2: BHP, Dec22, 65/62.50 Bull Put Spread
Max Gain: 13%
For bearish trades, we like the looks of Molycorp and Cliffs Natural. Molycorp looks like it could break down right now. The stock broke key support on Friday at 8, and they are looking very weak. The company saw a good deal of weakness after announcing that they are being probed by the SEC, and that news is not at all positive for MCP. Additionally, Friday the company announced that they are looking to raise capital as well. How that will be done is something to look into, but the company needs funding. Right now, there is not a lot to like in MCP, and we believe they are a solid short moving forward.
CLF is also looking weak. The company is in a strong downward channel right now, and we are not sure if they have much of a catalyst moving forward. The company had very weak earnings at the end of October, and they have been dropping since. The company saw an 86% drop in net income for the latest quarter, and the company lowered the outlook. 45 is a very strong resistance level for CLF, and we like the 43/45 bear call spread for the company for December expiration. The company would have to break the 20-day and 50-day MA to the upside in order to even come close to not working.
Trade #3: Short, MCP
Breakout: Failure of 7.25
Trade #4: CLF, Dec22, 43/45 Bear Call Spread
Max Gain: 11%
We have the following positions:
In our Options Portfolio, we are long PulteGroup (PHM), Whirlpool (WHR), Capital One Financial (COF), Intuitive Surgical (ISRG), Discover (DFS), Starbucks (SBUX). We are short SPDR S&P 500 (SPY) and Baidu (BIDU).
In our Goldman Sachs Up/Down Paper Portfolio, we are long CSX.
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.