We were a bit disappointed in the Twitter (TWTR) quarterly earnings release this week, or rather the stock’s reaction to it. We’ve been using Twitter more and more and continue to find great insight and research on the medium from a host of different contributors including, Josh Brown, Ryan Detrick, Jeff Kleintop, Bob Lang, etc. etc. This type of 140 character post is perfect for our business. (Long small position in TWTR, less than 1%, looking to add to it over time.)
Great tweet from Ryan Detrick on Todd Salomone’s piece on the VIX backwardation. Ive read it three times, but still can’t figure it out. I think it is short-term bullish for the stock market though, since the spread is positive.
Another chart from Frank Zorilla picked up off the Ryan Detrick Twitter Feed. Bespoke noted this several times during the 2013 rally and it has now been picked up by Josh Brown, Jeff Kleintop and Zorilla. That isn’t a criticism, but really a compliment to Bespoke. This proves to me that the “message of the market” constantly changes. What is a positive coincident or leading indicator can become negative in the next market. Correlations may be positive for one minute, negative the next (like the dollar and GLD, which worked for a while and then it didn’t). I find that as a portfolio manager I continue to have to be wary from drawing too easy conclusions and must constantly sift and question the data to see it what it is telling me is worthwhile. Like with earnings, sometimes it just pays to wait and NOT draw premature conclusions…
Our Weekend Earnings Update here: q4 ’13 earnings and revenues much stronger than expected. q4 ’13 is turning out to be the strongest quarter for earnings growth since q3 ’11. Here is the eternal question though: how much of those earnings are in the market, and how much isn’t ? I don’t know. I’m watching full year 2014 too to get a feel for how the year might turn out. We’ll update our 2014 earnings scenario next weekend. Remember, it doesn’t feel like it now, but if we get just 10% earnings growth in 2014 and modest P.E multiple expansion from 15(x) to 18(x) forward EPS, then we see a 20% return on the SP 500 this year.
Many watching the re-test of the 50 day moving average for the SP 500 at 1,809 – 1,810. If we fail there and drop on heavier volume, then the correction could have further to go.
Speaking of Twitter: picked up from Josh Brown’s Twitter feed this weekend, another slam on Twitter as the most overvalued internet stock. Factset’s John Butters, who writes the weekly Factset “Earnings Insight” notes that Twitter had the fastest organic revenue growth of any company reporting q4 ’13 earnings thus far at 116%. (long TWTR)
Norm Conley of JA Glynn Capital out of St. Louis, on the improving relative strength of the Technology Sector. Apple is such a big part of Tech and the Q’s, I would guess that Tech bottomed when AAPL bottomed. (Long AAPL, overweight Tech).
Norm also posted on Basic Materials weakness, which is surprising since the sector is reporting the biggest upside surprises of all sectors within the SP 500. Per Factset, Basic Mat and Tech per Factset are the top 2 sectors in terms of sector-level suprises with Basic Mat at 14.9% and Technology at 4.7%. Basic Mat is being driven by Chemicals such as Dow Chemicals and Lyondell (not long either). (Overweight Basic Mat, but long AA, X and FCX. May have to add Chemical company like Dow. Chemicals 70% of Basic Mat weighting).
Our worst trade in quite a while this week; JC Penney. Should have listened to Kristen Bentz of the Talented Blonde on that trade. JCP has now traded back over its October ’13 low, and above where we sold it. Given the comp’s number just reported I wonder if JCP can generate positive operating cash flow. That is the real question. Kristen has been telling whoever will listen about bricks-and-mortar retail and the action in the stocks since last November ’13 has proven her prescience. I’m wondering if the Consumer Discretionary pullback is temporary or permanent ? I think it depends on the retailer. We’ll have a separate post on retail and Consumer Discretionary.
Love this guy’s work: @ukarlewitz. Writes “The Fat Pitch”; here is his small-cap chart from late last week. This tweeter notes the relative strength of the QQQ’s as Norm Conley did above. Our three big sales this year-to-date of long-held positions have been Goldman Sachs (GS), Sandisk (SNDK) and the Russell 2000 (IWM). UKarlewitz comments on the Goldman Sachs chart. He noted what I did last week: despite Thursday’s and Friday’s rally, GS didn’t rally inkind.
On Bonds and Credit
We’re repeating ourselves but watch corporate credit for clues on whether we are seeing a vanilla correction in the SP 500 or something else ? The HYG was positive this week, while the JNK was slightly negative. Both the high yield ETF’s are trading above their 50 and 200 day moving averages still. The HYG saw heavy volume on Monday’s sharp equity drop. Ironically, both ETF’s were hit last summer on the sharp rise in Treasury yields, from which we can infer that duration risk might be just as big an issue as credit risk. We’d look at buying HYG under $91 and JNK under $39.50, where presumably they would be oversold. It would depend too, on what got them to that point.
Speaking of High Yield and Corporate Credit Quality, Christina Padgett of Moody’s circulated a research piece this week, noting that Bond Covenant Quality continues to weaken in almost every sector. Only Cable, Oil Services sectors saw covenant improvement. I tried to attach the piece, but couldn’t do it. (Yes, I am an technological idiot…) Reach out to Christina Padgett directly for a copy of the 10-page summary.
Charles Schwab had a good piece on the municipal bond market this weekend. May be time to re-enter the muni closed-end bond fund trade, but Id rather do that when Treasuries and muni’s have moved back to oversold status. We took some nice gains trading the NUV and MEN, but sold them the last two weeks to raise cash in balanced accounts and reduce duration risk.
————————
Dan Fitzpatrick, a technician that writes the Stock/Options Market Mentor had a good call on AAPL of late. We were waiting for a test of the 200-day moving average to add more AAPL. Dan thought (on one of his nightly video’s) that if the AAPL didn’t hold $500 it had a serious problem. After the 8% earnings drop, AAPL never really traded below $500. Nice call, Dan. We haven’t added to AAPL yet.
Here are some good charts from Gary Morrow and Doug McKay of This Week on Wall Street (TWOWS). They are asking the same question I do in this weekend’s Linkfest, i.e. Is the Correction Over ?
Helene Meisler (@hmeisler), a great technician and one of my fellow contributors when we both wrote for the TheStreet.com, noted the SOXX had a positive outside week, this past week. Check the chart of Micron Technology (MU), which set a 52-week high this week. Micron held an analyst meeting this week, on Friday, 2/7/14, and MU’s volume was heavy on Thursday. MU was up 6.38% this past week. Micron is the 4th largest position in the SOXX with Intel, Qualcomm, Texas Instruments, and MU each with 7% positions. (Long INTC, MU, TXN). Another semiconductor ETF is the SMH, with INTC holding a 20% position and MU a 5% position in the SMH ETF.
Coming into 2014, we thought the US economy would continue to accelerate as would Europe, and thanks to the weather, and worries over deflation, neither has happened, and the 10-year Treasury has rallied sharply since 12/31/13. We’ve reduced interest rate risk in balanced accounts, even though bond fund inflows have soared already. It is amazing to me how risk-averse retail investors still are following, 2001 – 2002 and then 2008. Technically, if you look at a chart of the SP 500, a new secular bull market began in late April, 2013, when the SP 500 finally surpassed the March, 2000 and October, 2007 highs of 1,555 and 1,577 for good.
We still believe stocks are headed higher, along with interest rates. The dollar too, but it is harder to play on stand-alone basis. The UUP is
Is this correction over ? I hope it isn’t since I’d like to buy stocks lower for clients, but SP 500 earnings growth tells me it could be. Could the debt ceiling in late February ’14 be an issue ? Sure.
It is harder to find absolute value in today’s stock market, but p.e’s and cash-flow ratio’s relative to growth earnings growth rates and such, indicates there are still a lot of good values out in the stock market today. We were buying PG, WMT, F, BA, and a few others names earlier this week. Old tech names are not expensive at all. New tech is overvalued, but it always is – split the difference in your portfolio, and find a balance between old and new technology. (Long all – overweight Tech).
Thanks to Bob Brinker and Ryan Detrick for re-tweeting Trinity Asset Management’s Weekly Earnings Update.
Trinity Asset Management, Inc. by:
Brian Gilmartin, CFA
Portfolio manager