Name That Trade(s): Shopping List – $HD, $M and one more thing

by Dan July 9, 2015 3:14 pm • Commentary

Before adding a couple new short biased trades in COST & PG, we spent the early part of the week trimming a couple shorts (INTC and JPM), closed a poorly constructed short biased trade in CAT, and closed a long biased trade in MSFT.  I suspect we see another test of 2050 in the S&P 500 (SPX) soon which could push as low as 2000 and finally find some support:

SPX 1yr chart from Bloomberg
SPX 1yr chart from Bloomberg

I have mentioned this on a few occasions over the last few months as the S&P 500 has been grinding between 2050 and 2125 that one reason for the inability for the index to breakout to new highs has been the lack of leadership and waning upward momentum, while on the downside we have not witnessed a meaningful decline of more than a few % as the S&P 500 has benefited from a sort of safe haven mentality by global equity investors.

The out-performance ytd of stocks like Apple, Comcast, Disney, Facebook, Home Depot, JP Morgan, Nike and Starbucks is not nearly as bullish for the broad market as it may be for your portfolio as it highlights the increasing concentration of a few mega-caps, despite weakening breadth.

If the biggest risks to the bull market here in the U.S. is external, then I think it makes sense to steer clear of committing new capital to stocks who have large dollar exposure or who rely on emerging markets and Europe for a good bit of future growth. These trades are crowded and could be used as a source of funds.

Here are a few stocks though that could show relative strength if the volatility in China and  uncertainty surrounding Greece effect the outlook of U.S. corporations when then report Q2 results over the next month:

Home Depot (HD) – Despite not confirming the new high in the S&P 500 in May the stock has shown great relative strength over the last couple weeks, and its 90% revenue exposure should attract buyers on dips:

[caption id="attachment_55194" align="aligncenter" width="600"]HD 1yr chart from Bloomberg HD 1yr chart from Bloomberg[/caption]

Macy’s (M) – the company has put up just okay numbers all year, and called 2015 a transition year. But some investors have gotten it into their heads that there may be opportunities to monetize their real estate holdings. Macy’s has little dollar exposure with 100% of sales in the U.S.  The stock has also held the uptrend from the Oct lows, but a move back to the May low near $64 could be a good long entry:

[caption id="attachment_55195" align="aligncenter" width="600"]Macy's 1yr from Bloomberg Macy’s 1yr from Bloomberg[/caption]

Oh, and one more thing…

Apple (AAPL) – I don’t need to rehash my views here (read here), but I would probably buy a little below $110 post earnings if it got that low.  But in the near term, the chart is horrible, holding onto 9% year to date gains. This week the stock broke the uptrend that has been in place since last Spring, is testing important support at $120 that was the high from last November and the breakout level from February and nearly touched its 200 day moving average today, a momentum indicator it has not been below since Sept 2013.  I see no rush to step in here, sentiment is so universally positive, but let’s see some analysts, pundits and investors start to get nervous on a sentiment shift. Then it would make sense to take a shot from the long side:

[caption id="attachment_55196" align="aligncenter" width="600"]Apple Since Jan 2014 From Bloomberg Apple Since Jan 2014 From Bloomberg[/caption]

I still think AAPL’s revenue exposure outside the U.S., the growing importance of China for growth and sentiment are huge headwinds to the stock making a new high anytime soon, but the company is the blue chip of all blue chips and should be bought after a period of weakness.