Trifecta Stocks: Bracing for the Stock Market's Own Hurricane Season

 | Sep 10, 2017 | 10:00 AM EDT
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The following is an excerpt from Trifecta Stocks Weekly Roundup sent to subscribers on Sept. 8. Click here to learn about this dynamic portfolio and market information service.

Hurricanes and Washington, D.C. took center stage this week, and surprisingly, despite both news events, the overall stock market held up arguably better than expected even as companies started issuing Hurricane Irma-related warnings. Given the magnitude of these storms and subsequent destruction, the fallout will dominate headlines over the coming days. We also recognize companies, ranging from Disney (DIS) to Kroger (KR) to Carnival Corp. (CCL) and a host of retailers, will see disruptions that will weigh on expectations for the current quarter as well as overall economic growth.

We expect there to be a number of revisions to projections in the back half of September as hurricane damage is assessed, which is likely to keep the month's tumultuous track record in check. We say this as Federal Reserve Vice Chair Stanley Fischer has announced he is stepping down for "personal reasons" even though his term was to end June 2018. Also, U.S. Treasury Secretary Mnuchin warned that the U.S. could seek to sanction any country trading with North Korea in an effort to put the kybosh on this missile and nuclear testing insanity. China and Russia quickly signaled their opposition, reducing the chances that this area of geopolitical uncertainty will be resolved diplomatically in the near term.

Meanwhile, the U.S. economy continues to show signs of being long in the tooth, as even the Bureau of Labor Statistics has acknowledged that employment growth has been slowing. And then there's the CEO of Goldman Sachs (GS:NYSE) being "unnerved" by this market.

Stepping back, stock valuations remain heady, with the decidedly meh reactions to earnings and revenue beats (most shares actually fell on reaction day) in the last reporting round reflecting the priced-to-perfection market. We have an economy and a bull market that are both long in the tooth heading into what is typically the most volatile time of the year, on top of unusually high domestic and geopolitical tensions. While we may see some market relief as the debt-ceiling battle has been pushed back three months, removing the possibility of a technical default in October, the upside potential from here versus the downside risk indicates caution is in order.

A growing number of our positions have tripped technical support levels resulting in our exiting Disney, CSX (CSX) and Dycom Industries (DY) . These sales have boosted our cash position, which should serve to help us ride out near-term turbulence as will our inverse ETFs, which all traded higher this week. We'll continue to look for new opportunities where and when they make sense for the portfolio.

Turning to next week, there are several pieces of data we'll be watching, but the two we'll focus on are August retail sales and August industrial production. Considering the ongoing disruption to the retail landscape, we'll once again sift through the reports to see if department and electronic stores continue to be hit by the shift to digital commerce. We suspect the answer will be a resounding "yes."

Outside of economic data, a number of other items are sure to catch investor attention. We can safely say that most will paying close attention to Apple's (AAPL) next "special live event" on Tuesday, Sept. 12. We, too, will be watching the event to separate fact from internet rumor and innuendo for the company's next iPhone, Apple TV and Apple Watch products, as well as any other surprises. Late last week, it was reported that Apple is facing a month long production delay for the new iPhone. In our view, this means one of the most critical things to watch as it concerns expectations for Apple's current quarter is the ship date for the next iPhone.

We'll be looking to see how many new iPhone models Apple launches next week and how many of those include organic light-emitting diode displays (OLEDs). There has been much speculation over this and Apple's investment of $2.67 billion in LG's OLED production for smartphones certainly fueled that. Outside of Apple, other smartphone, TV and wearable manufacturers are embracing OLED displays all of which is pressuring the currently capacity constrained industry. Our holdings in Applied Materials (AMAT) and Universal Display (OLED) are positioned to benefit from increasing OLED capacity, and wider-spread adoption of the technology. That said, we recognize there tends to be a high correlation between "buy the rumor, sell the news" and Apple's events. Stay tuned for more on this next week.

In three weeks, we will shut the books on the current quarter and before too long we will once again be hip deep in quarterly earnings. As we noted last week, this means investors will be focusing on the rash of upcoming investor conferences over the next two weeks in order to revisit and fine tune expectations. Yes, this happens every year, but unlike 2016 we have Hurricanes Harvey and Irma to contend with, and that could amp up the frequency of those revisions compared to last year. Odds are those revisions will be more to the downside than upside. This could take some of the froth out of the market and offer us the chance to scoop up well-positioned companies at better prices.

Let's be patient!

-- Chris Versace and Bob Lang are co-portfolio managers of Trifecta Stocks. Click here to learn more.

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