Markets seem to behave very erratically in the short term based on the latest headlines about this scandal or that in Washington. After all, computer algorithms do search for keywords. Let's look at how to play this.
Strategically, the fact is that investors' hands have grow calloused by all of the headlines out of Washington. We've become accustomed to ignoring scandals that are either unimportant, might take time to develop or aren't really anything.
We've also become accustomed to the game of musical chairs that's being played these days at the Trump administration's highest levels. We thought we couldn't handle losing top Trump administration economic adviser Gary Cohn, but now we love his replacement, Larry Kudlow, every bit as much.
Every single political item that we face seems monumental by itself. But in aggregate, they all lose impact.
Oh, don't get me wrong, markets will take it very badly if there's a constitutional crisis at some point. And perhaps one other thing that might negatively impact stocks would be a repudiation of Trump by the voters in November's midterm elections. But until then, the Trump administration is good for business.
For example, markets are realizing that tax cuts and deregulation are really going to improve U.S. corporate performance. Will this impact only be short term? Well, that depends on how you define "short term."
I've recently felt that the U.S. macroeconomic figures have been softening up a bit. For instance, the Atlanta Federal Reserve took its first-quarter GDP model down to a projected 1.9% growth rate (from a previous 2%) based on Monday's March U.S. retail-sales report, which markets had seen as solid.
Whether most economists will admit it or not, it's obvious that developed markets saw a slowdown in the first quarter. I expect economists to revise U.S. growth expectations further on Tuesday after we get reports on March housing starts, industrial production and capacity utilization. But political risk? That's the "cleanest dirty shirt" in the hamper right now.
But let's say political risk becomes a bigger concern in the future. How should you prepare your portfolio now?
Well, I'm sad to report that if tax reform and deregulation fade away, there will be no place in equities to completely hide. That said, some business lines are further away from politics than others, including:
- Defense. I've written about defense stocks ad nauseam. Yes, trade restrictions matter there, but let's face it, nations are always going to feel the need to arm themselves. The world just isn't a nice place.
- Energy. Oil prices are rising, but energy firms' stocks are only just now catching up. I prefer oil-services stocks to exploration names here, although I remain long ExxonMobil (XOM) . As for services, I see Halliburton (HAL) as less vulnerable than Schlumberger (SLB) to negative news regarding Russia. I'm long both names.
- Technology. I still like tech, even though semiconductor stocks have broad exposure to Chinese revenue that's vulnerable to a U.S.-Sino trade war.
I'm Pumped Up About Planet Fitness
Where else could you hide from political risk? How about something truly different?
Check out this chart of gym chain Planet Fitness (PLNT) :
Poised for a breakout? Well, the stock rose 1.8% Monday to close at $39.18, so that's a definite maybe. Good looking enough for this trader to leg in on Tuesday after the market opening? Yes.
Talk about momentum! PLNT's recently soft Chaikin Money Flow (CMF) provides a good entry opportunity, while I think the daily Moving Average Convergence Divergence oscillator (MACD) is poised to go bullish.
Yes, I see resistance just ahead at $40, but support comes in just a bit under $36. The Fibonacci models also show us that this name has a knack for finding support at 38.2% retracements off of trend highs. PLNT also displays a high level of obedience to the Pitchfork model.
My plan will be to start by purchasing one-eighth of my total intended position. Then, a break above the stock's March highs of around $40 will trigger a purchase of an additional three-eights of a position, to make for a 50% stake.
On top of that, I plan to write $35 May puts, which closed at 55 cents Monday night. That will reduce my cost basis but only increase my equity risk at a level below where I expect to see support for the stock.
Keep in mind that Planet Fitness reports earnings on May 7 and has been a revenue-growth beast. I expect more of that, and apparently so do institutional investors.
This name is experiencing big institutional-investor share accumulation even though its forward price-to-earnings ratio of 27 means that Planet Fitness is expensive. According to Investor's Business Daily, PLNT has enjoyed eight consecutive quarters of rising fund ownership. Know who else can make that claim? My beloved Nvidia (NVDA) .
Add it all up and here are my trading parameters for Planet Fitness:
Target price: $45
Aggressive target: $51
Panic-sell price: $34.25
Chart of the Day: IBM
IBM (IBM) reports earnings on Tuesday night, and the firm has beaten analysts' earnings-per-share expectations for a whopping 13 consecutive quarters.
And while EPS beats are nice, Big Blue also posted 3.5% year-over-year revenue growth back in January. That broke a nearly six-year string of year-over-year revenue contraction.
Now, IBM was part of my portfolio until this winter, when I went to higher cash levels. The stock was one of the casualties, but I'm currently in the process of redeploying some cash.
Is it time to get back into IBM? Well, I've fallen into and out of love with the firm's alleged "renaissance" enough times over CEO Ginni Rometty's tenure to know not to believe a comeback until I see it.
Analysts expect IBM to report a another quarter of revenue growth on Tuesday evening. However, I believe the firm will have to show momentum off of the 27% cloud-based revenue growth it reported last quarter. Mobile and Security are also areas where we need to see continued strength.
It's also worth noting that while IBM's share price has gone both up and down in recent years, it's been mostly down since early 2017. Let's look at Big Blue's chart:
As you can see, IBM has traded in a range larger than $25 in 2018, and the firm's Chaikin Money Flow (CMF) has sported very little green since 2017.
However, the model above shows us potential support below $154, with $144 completing a 100% retracement for the second time. First-line resistance should show close to $160, which could become support on a positive reaction. (IBM closed on Monday at $157.89.)
This is clearly a high-risk name for a small investor, but you could attempt to make money on a positive reaction to Tuesday's earnings if you're willing expose yourself to discounted equity.
You could also write $155 or $152.50 IBM puts expiring this Friday. The $155 puts closed on Monday at $2.15, meaning that your net risk would begin at $152.85 on an adverse earnings reaction.
The $152.50 puts closed Monday at $1.40, but greatly reduce your risk to just $151.40 in the event that Rome does indeed burn.
Economics (All Times Eastern)
08:55 -- Redbook (Weekly): Last 2.9% y/y.
09:15 -- Industrial Production (March): Expecting 0.3% m/m, Last 1.1% m/m.
09:15 -- Capacity Utilization (March): Expecting 77.9%, Last 78.1%.
09:15 -- Fed Speaker: San Francisco Fed President John Williams.
10:00 -- Fed Speaker: Fed Gov. Randal Quarles.
11:00 -- Fed Speaker: Philadelphia Fed President Patrick Harker.
13:40 -- Fed Speaker: Chicago Fed President Charles Evans.
16:30 -- API Oil Inventories (Weekly): Last Week +1.758 million.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: CSX (.66), IBM (2.42), LRCX (4.37), UAL (.41)