Think G-7 was a circus? That was mere child's play.
Even as President Donald Trump prepares in Singapore to meet North Korean leader Kim Jong-Un, The Donald was on Twitter overnight complaining about Canada's sky-high tariffs on U.S. dairy products. He also complained about much of Europe's reluctance to contribute proportionately to its own defense while enjoying a large trade surplus with America. Then, he tweeted: "Sorry, we cannot let our friends, or enemies, take advantage of us on trade anymore. We must put the American worker first!"
The truth is that the global trade situation has been unfair to the United States for many years, but no nation is going to surrender its advantages on these matters all that easily. So, this will go on for a while.
The point is that as one event passes, another will begin. So, Trump will clearly be pulled in more than one direction -- as you, the investor, will also be.
Market participants will sort of catch a break on Monday, as there's very little in the way of U.S. economic data coming out. And as economic reports start to flow in later this week, at least quarterly earnings releases will be light (with the notable exception of Adobe (ADBE) on Thursday evening).
Avenues of Attack
Anybody out there remember the old (pre-night vision) nighttime booby-trap course at Camp Lejeune? The chaos ahead for markets this week might be akin to that. Things that we'll face will include:
- The U.S./North Korean Summit. There seems to be a "peace dividend" building into stock prices, but how easy would it be for something to go wrong as a sitting U.S. president meets for the first time in history North Korea's current leader? Even if North Korea agrees to a complete denuclearization (which seems unlikely), what would the timeline look like? How would such an outcome be verifiable? How much new headline risk would even a positive result from the summit create?
- AT&T/Time Warner. We're expecting a court to rule on Tuesday about the proposed merger of AT&T (T) and Time Warner (TWX) . This obviously not only matters for the two companies directly involved, but will also impact just how seriously Comcast (CMCSA) can pursue buying the content-related assets of Twenty-First Century Fox (FOXA) . And the decision might or might not force Walt Disney Co. (DIS) to raise the stakes in its own bid to acquire FOXA's assets.
- Central Bankapalooza. Not only will the Federal Reserve almost certainly raise rates Wednesday, but it'll also release its latest (and not usually very accurate) forward-looking economic projections. The Federal Open Market Committee's official statement and Fed Chair Jerome Powell's news conference will be Wednesday's main attraction, and they'll impact market expectations about interest rates for the rest of 2018. Then, the European Central Bank will meet on Thursday and consider a timeline for termination of its quantitative-easing program. Lastly, the Bank of Japan steps up to the plate on Friday. Markets don't expect the BOJ or ECB to overtly change policy this week, but the ECB's forward-looking posture will clearly impact markets.
- E3 2018. While the Nasdaq Composite index scrapes along at record levels, the video-game industry will kick off its three-day Electronic Entertainment Expo 2018 show in Los Angeles this Tuesday. The E3 event is a big deal for video-game stocks, with pre-event things going on since this weekend. Expect such big names as Microsoft (MSFT) , Activision Blizzard (ATVI) , Sony (SNE) , Take-Two Interactive (TTWO) and Ubisoft (UBSFY) to show off their most recent wares. One might expect e-sports to be in focus, as well as games currently using the battle royale "last-player-standing" format.
- Macro. Monday will be a light day for macroeconomic data and events (outside of the U.S. Treasury Department's plans to auction off $22 billion of 10-year paper). However, the rest of the week will feature extremely heavy high-profile U.S. economic releases. Taking the center stage will be Tuesday's May Consumer Price Index report. Of nearly equal importance will be May U.S. retail sales and May industrial production later in the week.
How should we trade such a week? The truth is that for the most part, you'd be crazy to try to trade the newsflow on a week such as this. These events will create both opportunity and hazard, but high-speed algorithms will be much quicker than any human trader could ever hope to be.
So, the best way to handle this is to know ahead of time which stocks you like and which you don't. Then, know where you like them and where you don't. You don't win this game without a plan, gang.
I believe that in all likelihood, there are three industry groups that could see a significant reaction to this week's events:
- Defense Contractors. Peace sells, but who's buying? I remain long to varying degrees on several defense names. As most of you know, my favorites in the space have been Raytheon (RTN) and Northrop Grumman (NOC) . The latter of those two recently responded very well to receiving antitrust clearance to acquire Orbital ATK (OA) , then raised its fiscal-2018 guidance. That said, I'm looking to sell General Dynamics (GD) on any pop, as the name has become my least favorite one in the group.
- Banks. Higher Fed rates will in theory allow banks to improve their net-interest margins should the Fed and bond traders ever create some space between the yield curve's short and long ends. On top of this, investors will see the group's annual Comprehensive Capital Analysis and Review results (i.e., "stress tests") later this month. That event has typically unlocked higher dividends and increased share repurchase programs for the group broadly in recent years. My favorites in the space remain JP Morgan (JPM) , Goldman Sachs (GS) , and Citigroup (C) .
- Gamers. If you're old like me, you might not realize just how big a deal this week's E3 get-together is. My favorite name in the space remains Activision Blizzard for its exposure to development of the evolving e-sports business, where ATVI has support from many real-life owners of professional-sports teams. ATVI has been trading sideways in recent months, but is nonetheless up 17% year to date. But that's nothing compared to the 47% YTD gain scored by the Ubisoft. UBSFY is the brand behind several high-profile gamer series like Far Cry, Assassin's Creed and some Tom Clancy-based titles.
How I'm Playing Things, Part 1 (Goldman Sachs)
Given the right opportunity, I look to add to (or take profits from) two names that could be impacted by this week's newsflow.
First up is Goldman Sachs. Goldman is my least successful position in the financial space and one of the worst on my entire book not related to a hedge of some kind. I'm down 1.9% on the name.
However, the stock has recently shown some signs of life, breaking out of a horrendously downward sloping pitchfork pattern so far in June:
Not only is this stock likely to benefit from a rising-interest-rate environment and a more volatile trading arena, but this is a stress-test story as well.
Goldman sold off as the firm decided over the past quarter to invest in places other than its own shares, but should Goldman come out of the upcoming CCAR stress tests in position to return more capital to shareholders, its chart should change significantly ... for the better. So, here's my recommended trade:
Friday's Closing Price: $233.39
Target Price: First level: $243, "house money": $255
Panic or Add Price: $225 (for me, that's probably where I'd add)
How I'm Playing Things, Part 2 (Ubisoft)
Ubisoft is seeing a seemingly sustainable condition, as this chart shows:
You can see that the name remains on trend and has been so for multiple years now. You can also see where both the pitchfork model's lower trendline and the first line of Fibonacci Fan support run side by side for about a week in mid-June.
I intend to add to my UBSFY position on any selloff related to the E3 event, even though that'd be well above my current net basis for the name. My recommended trade:
Friday's Closing Price: $22.55
Target Price: $27
Panic or Add Price: $20.50
Events (All Times Eastern)
13:00 -- 10-Year U.S. Treasury note auction: $22 billion worth.
21:00 --Trump/Kim summit opens.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: RH (1.01)