US stock futures are pointing to a lower open to begin the second week of 2011, while aluminum giant Alcoa Inc. (AA) is set to kick off earnings season after the close today. The drop follows declines in the European markets, where debt worries continue to persist with Portugal and Spain, and Asian markets, where a falling trade surplus diminished risk appetite.
The market was mixed last week after Monday’s New Year gap up. The action was choppy after that, however, and traders really had to be selective picking and choosing where to put money to work. The first two weeks of January effect are typically a strong period in the markets as new money gets put to work, but we saw some sectors struggle to hold upper levels. Commodities, precious metals in particular, broke down while banks played catch up until Friday. The second two weeks of January are typically weaker as new money gets exhausted, and now is time to pare back risk and remain nimble with your capital, says Scott Redler of T3Live.com. For buy and sell triggers and notable support and resistance levels on specific stocks, take a look at Redler’s daily Pricepoint Sheet.
Many people have pointed to strong earnings during the recovery as a harbinger of things to come. Corporations have been able to squeeze greater productivity out of workers to grow the bottom line, but as marginal worker output growth shrinks, companies will be forced to higher to maintain growth. As employment and housing remain a drag, investors will look toward another earnings season as a crucial ingredient for the rally to continue. Alcoa after the close will be in sharp focus with no economic data on tap today.
Sector rotation has been very defined in this market as it looks to squeeze out gains before a potential rest or pull-back. Towards the end of last week we saw some forgotten sectors, like the solars and the laggard banks, start to come into focus and perk up. This week, however, Marc Sperling of T3Live.com expects high beta tech to reassert itself. Apple Inc. (AAPL) continued to be strong last week, but the best looking play of the bunch this week, he says, is Netflix Inc. (NFLX). This controversial, highly valued growth stock was one of the stories of 2010, but pulled sharply off all-time highs before consolidating in a tight wedege around $180. Look for Netflix to get back to the $190 area very quickly and likely back to the $200 over the next couple of months. To provide a favorable risk-reward parameter for the trade, place your stops at $175, says Sperling.
Chinese stocks are hot
The overall market remains overbought but Friday’s advance/decline line was 2 to 1 negative, although the market improved into the close. The market was actually weaker than the averages indicated. Even if you like a company, resist entering extended stocks, says Magnet Investor Jordan Kimmel of T3Live.com. He believes there will be greater opportunities to enter strong stocks in the near future.
Looking at his Magnet holdings holdings, Kimmel notes that several new companies that have appeared on his propreitary stock selection system operate in Chin. Camelot Information Systems Inc. (CIS) is a Chinese logistics and cloud stock, Renesola Ltd. (SOL) is a Chinese solar play, China MediaExpress Holdings Inc. (CCME) does Chinese bus ads, Las Vegas Sands Corp (LVS) growth is being driven more by Macau than it is a recovery in Las Vegas.
Continue to watch Affymax
Affymax, Inc. (AFFY), a bio-pharmaceutical company, had a high volume breakout above its multi-month trendline on Friday, closing at $7.99 Friday. The company’s product candidate Hematide, is designed to treat anemia associated with chronic renal failure. The consensus price target of analysts for the stock is $10, and like many bio-pharma stocks whose fate rests with its drugs’ approval, gapped down from the mid 20’s to around $7.50 back in June after news about one of its drugs.
The inverted head and shoulders pattern would suggest a likely move into the $12.00 area without significant resistance, according to Evan Lazarus of T3Live.com. The trade would be a buy on a pullback down to the trendline area around $7.5. First profit target is $10 and than $12. Stops can be placed for now at $6 and managed upwards as this trade develops further.
*DISCLOSURE: Scott is long CCME, SOL, LVS. Marc is long AAPL, NFLX. Jordan is long CCME, LVS, CIS, SOL. Evan has no positions mentioned.
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