Select Chinese Stocks Could Benefit from Smog Concerns

There are mixed markets around the world as we enter Friday morning. The week started off with a very negative tone making most active market participants take down risk, then we talked about measuring the strength of the bounce. On Tuesday we reclaimed the 8- and 21-day moving averages and put us right back in striking distance of all-time highs that were set Wednesday as we poked through S&P 1848 with the tech sector already at highs. Yesterday, the market held the top third of the range giving us S&P 1837-1840 as a new upper support floor to trade against even with the bank weakness.

This morning S&P futures again are showing resilience and are 3-5 handles higher in the face of weak Intel (INTC) earnings. Five analysts this week slapped “Buy” ratings on INTC, and now this morning it is down almost 4% pre-market. General Electric (GE) also reported lukewarm earnings and is down around 1.5% this morning.

Anyway, as long as we stay above S&P 1837-1840 it’s hard to have short on the brain. This year has been choppy, thin and at times filled with air pockets that have caused some turbulence, but we are still flattish absorbing a 30% move from 2013.

Yesterday solar stocks came to the fore as SunPower (SPWR) and SolarCity (SCTY) both surged more than 10%. The SCTY news was very interesting as the company announced a plan for basically crowd-funding its short-term debt, allowing Main St investors to invest in sustainable energy projects rather than relying on credit from big banks. Some analysts believe it could shake up the energy industry as we know it, and the market certainly like the sound of the news as SCTY blasted to highs.

See if some second-tier solar names get any momentum today as the sector outlook brightens. Two of the better patterns that haven’t triggered are Yingli Solar (YGE) and Trina Solar (TSL), both Chinese solar names. Yesterday they had to close schools in parts of China because the smog was so bad, and having visited China I can tell you first-hand it is an enormous problem. Reports are that Chinese policy makers will increase their targets for solar energy in an attempts to reduce the debilitating smog.

The banks had been among the strongest groups to start the year, but after a solid start to earnings season yesterday the sector took a step-back. JP Morgan (JPM), Wells Fargo (WFC) and Bank of America (BAC) in particular kicked things off with solid numbers, but we got mediocre earnings from Goldman Sachs (GS) and more glaringly Citigroup (C) yesterday. C had a potent gap and go to the downside and will need time to repair its chart, while GS finished 2.0% lower after opening flat. We might start to see more divergences in the sector for the next few months, and my clear favorite remains BAC.

Overall earnings season has gotten off to an underwhelming start, but the market has so far absorbed some warnings and weak reports well. The retail in particular looks like it could severely lag the market in 2014 after early warnings and/or weak earnings from names likes Lululemon (LULU), Sodastream (SODA), JC Penney (JCP) and Best Buy (BBY) that led to huge sell-offs. A name like Under Armour (UA) that had been holding up well has started to break down this week, and we have Wal-Mart (WMT) as a short idea on Off the Charts as it breaks through pivot lows. I think there is room to the downside in most retail names that haven’t already gotten whacked.

Tech remains a very mixed bag. Apple (AAPL) has started to act better since Tim Cook’s excited comments about the China Mobile deal, and it sounds like the deal is going to have a tremendous positive impact on AAPL earnings – the only question being whether that is already priced in. Google (GOOG) remains very strong without really providing a way in for investors who want to be involved with it.

Twitter (TWTR) remains choppy but I think it could find a way to grind higher after a series of downgrades over the past two weeks. Facebook (FB) looks interesting – it has come a long way certainly in the past year or so, but right now although it has been choppy in the upper range it looks like it could be basing for another move higher.

Biotech stocks also continue to get a strong bid. We saw Intercept Pharmaceuticals (ICPT) make a 500% move in two days, and although it has pulled back sharply we have seen money flow into other members of the group. We listed Gilead (GILD) on Off the Charts and it staged a strong breakout yesterday. Unilife (UNIS) is a medical supplies company we listed on OTC that also had a nice breakout. The Biotech ETF (IBB) might be a little extended right now, but with technology and medical innovation accelerating we could continue to see the biotech sector unlock huge profit potential this year.

Traders who use stock selection skills based on price patterns and relative strength are having more success in January. I do feel that being stock specific and tactical will be the mantra for 2014. All stocks are not created equal, but this year that might be even more important. Stay flexible and know your time frame.

Disclosure: Scott Redler is long SOL, UNIS, YGE, SPWR, AAPL, NUS calls, DANG, TSL, SNDK, FB, ONVO, BAC. Short SPY.

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