I believe that it is important to point out to all my readers, especially those who are not already members of S.O.M.E. (as members are already well-aware of my trading strategy!), that the more volatile the market becomes, whether it trades up or down, is more beneficial to us, as the returns on our options increase dramatically, as observed throughout June and July, so far.
I must say I am a great supporter of the bulls, but will play-along with the bears to extract as much value from our options plays, as possible. I am a great believer in things moving forward and improving as time progresses but I also know that we have to play-the-game to extend our profits. The only catch in this type of market is “knowing” or realizing in which direction it will take, and it seems that we have been able to fulfill this decision in most cases, to gain our profitability.
Key Events This Week
Note:-All earnings dates listed below are tentative and subject to change.
This Week’s Economic Reports
There are still quite a few major economic indicators available this week, which are:-
• The Commerce Department will release its construction spending report for June.
• The Institute for Supply Management (ISM) Index for June.
• The Commerce Department reports on personal income, personal spending and factory orders for June.
• July auto sales.
• Weekly report on U.S. petroleum supplies,
• The ISM services index,
• The ADP report on private sector employment, the first of three days worth of employment data.
• Weekly initial jobless claims,
• The Labor Department’s nonfarm payrolls and unemployment reports.
This Week’s Major Earnings Reports
• Humana Inc. (HUM),
• Loews Corp. (L),
• MannKind Corp. (MNKD),
• Aflac Inc. (AFL),
• Evergreen Solar Inc. (ESLR),
• General Cable Corp. (BGC),
• SBA Communications Corp. (SBAC), and
• Verisign Inc. (VRSN) .
• Archer Daniels Midland Co. (ADM),
• ArvinMeritor Inc. (ARM),
• Coach Inc. (COH),
• D.R. Horton Inc. (DHI),
• Duke Energy Corp. (DUK),
• The Dow Chemical Co. (DOW),
• Marathon Oil Corp. (MRO),
• MasterCard Inc. (MA),
• MGM Resorts International (MGM),
• Molson Coors Brewing Co. (TAP),
• OfficeMax Inc. (OMX),
• Pfizer Inc. (PFE),
• The Procter & Gamble Co. (PG),
• Rowan Companies Inc. (RDC),
• Solarfun Power Holdings Co. Ltd. (SOLF),
• Tenet Healthcare Corp. (THC),
• Anadarko Petroleum Corp. (APC),
• AvalonBay Communities Inc. (AVB),
• CBS Corp. (CBS),
• Force Protection Inc. (FRPT),
• Leap Wireless International Inc. (LEAP),
• Novatel Wireless Inc. (NVTL),
• priceline.com Inc. (PCLN),
• STEC Inc. (STEC),
• True Religion Apparel Inc. (TRLG), and
• Whole Foods Market Inc. (WFMI).
• Agrium Inc. (AGU),
• AOL Inc. (AOL),
• Garmin Ltd. (GRMN),
• IntercontinentalExchange Inc. (ICE ),
• Polo Ralph Lauren Corp. (RL),
• Qwest Communications International Inc. (Q),
• Sirius XM Radio Inc. (SIRI),
• Time Warner Inc. (TWX),
• TRS Automotive Holdings Corp. (TRW),
• Transocean Ltd. (RIG), and
• Yamana Gold Inc. (AUY) .
• Beazer Homes USA Inc. (BZH),
• Diana Shipping Inc. (DSX),
• DIRECTV (DTV),
• Fuel Systems Solutions Inc. (FSYS),
• Hyatt Hotels Corp. (H),
• Liz Claiborne Inc. (LIZ),
• Playboy Enterprises Inc. (PLA),
• Time Warner Cable Inc. (TWC),
• Activision Blizzard Inc. (ATVI) and
• Kraft Foods Inc. (KFT) .
• China Sunergy Co. Ltd. (CSUN) and
• Dynegy Inc. (DYN).
Outlook for This Week
A modicum of confidence returned to markets in July, as U.S. and European stocks erased much of the losses inked in prior months and investors took heart that slow growth is better than none at all, dumping gold and the U.S. dollar in light of this more sanguine view.
The recovery in stocks, oil and other hard-hit investments puts investors on a more stable footing as they head into August.
"There's no question we had a material improvement in sentiment," said Dan Peirce, a vice president and portfolio manager at State Street Global Advisors in Boston. There are ongoing problems, but "we're certainly not about to roll off the edge anytime soon."
Concerns about a debt debacle in Europe galvanized Wall Street in May and June, punishing stocks and pushing gold to a string of record highs.
July was kinder by far, even as solid earnings results were tarnished by concerns about the slow pace of the U.S. recovery.
Such worries were reinforced Friday, when the Commerce Department reported the U.S. economy expanded at 2.4% annualized rate in the second quarter, compared to 3.7% in the previous three months.
Nonetheless, the stock market, a barometer of the general mood about the economy, has recovered about half the ground lost since the end of April.
However, economic reports on jobs, manufacturing and the consumer could be what trips up stocks in the week ahead, deflating some of July's 7 percent gain.
About a third of the S&P 500 companies report earnings. Investors may, however, pay more attention to any other measure that casts light on the strength of the economy or the consumer, including Tuesday's important monthly auto sales. The July employment report, released Friday, is the most important economic report.
"We're going to lose that catalyst we had, which was better than expected earnings," said Jefferies managing director Art Hogan. "The problem is we've run out of steam."
"We probably will have more inclination to be concerned about the pace of the economy and will trade off on it," said Hogan. "...If we're shifting our focus to economic data versus earnings, the tendency of that has been to be a negative catalyst rather than a positive catalyst."
The S&P 500 companies reporting so far have seen quarterly profit increases of 45 percent on average. Of those companies, 75 percent topped earnings estimates and 64 percent beat revenue expectations. A mix of consumer, media, insurers and financial companies dominate the coming week's calendar, and the companies reporting include Procter and Gamble (PG ) , Kraft (KFT) , Time Warner (TWX) , News Corp (NWS) , MasterCard (MA) and Berkshire Hathaway.
Expectations for this Week
The S&P 500 this past week closed above its 200-day moving average of 1113, but then slid below it. "It doesn't really tell you much about what's going to happen with the fundamentals. I guess that we're sitting at that point where it's going to lead to volatility as we bounce under and over it. There's a good chance we go back over it., but I think that we probably go back under too," said Stuart Freeman, chief equity strategist at Wells Fargo Advisors, of the 200-day.
"I think if we don't see some more pullbacks between now and the middle of October, and it looks like investors are feeling better by that period of time, we may have passed through an important period of risk there. Between now and the early part of October, if the seasonal factors and fears of slowing aren't born out in the data we're getting, we may be getting ready to create that second leg up already," he said.
"Our target is still 1100 to 1140 (on the S&P 500) at the end of the year, and I don't think we're going to see it in a straight line," said Freeman.
In the past month, 20 companies in the S&P 500 increased dividends, according to Standard and Poor's. That compares to just eight in the same month last year.
"Yields are so low by historical standards that (dividend yields) are higher than the 10-year Treasury, which you don't get often," said Jack Ablin, CIO of Harris Private Bank.
Ablin has been cautious on the market ever since the S&P fell 5 percent below it's 200-day moving average on June 8.
"Actually, I wouldn't mind if you just clip a dividend and keep your head down," said Ablin. "What we're seeing is in this kind of market is go for dividends right now and growth. It's possible it could come from some other place, but at this stage, dividends to me have a much higher degree of certainty than the prospects for higher revenues."
Ablin said there is a chance the market could surprise on the upside. "It's one of those things where from a technical standpoint, if we break out we're going to add some risk. But we're likely to do it in some place out of the way, like real estate, not equities. Aside from that, I don't see a huge catalyst to the upside unless all of a sudden these temporary jobs turn into full time jobs," he said.
Treasurys this past week saw yields in some durations gap to record levels against the 30-year bond. The gap between the 10-year and 30-year yields reached 110 basis points at one point Friday. It had been about 90 in the spring. The yield on the 10-year was at 2.91 percent Friday, while the 30-year was at 3.99 percent, down from 4.03 percent a week earlier.
"The market could clearly be vulnerable to stronger data at these yield levels," said John Briggs, Treasury strategist at RBS. He pointed to the surprising strength in Chicago Purchasing managers data Friday.
"It will be interesting to see if the ISM confirms that. Chicago was the first growth indicator that went the other way," said Briggs, noting if the ISM confirms that story it will surprise the market.
The dollar was down 0.89 percent on the week against the euro, and is down 6.2 percent for the month, at a level of $1.3033.
"The dollar is the only constant mover this week," said Brian Dolan of Forex.com. "We can see some stabilization and consolidation, but the risk is the dollar breaks down further and we see more dollar weakness on data, and just on flows."
Hedge Funds Clues
There appears to be more put buying on major exchange-traded funds, which could be interpreted as hedge funds buying protection when they are in accumulation mode. However, there is also a worry about intermediate-term turbulence amid midterm elections and a regulatory environment that is anything but business-friendly.
"Investors more than halved their equity overweight positions this month and boosted bond holdings as their expectations for global economic growth collapsed, a survey from BofA Merrill Lynch showed on Tuesday [July 13] ... Hedge funds' net exposure to equity markets - measured as long minus short as a percentage of capital — fell to 18 percent, the lowest level since March 2009, from 29 percent in June ... Investors' overweight in U.S. equities tumbled to 7 percent this month from 20 percent."
Reuters News, July 13, 2010
"The 1.65 trillion hedge-fund industry, after posting its worst second-quarter performance in a decade, is taking less risk, using less debt and making fewer trades, according to data from securities exchanges and brokers including Credit-Suisse AG and JPMorgan Chase & Co. Hedge-fund clients of Zurich-based Credit Suisse held 24 percent of their assets in cash in June, compared with 19 percent three months earlier."
Bloomberg News, July 30, 2010
Hedge funds are a predominant force in the current market environment, and the trends reported by articles such as these, are extremely relevant. These stories were produced for public consumption during the past couple of weeks, but the daily analysis of option activity on major exchange-traded funds (ETF) has indicated for weeks now what has been revealed in these articles.
Below is a chart of the combined 20-day buy (to open) put/call volume ratio on three major ETFs - the SPDR S&P 500 ETF Trust (SPY), the PowerShares QQQ Trust (QQQQ), and the iShares Russell 2000 Index Fund (IWM). Hedge funds are heavy users of these products, and will often buy puts on these exchange-traded funds when they are accumulating individual stocks.
A rising buy (to open) put/call volume ratio is often indicative that the hedge fund world is in accumulation mode, as they buy ETF puts to hedge long positions. However, a decreasing ratio of put volume to call volume can point to less put protection being purchased, which is often a sign that hedge fund managers have had their fill, resulting in a loss of bullish market momentum or leaving the market vulnerable to a corrective phase. As you can see, the ratio moved sharply lower in late April/early May, an indication that hedge fund managers were no longer in buying mode.
With retail investors pulling money from equity funds for three-plus years, this leaves little room for traditional fund managers to accumulate stocks. It is the hedge funds and high-frequency traders who are dominating market action at present. Therefore, when hedge fund managers are not actively bidding stocks higher, there is little chance the stock market will make any significant headway. Worse yet, if hedge fund managers are in distribution mode, corrections occur. Finally, if hedge funds are neither aggressively buying nor selling shares, it is the mean-reverting actions of high-frequency traders that influence the market, often resulting in painful trading-range action.
Referring back again to the chart above, it is encouraging if you are a market bull to see the 20-day buy (to open) put/call volume ratio turn higher from relatively low levels earlier this month, as it suggests that hedge fund managers with heavier-than-normal cash positions are in accumulation phase once again. The big question is whether or not they'll remain in buying mode for a sustained period, as in 2009.
At present there appears to be the correct environment for a strong bullish move in equities. However, the timing of such a move is crucial, as investors continue to fret over the slowdown in economic growth amid a regulatory environment that is far from "business friendly," and tax reform that may not be "investor friendly" in the year ahead. Throw in the upcoming midterm elections in November, and such uncertainty could drive hesitancy among potential investors.
Turning to the technical backdrop, the SPX comes into the new week trading not far below stiff resistance in the 1,115-1,120 region. The significance of this area is that it has served as resistance for several weeks in late 2009, as traders focused on the 1,121 level being a 61.8% Fibonacci retracement of the 2007 high and 2009 low.
Presently, in addition to the Fibonacci significance of the 1,120 area, there are important trendlines converging in the 1,115-1,120 zone -- specifically, the 80-day, 160-day and 200-day moving averages could continue their role as resistance in the near term. Moreover, 1,117 is the site of the SPX's June closing high, and 1,115.10 is the site of 2009's close.
With the SPX still below 1,120, the bears are still in the driver's seat. A short-term swing lower could push the SPX back to the 1,040-1,050 area. But, if hedge fund managers are indeed in accumulation mode -- which current option activity on major ETFs suggests -- look for 1,120 to be penetrated to the upside.
Given the mood of the environment and investors uncertainty it would be sensible to retain long exposure, but continue to hedge so that you can stay whole during periods of market turbulence.
The last trading day of July is now completed, and the major market indexes have performed well with each gaining approximately 7% for the month.
Seasonality statistics need to be considered as we move into the month of August. July has historically been very bullish for the S&P 500 Index (SPX), with the index averaging gains of 2.29% and 0.42% for the previous five-year and 10-year periods. While August doesn't quite live up to July's performance during the past five years, the month is far from being a laggard.
The last trading day of July is now completed, and the major market indexes have performed well with approximately 7% gain for the month. July has historically been very bullish for the S&P 500 Index (SPX), with the index averaging gains of 2.29% and 0.42% for the previous five-year and 10-year periods.
According to data the SPX has turned in a positive performance in seven of the past eight Augusts. Furthermore, the index has logged gains of 1.37% and 0.90% during the month for the prior five-year and 10-year periods. In fact, August has a slightly better track record, from a longer-term perspective, than July.
During the past 30 years, the month of August has ushered the SPX higher 63% of the time, for an average gain of 0.40%. The average percentage gain ranks ninth out of the 12 months.
However, the month of August has been even better for investors since the turn of the century. During the past 10 years, the SPX has finished higher eight times during August, and the average monthly return of 0.90% ranks it third out of the 12 months.
While it would be daring, at best, to expect August to top July's current gain of more than 7% on the SPX, bulls should take heart that Wall Street should continue higher for at least another month. Enjoy it while you can, because - looking at the tables above - September doesn't look so hot.
Historical - July Performance vs. Q3 Performance
The current July gains could bode well for the markets’ third quarter performance. Essentially, a July gain has often translated into a Q3 gain for the markets:
• Since 1929, the Dow has posted a July gain 50 times. During those instances, the Dow has also finished the quarter with a gain 76% of the time (38 times total).
• Since 1951, the S&P has posted a July gain 31 times. During those instances, the S&P has also finished the quarter with a gain 84% of the time (26 times total).
• Since 1972, the Nasdaq has posted a July gain 19 times. During those instances, the Nasdaq has also finished the quarter with a gain 89% of the time (17 times total).
Keep in mind, according to the Stock Trader’s Almanac, July is typically the best month of the third quarter for the Dow & S&P. (Dow up 1.0% in July vs. up 0.01% in August and down 1.0% in September; S&P up 0.8% in July vs. up 0.1% in August and down 0.7% in September).
Year-to-date (YTD) performance at the end of July vs. end-of-year performance
Despite the solid July gains, the major indices are currently still teetering around the breakeven point for the year. So far this year, the Dow is up 0.4%, the S&P 500 is down 1.2%, and the Nasdaq is down 0.8%.
But what does the current YTD performance indicate about the markets down the road – let’s say at the end of the year?
In fact, a strong correlation exists when comparing the direction of the markets’ year-to date performance at the end of July to the direction of the markets’ performance at the end of the year (i.e., if the index was up YTD at the end of July, it was also up at end of the year –or- if the index was down YTD at the end of July, it was also down at the end of the year):
• Since 1929, 83% of the time, the direction of the Dow’s calendar year performance has been the same as the direction of its YTD performance at the end of July.
• Since 1951, 90% of the time, the direction of the S&P’s calendar year performance has been the same as the direction of its YTD performance at the end of July.
• Since 1972, 84% of the time, the direction of the Nasdaq’s calendar year performance has been the same as the direction of its YTD performance at the end of July.
Here’s a breakdown of the correlation in the years that the indexes are up YTD at the end of July vs. when they are down YTD at the end of July:
For year-to-date gains at the end of July:
• Since 1929, when the Dow has finished July up YTD, it also ended the full year with a gain 87% of the time.
• Since 1951, when the S&P has finished July up YTD, it also ended the full year with a gain 95% of the time.
• Since 1972, when the Nasdaq has finished July up YTD, it also ended the full year with a gain 92% of the time.
For year-to-date declines at the end of July:
• Since 1929, when the Dow has finished July down YTD, it also ended the full year with a decline 75% of the time .
• Since 1951, when the S&P has finished July down YTD, it also ended the full year with a decline 78% of the time.
• Since 1972, when the Nasdaq has finished July down YTD, it also ended the full year with a decline 69% of the time.
More Reasons Why the Market Will Strengthen From Here
Factors that could push the stock market onto a nice growth path:-
1. Profits = Cash = Jobs
Corporations are fairly predictable in most cases. They react to economic downturns and upturns in a repeated fashion. First, they cut jobs. Then, they generate higher profits thanks to now-smaller workforces. As those profits pile up on the balance sheet, they post abnormally high levels of cash. Finally, when convinced that the worst has passed and they have tired of over-burdening shrunken workforces, they begin to re-hire lost employees. Eventually, unemployment shrinks and consumer spending rises. This is precisely how things played out in the 1990s, with very positive results for investors willing to stick it out through the lean years.
2. A long, long way from onerous interest rates
The cost of borrowing remains near an all-time low as the Federal Reserve keeps inter-bank lending rates barely above zero. The Fed is likely to keep rates low for some time to come. When the Fed finally begins to raise rates -- perhaps some time in 2011 -- they will go slowly and may simply move rates back up 300 to 400 basis points, a level which should still be conducive to economic growth and a level that should still make equities comparatively attractive relative to fixed income plays.
3. The global consumer
Lost in all of the hand-wringing about global economic problems has been the stunning rise of a consumer class in Chile, Brazil, Korea, China, India and elsewhere. Those countries alone account for more than half of the world's population. And if history is any guide, markets with fast-rising middle classes (such as Japan in the 1970s) tend to drive demand for global brands. Executives at firms like Coca-Cola (NYSE: KO), IBM (NYSE: IBM), Walmart (NYSE: WMT) and Procter & Gamble (NYSE: PG) have been busy establishing beach heads in those newly-robust countries, and should become dominant brands in these newer markets.
Brazil in particular is a great story -- the country is in the process of lifting its neighbors through direct investments and increasing trade flows. Conveniently for us, major Latin American markets are just a direct flight away.
4. M&A and private equity give benchmarks
We've seen a reasonable amount of deal-making in 2010. More than we saw in 2009, when everyone was gun-shy, but perhaps less than what many forecasters had expected.
The healthcare industry -- especially biotech -- has accounted for the lion's share of deal-making in recent quarters. But as the economy stabilizes and companies realize that organic sales growth is muted, we might see a robust uptick in mergers and acquisitions (M&A) in other sectors as well -- that is, if the private equity (PE) shops don't beat them to it. A lot of these PE firms raised oodles of money three or four years ago and are bumping up against deadlines that compel them to put that cash into play or return it to investors.
All of these deals are very helpful for investors, as they establish an appropriate value for businesses and industries. Hypothetically, if a company is bought for 20 times trailing earnings and its rivals are trading at 12 times earnings, you can bet that investors will flock to cheaper rivals in search of the next hot deal.
For companies sitting on lots of cash (see #1), but have no interest in doing a deal (#4), then stock buybacks become a real option. We're already seeing companies as diverse as Hasbro (NYSE: HAS), DirecTV (NYSE: DTV)and Cisco Systems (Nasdaq: CSCO) buying back a great deal of stock. Until and unless the stock market really zooms ahead, look for an increasing number of companies to announce large buyback programs, which can be a real boon for per share profits. For example, since 2005, Home Depot (NYSE: HD) has reduced its share count from 2.2 million to 1.7 million. That -23% reduction in the share count means that earnings per share (EPS) is +23% higher -- on the same amount of net income.
Jobs, cars and retail sales will lead the economic headlines next week. It’s also another big week for second-quarter earnings.
The July unemployment rate, to be released next Friday, is expected to tick up to 9.6% from 9.5% in June. Auto makers and major retailers will release July sales figures Tuesday and Thursday, respectively.
Economists expect the July jobless rate, to be issued next Friday, will rise slightly from June, when only 83,000 private-sector jobs were created, according to the Labor Department's initial reading. Overall, the U.S. shed jobs in June for the first time this year as hundreds of thousands of part-time Census jobs ended. The number of U.S. workers filing new claims for unemployment benefits fell slightly last week, but that followed a big rise the previous period, signaling little improvement in the job market.
July U.S. new-vehicle sales, out Tuesday, are expected to grow 8.4% from a year earlier, according to Edmunds.com, which expects sales to be the highest since the Cash For Clunkers frenzy last August. U.S. auto sales in July 2009 reached their highest pace since before the financial crisis, boosted at the end of the month by a rush of customers lured into showrooms by the federal government's rebate program, the car-shopping Web site said. Edmunds on Thursday estimated the industry will sell roughly 1.1 million units in July, which would result in a seasonally adjusted, annualized rate of 11.8 million units, up from 11.1 million in June.
Major retailers will report July same-store sales Thursday, after posting mixed results a month earlier. Some stores benefited from aggressive promotions in June, while others remained pinched by consumers' restrained spending.
June personal incomes and spending are expected to show small increases. Neither figure has grown more than 0.5% this year as inflation remains tame. The government will report on June construction spending Monday and June factory orders Tuesday. The Institute for Supply Management releases its report on manufacturing in July on Monday, two days before it details July activity in the services sector. The government also reports on June consumer credit next Friday.
The Senate is expected to approve a slimmed-down measure to enhance airline safety before Congress begins its August recess at the end of next week. The House passed the bill Thursday after congressional leaders deadlocked over a comprehensive Federal Aviation Administration bill, including plans for air-traffic control improvements. The legislation raises minimum experience and training requirements for new airline pilots and requires that before purchasing tickets on the Internet, passengers must be informed when a flight will be operated by a commuter carrier on behalf of a larger airline.
The Senate is expected to confirm President Barack Obama's nomination of Solicitor General Elena Kagan to the Supreme Court next week. At least four Republicans plan to vote for the former dean of Harvard Law School who would be the fourth woman to sit on the nation's highest court.
**Among appearances by Federal Reserve officials: Chairman Ben Bernanke will speak at the Southern Legislative Conference's 64th annual meeting Monday in Charleston, S.C.
**Treasury Secretary Timothy Geithner will discuss the "next steps for financial reform" Monday afternoon at New York University's Stern School of Business. He is scheduled to talk about the Wall Street reforms included in recent legislation passed by Congress.
State Finances - Fed Chairman Bernanke speaks to lawmakers in South Carolina on Monday on the challenges faced by state and local governments in the recession. His comments will be closely watched as he rarely weighs in on state policy. We will be running the first in a series of stories on state and local government finances next week, focusing on the effect their troubles are having on the national economy.
Conferences of Importance
Among the significant conferences next week are:-
• The Wedbush Morgan Securities Life Sciences Best Ideas Management Access Conference on Tuesday in New York,
• Bank of America Merrill Lynch Senior IT Executive & Private Technology Company Conference on Tuesday in Boston, and
• BMO Capital Markets Focus on Healthcare Conference on Thursday in New York.
**In addition to U.S. data, investors will be watching China's PMI, released overnight New York time on Sunday.
**The European Central Bank and Bank of England hold rate meetings Thursday.
**The Stoxx Europe 600 index (ST:SXXP) , a benchmark for European shares, gained 4.9% in July, rebounding from three straight months of losses.
**And emerging markets have also recovered, with the MSCI Barra Emerging Markets Index up about 8%, putting it on par with March's performance.
**"What everyone was expecting in the last six months was for the U.S. economy to outpace its European counterparts in the race to recovery," said John Doyle, a currency strategist at Tempus Consulting in Washington, DC. "Now the U.S. is losing steam and data out of Europe has come back."
But the U.S. is still better positioned to stage a full recovery quicker than euro-zone countries and Great Britain, which implemented more austere government budgets. Tempus looks for the euro to change hands at $1.23 at the end of the year provided macroeconomic reports show an improving picture in the U.S.
Three Dow Jones Industrial Average components and a fifth of the companies in the Standard & Poor's 500 Index will report second-quarter results next week in the final "peak" week of earnings season.
Major media companies, which are among those reporting results next week, are expected to show improvements from a year earlier as advertising markets rebound.
CBS Corp. (NYSE:CBS), which reports Tuesday, is likely to see results similar to General Electric Co.'s (GE) NBC, which said second-quarter ad sales climbed 20% on strength at its cable networks, local stations and even the flagship network. News Corp. (NWSA), owner of Dow Jones & Co., publisher of this newswire, and Time Warner Inc. (TWX) both report Wednesday. Both companies are likely to show strength in their cable networks. Viacom Inc. (VIA), which reports Thursday, is expected to benefit from a string of blockbusters produced by its Paramount Pictures unit.
Pfizer Inc. (PFE), the world's biggest drug maker by sales, wraps up Big Pharma's second-quarter reporting season Tuesday. Earnings excluding one-time items are expected to rise 8% on a big jump in sales because of Pfizer's acquisition of Wyeth last year. A big focus for investors will be Pfizer's drug-research pipeline, which has had setback after setback, leaving a big question mark about whether the company can reach long-term financial targets that it laid out with the Wyeth deal.
Procter & Gamble Co. (PG) and Kraft Foods Inc. (KFT), both components of the Dow Jones Industrial Average, will report results Tuesday and Thursday, respectively. P&G is likely to post lower earnings on slightly higher revenue than a year earlier as it aggressively pushes to introduce new products and increase advertising. The company also has cut prices or introduced less-expensive versions of some goods to attract bargain-hunting U.S. consumers and less-affluent customers in emerging markets. Kraft also is expected to report lower earnings on improved revenue in the first full quarter to reflect results from its nearly $18 billion purchase of Cadbury.
Research in Motion Ltd. (RIMM) will likely show off its new Blackberry 6 operating system and slider device Tuesday. There has been eager anticipation for a revamp of the Blackberry software, which many believe has fallen behind Apple Inc. (AAPL) and Google Inc.'s (GOOG) Android software. There has been no indication on whether RIM will show off a planned tablet device.
A $788.5 million commercial mortgage-backed securities issue from Goldman Sachs Group Inc. (GS) and Citigroup Inc. (C) is expected to launch and price next week. Commercial mortgage bonds are popular with investors because they're relatively cheap, offering higher yields than other asset classes. But this is only the fourth such issue this year, leading many analysts to scale back their projection for commercial mortgage issuance to $5 billion this year from $15 billion to $20 billion.
INDICATORS AND MARKET CONDITIONS
The S&P 500 Index (SPX)
The Standard & Poor's 500 .SPX index has been stuck near its 200-day moving average, a level used to determine market direction, amid recent weak economic data and disappointing outlooks from companies, including tech firms Nvidia Corp (NVDA)and Symantec (SYMC).
The S&P 500 Index (SPX) was hammered down this past week just as it was about to move into positive territory for the year. The same thing happened in June. Co-incidentally, it may be that 1,115 (about where the SPX began the year) is acting as some sort of resistance level. Traders seem to be psychologically anchoring the index to where it stood at the beginning of the year.
As the index approaches this level from below, traders seem to view prices as becoming high- and therefore begin selling. Or maybe big-money players have an interest in whether the market finishes up or down for the year. If so, then the SPX's trek toward the 1,115 region might prompt a bunch of hedging and/or speculative activity, which should ultimately send the index in one direction or the other, depending on whether the bulls or bears win out.
Look at 2009 in the chart below. The S&P 500 began the year in a freefall, bottoming out in March. From early March until the end of the year, the market steadily climbed 67% higher. In fact, the only time the market struggled for any length of time was from May through July, just as the index was moving into positive territory for the year.
More Historical Results: Observation of the S&P 500 since 1972, where the index began the year which is called the 0% YTD line, and deciding whether the SPX approached this 0% YTD line from below or from above. If the barometer approached it from below, then it is called it a resistance line; a summary of the results is in the top table (red). If the index approached it from above, it is called it a support line, as reflected in the green table below.
The findings support the theory that the index's level at the beginning of the year can act as support or resistance for the market. Focusing on the one-month returns when the SPX has approached this level from below, the index has a tendency to get knocked down. It's positive in the next month only 35% of the time, and averages a loss of nearly 1%. On the other hand, when the market is positive and the SPX approached this level from above, the month was positive 64% of the time, averaging a return of 3.84%.
Analysts say a significant break above the S&P 500's 200-day moving average, currently around 1,114, would be a bullish signal.
"The market has the potential to push higher again if we can get through the 200-day moving average," said Michael Sheldon, chief market strategist, RDM Financial, Westport, Connecticut.
Chris Burba, short-term market technician at Standard & Poor's in New York, noted that the 200-day moving average has been nearly flat since late June, which supports the view that investors should be cautious.
***Further evidence of market conditions can be seen in representations of charts below.
Tracking of SPY, DIA, IWM and QQQQ
The markets have basically spent last week pausing near their June highs. In fact, the markets are basically near where they closed the week before after a strong Monday and three days of selling, and are pulling back from a well-established resistance area. However, while the pullback looks constructive so far, traders need to be on alert for a failure here. Ultimately, all eyes are on the pivot lows set last week and the June highs above.
The two levels are pretty clear in the chart for the S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY) ETF. Notice how SPY is backing away from the $112 area, which coincides with SPY’s June high. This will be the key level to watch in the near future, as a move above this level will likely catch some bears off guard. Looking below, the first level of possible support would likely lie near $108. This is the current location for SPY’s 20- and 50-day moving averages. However, the key level to watch is the pivot low set near $106. A failure here could lead to a retest of the July lows and call into question the idea that a higher low has been set at all.
The Diamonds Trust, Series 1 (NYSE:DIA) ETF, which tracks the Dow Jones Industrial Average, also backed away from its June high near $106. This is the key level to watch above, as a move above this area will confirm a higher high. The key question traders are facing is whether DIA is resting before an attempted breakout, or is in the early stages of resuming its downtrend. While there are a few levels of possible support below, the key level to watch is near $100. A break below this level may have some bulls scrambling for the exits.
It’s interesting that the Nasdaq, as represented by the Powershares QQQ ETF (Nasdaq:QQQQ), failed to even reach its June high. In healthy markets, typically the Nasdaq would be outperforming as it would show investors being more aggressive in seeking better returns. If the markets are going to attempt a move higher, QQQQ will have to start leading the way. The first step would be clearing this week’s high, but much like the other ETFs, the June high is the key level to watch above, while $44 is the level to watch below.
The Russell 2000, as represented by the iShares Russell 2000 Index (NYSE:IWM), also failed to reach its June high, although it did come fairly close. Much like QQQQ, IWM will need to resume its role as a leader if the market's rally attempt is to continue. IWM is trading just above a cluster of its 20-, 50-, and 200-day moving averages, which could provide near-term support. Ultimately though, IWM is trading between the same two key levels as the other market index ETFs. For IWM, these levels would be $67.50 and $60.
Despite the fact that the market index ETFs are beginning to back away from resistance near the June highs, not much has changed in the grand scheme of things. The markets remain in a small consolidation after last week’s strong rally and they have plenty of room before the pullback will be a threat to last week's pivot low. Heading into a new week, it looks like the markets still have more consolidation ahead and it may take a few days before a resolution appears. However, traders should be on high alert as the markets could be setting up for a good move soon. If the markets clear their June highs, it could lead to a surge higher; if they break under last week's lows it could lead to a quick plunge. Either way, a trend move should be near.
Tracking of Stocks After Post-Earnings
Every three months the markets begin a new earnings season. This always injects new life into the markets, and stocks will often gap up or down as investors grapple with interpreting the new numbers and revised outlook. A theme also tends to develop as investors price in a certain scenario in advance of the reports. This quarter has seen a propensity for stocks to gap a large amount and then get faded the rest of the day. This action has occurred on at least four market-leading stocks, and interestingly enough with both gaps higher and lower. The end result is they ended near where they were the day before earnings and are painting a mixed picture for the health of the markets.
Amazon.com (Nasdaq:AMZN), for instance, had a sharp gap down following its earnings report a few days ago and promptly headed higher the entire day. The gap down should not have come as a surprise, as AMZN had been steadily setting lower lows and lower highs for several weeks. The gap down reversal does present some challenges for traders attempting to interpret the action. On the one hand, AMZN has yet to make any progress after the gap reversal and remains under its 50-day moving average. On the other hand, the gap reversal showed strong buying and should act as support moving forward. Traders are probably best served watching to see if AMZN will attempt to drop back beneath the gap low near $105 or if it can show some sustained strength and set a higher high above $125.
Goldman Sachs Group (NYSE:GS) is another stock that has been weak for the past few months, but it did start to show some life heading into earnings. GS gapped lower much like AMZN, and then promptly headed higher. While GS hasn’t made much progress following its report, the company has begun to consolidate in a small bull pennant. GS has also cleared a small base and could have bottomed. The earnings gap low will be a key level to watch moving forward on the downside, while $150 will be a key level on the upside in the near term.
Apple's(Nasdaq:AAPL) earnings report is one of the highest profile events each season and this time, the company didn't disappoint. AAPL gapped higher despite showing some weakness in its chart heading into the report. However, AAPL did the reverse of AMZN and GS by gapping higher and promptly heading lower the entire day. In the end, AAPL ended up closing very close to where it did the day before, which also happened to be a pretty wild day. Despite the wild swings, AAPL remains in a consolidation between $240 and $275.
Intel (Nasdaq: INTC) is another stock that ended up giving up its earnings-related gap. INTC gapped higher following its report and ended up closing near the lows for the day. It has yet to climb back above the earnings day high, but overall the chart has some positive traits. INTC broke free of the channel it was following as it headed lower from May through July and has been consolidating above its 50-day moving average. It also has yet to fill another gap that wasn’t related to earnings, which shows that buyers are willing to continue buying at higher prices. INTC has also set a higher high, which represents yet another bullish development.
While it’s interesting that all of these stocks reversed their earnings gap, the more important observation is how none of these stocks has managed to follow through one way or the other after earnings. This is showing some indecision and ultimately the peaks of these earnings days need to be watched moving forward. These are important inflection points and a move above or below these levels would have important implications for these stocks. It seems like the markets are close to making an important move and the direction these stocks take could provide an early signal for astute traders.
Stocks in the past month have seen an earnings bounce, as they struggled against a patch of weaker economic reports.
The Dow, up 7 percent for the month, ended up just slightly on the week, gaining 41 points to 10,465. The S&P 500 was up just 1 point for the week, to 1101, but it is up 6.9 percent for the month. The Nasdaq was up 14 points for the week, to 2254, and it has a 6.9 percent gain for the month.
"The market's volatile and that's going to continue to be the case. I don't think we're up, up and away. Earnings season has been good generally, but not as good as last quarter," said Stuart Freeman, chief equity strategist at Wells Fargo Advisors.
"We think we're going to see more up and down, up and down volatility. It's possible we move a little higher into the late earnings season, but it's possible we come down in the fall," he said.
Freeman said unlike last year when the market was in a strong recovery, stocks are likely to respond in a more traditional way to seasonal factors and could face a choppy September and October.
"We would expect it to be volatile just because it's a mid-cycle election year, which often causes some consternation and volatility in the market," Freeman said. He expects the market to rise once again after the election is over.
Markets likely will be choppy for a long time, said Dan Cook, a senior market analyst at IG Markets in Chicago. "This is not the type of market the retail investor wants to get involved in too quickly," he said.
But with relatively few top tier companies left to report earnings, the economic outlook is likely to set the tone for the market this week.
"As we get past earnings season it will be harder for the market to sustain the positive tone it has had over the last few weeks," said Bruce McCain, chief investment strategist at Key Private Bank.
As such, trading could be choppy in the early part of the week as investors gear up for the all-important monthly jobs report from the Labor Department on Friday. In addition, investors will take in government data on personal income and spending, as well as a key index of manufacturing activity.
"Without jobs it's difficult to have a robust economic recovery, and that will make it harder for the market to move significantly higher," said David Levy, a portfolio manager at Kenjol Capital.
Most economists expect the report to show that payrolls fell in July as the impact of temporary Census hiring continues to fade. But the market could rally if the number comes in better than expected or shows any improvement in private sector hiring, according to Alec Young, an equity analyst at Standard & Poor's. "There's room for the market to move higher if jobs pick up," he said. "But earnings alone are not enough anymore."
Options market activity points to more tech sector volatility next week, while the Nasdaq .IXIC had the poorest performance of the three major indexes this week.
Options investors appear to be expecting more volatility in the technology sector, which has heavily weighed on the market this week, to continue.
The most active options on PowerShares QQQ Trust ETF (QQQQ.P), an exchange-traded fund that tracks the benchmark Nasdaq 100 .NDX, was the weekly put options at the $45 strike which expire on Aug 6. Weeklys are options listed with approximately one week to expiration, different from traditional options that have a life of months or years before expiration.
"Puts are dominating in the QQQQ, both in weeklys and regulars," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research in Cincinnati, Ohio.
Regular put options at the August $45 and $46 strikes were also seeing heavy volume. The ETF is currently down 0.4 percent at $45.55.
Some options market analysts see more range-bound trading ahead, with top end at 1,120 on the S&P 500 and the bottom end at 1,065. "In order to take out the upside of the trading range, we need to see the majority of economic data this week to be better than expected," said Stifel Nicolaus options market strategist Elliot Spar in Shrewsbury, New Jersey.
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