The Past Week: Stocks Up More Than 2%!
Stock Market: Big Week For IPOs!
Wall Street: Treasuries Surge And Precious Metals Plunge!
by Ian Harvey
April 15, 2013
Stocks closed lower Friday, breaking a four-day winning streak, although the Dow almost made it back to positive territory after falling quite a bit in early trading. Though the widely anticipated earnings from JPMorgan Chase (JPM) and Wells Fargo (WFC) were better than expected, both stocks fell in the past week.
Stocks, so far, have not shown much reaction to worries that the economy is slowing down, with both the Dow Jones Industrial Average (DJI) and Standard & Poor's 500 Index (SPX) at record highs in the past week -- the best 4-day run of the year.
Although the U.S. stock market shook off worse than expected retail sales data, volatility hit other markets hard to end the past week.
Precious metals were slammed on the retail sales data along with some signs of deflationary pressures in Friday's economic data. Technical levels were broken to the downside during the sell-off, which exacerbated the losses in precious metals.
Treasuries also surged on the day, which may be a sign that investors are preparing for a sell-off in stocks despite the Dow and S&P holding near record highs.
• The Dow Jones Industrial Average (DJI) jumped 2.06% for the past week, to settle at 14,865,06.
Home Depot was the biggest gainer on the Dow for the quarter, and Alcoa was the worst weekly performer.
• The Standard & Poor's 500 Index (SPX) surged 2.29%, to finish at 1,588.85.
All key S&P sectors finished in positive territory for the past week, led by consumer discretionary and health care.
• And the Nasdaq Composite Index (COMP) was up 2.84% for the past week, to finish at 3,294.95.
CBOE Market Volatility Index (VIX) ), widely considered the best gauge of fear in the market, finished Friday session with a loss of less than 0.2 points, down 1.5 % at 12.06.
For the past week, the VIX surrendered 13.4 %.
World Markets in the Past Week
In Asia, the main focus has been on Japan's aggressive monetary easing, which pushed the yen-dollar close to the 100 level last week.
Of course, the state of the Chinese economy is also getting quite a bit of attention. The sharp drop in their inflation rate last week was taken as a sign that the country's economy is recovering at a reasonable rate. Many of the China-focused ETFs may be close to bottoming, and I would expect them to be higher by the end of the year.
Chinese imports surged more than 14 percent from a year ago, a sign that demand from the world's second-largest economy remained strong.
In Europe, S&P revised its outlook on Cyprus to "stable" from "negative," saying immediate risk of sovereign default in the nation has receded.
Since the last update, the Spyder Trust (SPY) dropped back to stronger support, generating a cautionary signal. This was followed last week by new highs in the Dow Industrials, and more importantly new all-time highs in the S&P 500.
These new highs have not been confirmed by some of the other market averages, notably the Dow Transports and Russell 2000. A further decline in these two indices early in the week ahead could generate stronger sell signals.
The iShares Dow Jones Transportation (IYT) also had a good week, up around 1.6%, but like IWM the rally stalled at key resistance.
Therefore, the quarterly pivot support at $105.99—which was broken on the recent correction—now becomes more important. The IYT really needs to move back above the $111.62 level to reassert the uptrend.
The table below notes the disparity in the performance of the different sectors so far in 2013. On the one hand you have the Select Sector SPDR Health Care (XLV) up 20%, while the Select Sector SPDR Materials (XLB) i s up less than 5%.
Earnings Reports for the Past Week
The first quarter reporting season is underway and we have results from 31 companies in the S&P 500 already (as of Friday, April 12th).
The earnings reports thus far have been mixed. It is perhaps premature to pass judgment on the Q1 earnings season at this stage, though the underwhelming results from the past week for J.P. Morgan (JPM) and Wells Fargo (WFC) do provide us with a good-enough preview of what to expect from the banking group in the week ahead.
Evaluating the 31 S&P 500 results that we have seen already provides a bit of a mixed picture. Earnings and revenue growth for these 31 companies are a bit weaker than what these same companies achieved in 2012 Q4. But the beat ratios (% of companies coming out with positive surprises) are modestly better on the earnings side and bit lower on the revenue side. It is hard to see a trend from these reports, but with 94% of the reports still to come, the more important story on the earnings front pertains to expectations from the coming reports.
J.P. Morgan and Wells Fargo achieved earnings growth of 25% and 16%, respectively. But total earnings for the rest of the Finance sector are expected to be down -6.4% from the same period last year, with tough comparisons at Bank of America (BAC) and AIG (AIG).
J.P. Morgan’s strong investment banking results are a good omen for Goldman Sachs and Morgan Stanley, which has partly been showing up in upward earnings estimate revisions for Goldman. The composite picture for the Finance sector, combining the results that have come out with those still to come, is for earnings decline of -1.6% from the same period last year, an improvement from what was expected before the JPM/WFC results (-3.8%).
Downgrades of two big consumer names in the past week were Coca-Cola (KO) and PepsiCo. (PEP). Coca-Cola has gone from $36 to $41 a share, PepsiCo has gone from $68 to $80 a share this year and is at an historic high. Friday saw Davenport downgrade both to "neutral" on valuation, but also noted that for Coca-Cola was likely "weaker than expected."
It certainly is a bit of a mystery why these stocks have been flying: Coke had only 1 percent volume growth in the fourth quarter of 2012 and is trading at roughly 19 times forward earnings. Pepsi is trading at 18 times forward earnings.
IPO’s in the Past Week
This past week was a big week for IPOs, in terms of number and how well most of them did. Six companies went public this past week, and about $1.5 billion was raised.
Four of the six increased the number of shares offered, or priced above the expected range, or both. That is bullish. You don't see this type of activity in a bear market.
For the first quarter about $7.8 billion was raised, according to John Fitzgibbon at IPO Scoop. That is much better than the first quarter of 2012, when $5.9 billion was raised.
The IPO market is a follower, not a leader ... but it's catching up!
June crude oil was hit hard last Friday, losing over $2.40 per barrel and closing just above the early March low of $90.23. A drop below this level will signal a decline to the $88 area. Remember that the action in crude oil often leads the stock market by a few days.
The carnage in the gold market was even more dramatic than crude oil, as the June Comex gold contract lost over $80 per ounce. The chart of the SPDR Gold Trust (GLD) shows that the lows at $148 going back to late 2011 were broken, as it closed in the $145 area.
The major 38.2% Fibonacci support that goes back to the 2008 low is at $140, which is the next likely downside target. The 50% support is at $125.82.
Traditionally, April has been a good month for gold, even though the main seasonal low occurs in July. Aggressive investors who went long at $154.50 were stopped out at $149.65 for a 3.1% loss.
The yield on the ten-year T-Note dropped to a low of 1.75% on April 5 before rebounding back above the 1.8% level in the middle of last week. The decline did break the uptrend (line e) that goes back to last summer's lows, and a drop back below 1.75% will indicate the rally in yields is over.
Economic Reports in the Past Week
• Wholesale Inventories
Wholesale inventories fell 0.3 percent in February after increasing 0.8 percent for January. This compared to consensus expectations which called for an increase in wholesale inventories of 0.5 percent for the month. The decline in wholesale inventories was likely the result of strong sales growth in the month, with wholesale sales surging 1.7 percent in February after falling 0.8 percent in January.
• FOMC Minutes
The Federal Open Market Committee released the minutes from its latest meeting on Wednesday. A number of FOMC members said that the Federal Reserve should begin tapering its quantitative easing program in 2013 and move to end it by the beginning of next year. FOMC members “thought that if the outlook for labor market conditions improved as anticipated, it would probably be appropriate to slow purchases later in the year and to stop them by year-end.”
For the time being, however, the committee determined that it will continue with the Fed's $85 billion per month asset purchase program until the labor-market outlook has "improved substantially."
• Jobless Claims
Initial claims fell to 346,000 for the week ending April 6, compared to an upwardly revised 388,000 for the week ending March 30. This was substantially better than consensus estimates which expected initial claims to decline to 365,000.
Continuing claims fell from an upwardly revised 3.091 million for the week ending March 23 to 3.079 million for the week ending March 30. This was still above consensus estimates which expected continuing claims to fall to 3.058 million.
• Import Prices
Import prices fell in March as weak petroleum costs offset a spike in food prices, according to the Labor Department, matching expectations. The tame inflation environment should allow the Federal Reserve to stay on its ultra-easy monetary policy course as it tries to nurse the economy back to health.
• Retail Sales
Retail sales fell 0.4 percent in March after increasing 1.0 percent in February. This was worse than consensus expectations which expected retail sales to be flat.
Excluding the auto sector, retail sales also fell 0.4 percent versus a 1 percent increase in February.
Producer prices declined more than expected for March after rising 0.7 percent in February. The data showed that PPI declined 0.6 percent last month, which was more than the consensus estimate which called for a decline of 0.1 percent.
Core PPI, which excludes volatile food and energy costs, rose 0.2 percent compared to consensus estimates which called for an increase of 0.1 percent.
• University of Michigan Consumer Sentiment
The University of Michigan Consumer Sentiment Index fell 72.3 for the preliminary April reading. This compares to a reading of 78.6 for April and consensus expectations which called for a decline to 78.0.
• Business Inventories
Business inventories rose 0.1 percent for the month of February after increasing by 0.9 percent in January. This was less than consensus estimates which expected an increase of 0.4 percent.
Conclusion for the Past Week
If you're a retail investor who's missed the rally, there's a good chance you're berating yourself.
Year to date the stock market has gained more than 11% broadly.
And on Thursday, the Dow and the S&P 500 again climbed to fresh all-time intraday highs.
In the event that this applies to you and feel that you have completely missed the move - and you see yourself as fresh out of luck! – Maybe this is not the case!
We are now 3 1/2 months into the new year and stocks are up 11-12 percent – which in normal circumstances would mean that there's not a whole lot left. Either there's going to be a pullback at some point, or maybe things really get even better than we thought and many of the analysts’ targets are too low.
The more recent Reuters poll in March showed some analysts had revised targets following the strong start to the year, with the S&P above the midyear target for 21 of 34 analysts surveyed and the full-year target for 18 of 43 analysts surveyed.
The run has been notable for its resilience. As investors buy into weakness, dips are short-lived while bears are forced to cover short positions and asset managers chase performance.
So far this year, the S&P has only experienced three consecutive losing sessions once, and the deepest "correction" was a brief 2.8 percent slide in late February.
Data in the last six weeks has not been as weak as some expected, and the equity market managed to look past it, anyway.
JP Morgan estimates 2013 is currently the worst year for active-manager performance since 1995, with an estimated 68 percent of funds falling short of their benchmark. Fund managers, as a result, are taking on more risks in order to play catch-up.
One potential catalyst for a pullback could be company results as the pace of earnings season begins to pick up – we will know this soon enough!