The Past Week: Bulls Hibernating – Bears Celebrating!
Stock Market: Worst Weekly Drop In 2013!
Wall Street: Google Lifts S&P's Worst Week Since November!
by Ian Harvey
April 22, 2013
The past week, by many measures, has been rather rough for the financial markets. News that economic growth had slowed in China set off a plunge in commodity prices on Monday, leading the stock market to its worst day of the year. Gold dropped below $1,400 an ounce for the first time in two years.
The stock market bounced back the next day, and then fell again on Wednesday, its third worst day this year.
Stocks reversed a two-day slump to close out the past week on a positive note, with the S&P 500 rebounding after finishing below it 50-day moving average for the first time this year, but all three major averages still logged their worst weekly drop this year.
Stocks rose on Friday as earnings from Google (GOOG) and other companies lifted tech shares, but the gains weren't enough to stop the S&P 500 from suffering its worst week since November.
Boosting the S&P 500 on Friday were shares of Google, which gained 4.4 percent to $799.87 a day after posting upbeat results. At least six brokerage firms have raised their target on Google's stock price.
The Dow finished barely in positive territory on Friday, held back by shares of International Business Machines (IBM), which posted their largest drop in eight years after the company's quarterly results missed estimates. IBM's stock ended down 8.3 percent at $190.
• The Dow Jones Industrial Average (DJI) slid 2.1 percent for the past week, to finish at 14,547.51.
This is the worst week for the blue chips since the week of Dec. 12, 2011, when the blue chips fell 2.6%.
Coca-Cola was the biggest gainer on the Dow for the quarter, and IBM was the worst weekly performer.
• The Standard & Poor's 500 Index (SPX) finished down 2.1% for the past week, to close at 1,555.25.
Among the key S&P sectors, energy was the worst performer for the past week, while telecoms gained.
Still, the S&P 500 remains up about 9 percent for the year, and analysts said the pullback could give investors a chance to reevaluate their bets.
• And the Nasdaq Composite Index (COMP) lost 2.7 percent, to close at 3,206.06.
The COMP had its worst week since the week of Oct. 8, 2012, when it fell 2.9%.
CBOE Market Volatility Index (VIX) ), widely considered the best gauge of fear in the market, finished Friday session with a loss of 2.59 points, down 14.75% at 14.97.
For the week, the VIX was up 24.13%.
After going nearly silent throughout the winter, volatility has crept back onto Wall Street in recent days as investors fear a global economic slowdown, collapsing gold prices and scary geopolitical headlines.
Since tumbling to the ridiculously-low level of 11.05 in early March, the volatility index, or VIX, has surged as much 65%, although has been unable to maintain this level.
While it’s clear that volatility has staged a comeback from multiyear lows, investors are wondering if it can return to long-term averages, especially with Ben Bernanke pumping $85 billion of liquidity into the market each month.
Still, it seems safe to say the VIX, Wall Street’s fear meter, is no longer hibernating.
By climbing as much as 10% on Thursday, the VIX touched its highest level since late February, and it wasn’t that far from its recent high of 23.23 in late December amid the fiscal cliff mess.
The return of volatility has been driven by a number of factors, including jitters about the status of the global economic recovery.
Relatively disappointing growth figures out of China helped spark Monday’s 266-point plunge on the Dow Industrials, their ugliest performance since the day after the 2012 election.
Domestic economic data haven’t been much prettier, highlighted by a gloomy March jobs report, substandard regional manufacturing gauges and tumbling consumer sentiment surveys.
Market volatility has also been fueled by geopolitical concerns centered around North Korea as well as the tragic bombing in Boston on Monday, which helped fuel a 36% surge for the VIX -- its biggest one-day increase since August 2011 during the fumbled debt-ceiling negotiations.
Sector Focus in the Past Week
The iShares Dow Jones Transportation (IYT) stabilized in the past week, with Friday's close forming a daily High Close Doji or the HCD method, which is a short- term buy signal.
At the early April lows, it was 7% below its highs, which is not too bad. The close in the past week was back above the quarterly pivot support at $105.99, but the daily OBV (not shown) is still negative.
The standout sector last week was Select Sector SPDR Consumer Staples (XLP), which closed at new highs for the year, as did the Select Sector SPDR Utilities (XLU). The Select Sector SPDR Health Care (XLV) also held up well.
Two of the worst performers were the Select Sector SPDR Energy (XLE), down about 4.8%, and the Select Sector SPDR Technology (XLK), which lost 3.4%. The daily chart of the XLE formed a doji on April 11 (point 1) and closed below the doji low the next day, triggering an LCD.
XLE then broke support (line a) and has now hit the quarterly S1 support, with further support in the $72 area. The OBV is below its WMA, but has not yet broken its support (line b).
Earnings Reports for the Past Week
There is an air of disappointment in the market about the ongoing Q1 earnings season. Some of it is justified. After all, what else should investors think when companies like IBM (IBM) and GE (GE) come up short? Results from the Technology sector have been underwhelming and the revenues overall have been on the weak side.
In drawing conclusions from the Q1 results we have seen thus far -- the 104 S&P 500 companies that have reported results already (as of Friday) -- is that Q1 results aren’t materially weaker than what we saw in the 2012 Q4 earnings season. The market seemed satisfied, if not exactly thrilled, with Q4 results, as its strong momentum in January and February this year shows.
What this means is that the excessive hand-wringing may not solely be due to Q1 results, but rather what these results tell us about the coming quarters.
The Scorecard for the 104 companies that have reported results show total earnings growth of +4.6%, with 69.2% of the companies beating earnings expectations with a median surprise of +3.2%. Revenues are up +3.4%, with only 35.6% of the companies coming ahead of top-line expectations, with a median surprise of (negative) -0.3%.
The earnings growth rate and earnings ‘beat ratio’ (% of companies coming out with positive surprises) for these 104 is better than what these same companies reported in 2012 Q4. But the revenue growth rate and ‘beat ratio’ is lower, with the beat ratio particularly weak in the current period.
Technology results have been on the weak side thus far. We will find out more in the week ahead as Apple and Amazon report results, but the Tech companies that have reported already account for 46% of the sector’s total market capitalization. Only 64.3% of the Tech companies have beaten Q1 earnings expectations thus far, weaker than the earnings ‘beat ratio’ for the S&P 500 as a whole of 69.2% and the 78.6% ‘beat ratio’ for the same group of companies in Q4.
The revenue side is even weaker, with only 35.7% of Tech companies coming ahead of top-line expectations, roughly in-line with the S&P 500 as whole, but materially weaker than the group’s revenue ‘beat ratio’ in Q4.
It was another tough week for crude oil, as the June contract dropped over $2.40 per barrel for the second week in a row. The early March low of $90.23 was violated, reaching as low as $85.90 before rebounding to close at $88.18.
The selling was even heavier in the gold market in the past week, and it makes one wonder whether deflation will be the real problem facing our economy. The weekly chart shows that the SPDR Gold Trust (GLD) gapped below the 38.2% Fibonacci support that goes back to the 2008 lows. The volume was very heavy in the past week, as the weekly OBV broke support a few weeks ago.
The 50% support level sits at $125.82, which could be reached before the selling is over.
Economic Reports in the Past Week
The economic data in the past week also worked against the high stock prices. The Empire State Manufacturing Survey was weaker than expected on Monday, as was the Housing Market Index.
Last Tuesday's rally was due in part to the much better than expected industrial production and housing starts data. However, Thursday's Philadelphia Fed Survey was disappointing, as it reflected slowing growth.
Prices fell 0.2 percent for March after registering an increase of 0.7 percent in February. This compared to consensus estimates which called for a decrease in CPI of 0.1 percent.
On a core basis, which excludes volatile food and energy costs, consumer prices rose 0.1 percent in March versus a gain of 0.2 percent in February. This was below the consensus which expected prices to rise 0.2 percent in the most recent month.
The CPI reading is another sign that the economy is still susceptible to deflationary pressures. These concerns are one of the reasons for the recent sell-off in commodities.
• Housing Starts
Housing starts were up 7.0 percent to 1.036 million in March from 968,000 in February. This compared to consensus estimates of 930,000.
• Building Permits
Building permits for the month of March fell 3.9 percent to 902,000 from a downwardly revised 939,000 in February. This compared to consensus estimates of 945,000 building permit issuances.
• Jobless Claims
Initial jobless claims rose for the week ending April 13 to 352,000 compared to 348,000 for the week ending April 6. Despite the increase, this was below consensus estimates which expected the initial jobless claims level to rise to 355,000.
Continuing claims fell from 3.103 million for the week ending March 30 to 3.068 million for the week ending April 6. This was in-line with consensus expectations.
• Philadelphia Fed
Data from the Philly Fed's Business Outlook Survey showed that manufacturing activities in the Philadelphia region slowed in April but remained on a track of expansion. The Survey fell from 2.0 in March to 1.3 in April. This was well below consensus estimates which expected the index to rise to 3.0.
• Leading Indicators
This economic report provides clues to the condition and future of the markets.
The Conference Board's Index of Leading Indicators fell 0.1 percent in March after registering an increase of 0.5 percent in February. This compared to expectations that the index would be flat for March. Economists believe that the drop in the Leading Indicators Index will likely be temporary.
The chart shows that both the Leading Economic Index (LEI) as well as the Coincident Economic Index (CEI) are both still clearly rising.
The LEI peaked in 2006, and did not really turn lower until late 2007. It shows no signs of a turn in the economy.
A Healthy Pullback!
In March, it was a view that a correction was more likely to resemble the spring doldrums of 2012, when the S&P lost 11%, than the larger declines of 2010 or 2011.
Maybe the past week saw the correction take place – obviously the bull was in hibernation! Stocks have had a rough week. But the pullback is healthy and necessary.
Stocks don't go up every day, and it becomes a case of handling the downturns successfully.
This past week's pullback -- the S&P 500 was down nearly 3% as of Thursday afternoon -- may be just what the markets need.
It is important that the market does not overheat like in 2000 and 2007, and subsequently crash.
The sell-off was deserved -- we've had almost two weeks of bad numbers for the economy and earnings.
Many investing experts believe that stocks are sorely in need of a breather after the Dow and S&P 500 surged to all-time highs last week. Some even think a correction, which would be a 10% decline from the recent peak, is in order.
That may not happen. But this past week's selling, on a spate of disappointing earnings outlooks, weak economic reports from around the globe and fear sparked by the Boston terror attacks, is a logical reaction. Investors had been too cavalier this year and were pretending that a slowdown in China and the financial quagmire in Europe didn't matter.
The market is finally responding negatively to bad news, which is a move in the right direction -- it's normal and healthy.
This past week’s downturn does not mean that it is the beginning of a prolonged and nasty market downturn. The combination of low interest rates (thanks, Fed!) and decent valuations should mean stocks can continue heading higher over the next few years. It just isn't going to be a straight shot up. Volatility is back.
Conclusion for the Past Week
The global stock markets took a beating in the past week, with the S&P losing over 2%. The rebound Friday was encouraging, as another down day would have done more technical damage.
A weekly close in the S&P 500 under the lows of the past five weeks at 1,538.57 would have been much more negative. However, small caps were hit even harder, with the Russell 2000 Index (RUT) down over 3%.
However, even though economists expect a weaker economy, they do not expect it to be as soft as last year, and stock strategists also expect the market to rebound later in the year, after any sell-off.