The Past Week in the Stock Market 
May 13, 2013

The Past Week: Stocks End Higher for Third Week!

Stock Market: Dow, S&P 500 Close at New Highs!

Wall Street: Q1 Earnings Season Winding Down!

by Ian Harvey

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May 13, 2013

Introduction

The rally on Wall Street continues, with stocks ending Friday at fresh record highs.

The past week was relatively quiet on Wall Street, with the pace of economic and corporate releases slowing dramatically. However, both the Dow and S&P ended at record highs.

Stocks finished the week with nice gains, as even though the market was lower most of Friday, once again late buying pushed the major averages back into positive territory.

The Dow in the past week rose further into record territory, finishing at 15,118.49, up 0.97 percent for the week. The S&P 500 ended at 1,633.70. Both the Dow and S&P 500 closed at new highs. While stocks rose, so did bond yields. The 10-year note's yield rose about 16 basis points this week, the most on a weekly basis in two months.

For the past week, the ranges in some of the other world markets, like gold, were much more dramatic. The yellow metal was hit hard Friday, as expected.

Stocks spent most of the week responding to earnings reports, as there was little in the way of economic data.

Stocks gained new momentum after April's better-than-expected employment report showed the economy was not as sluggish as some had feared. The report, however, also painted a still-soft jobs picture, which should encourage the Fed to continue its easing programs, viewed as a positive for stocks.

Weekly jobless claims data have also been confirming the view that employment could be setting up to improve in the next couple of months. The four-week average of claims is now at the lowest level since November 2007.

The new highs in the major averages were confirmed by the market internals, and the number of stocks on the NYSE making new highs surged to over 500, which was above the January high. The financial networks almost appear to be showing reruns; many fundamentalists either argue for much higher prices or that the market is ready to fall off the cliff.

While earnings and economic data have not been particularly strong, it's difficult to tell that from stock performance. This quarter alone, the Dow Jones Industrial Average (DJI) is up 3.7%, the Standard & Poor's 500 Index (SPX) has advanced 4.1%, and the Nasdaq Composite Index (COMP) has grown 5.2%. Both the Dow and the S&P 500 gained 1% this past week, with the Nasdaq up nearly 2%.


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Closing out the second week of May, the Standard & Poor's 500 index is up 2.3 percent for the month.

For the year, the benchmark S&P 500 is up a stunning 14.6 percent.

Both the Dow industrials and the S&P 500 topped major milestones for the first time in early May, with the Dow Jones industrial average (DJI) surpassing 15,000 and the S&P 500 (SPX) breaking through the 1,600 mark. Since then, the indexes have been steadily holding above the landmark levels. The Nasdaq Composite Index (COMP) has climbed to the highest closing levels in 12-1/2 years.

In a sign of the rally's breadth, the Russell 2000 Index (RUT) of mid- and small-cap stocks also hit all-time highs recently.

The advance capped a third week of gains for the indexes. The Dow and S&P both held firmly above key psychological levels (15,000 and 1,600 respectively).

• The Dow Jones Industrial Average (DJI) advanced 0.97 percent in the past week, to 15118.

UnitedHealth was the biggest gainer on the Dow for the quarter, and McDonald's was the worst weekly performer.

• The Standard & Poor's 500 Index (SPX) jumped 1.19 percent, to finish the past week at 1634.

Among the key S&P sectors, utilities and consumer staples were the worst performer for the past week, while industrials and consumer discretionary gained.

• And the Nasdaq Composite Index (COMP) added 1.72 percent, to round out the past week at 3437.

The Markets Ending May 10, 2013

CBOE Market Volatility Index (VIX) ), widely considered the best gauge of fear in the market, was back in the red Friday, slipping back south of the 13 level on a drop of 0.5 point, or 4.1%, to finish at 12.59.

The VIX lost 2% on the week.

The SPX and the Trend of the Stock Market

The US stock market continues to rally with the S&P 500 trading up. For some perspective on the trend of the overall stock market, this chart illustrates the trend of the stock market (as measured by the S&P 500) since 2000. As the chart illustrates, the post-financial crisis rally (which began in early 2009) has been significant enough to move the S&P 500 to all-time record highs. In addition, the latest leg of the post-financial crisis rally has the S&P 500 breaking above resistance created by the last two all-time record highs (see thick blue line).

” Chart of the Day”
World Markets in the Past Week

Much of the focus for the week was on Japan and the continued weakness in the yen. The country's monetary policy is having a very positive impact on its exporters. Meanwhile, the US dollar has been gaining strength against many currencies. This has added additional pressure on the precious metals.

Some analysts are still taking the view that the move in Japan's Nikkei-225 and the yen is almost over. But a longer historical view might convince them otherwise.

The monthly chart of the Nikkei-225 and USD/JPY only goes back to 1992, and does not show the Nikkei's high of 38,952 in December 1989. The downtrend from just the 1995 and 2007 highs is still above the market in the 16,000 area. It also does not reflect that USD/JPY made a high soon after the stock market peaked, at 160, nor that it traded at 303 in 1975.

The downtrend of the USD/JPY is now above 108, but a move this year to 125 would not be a surprise. This makes the recent action look less impressive, though the length of the decline in these markets increases the odds that a major bottom is being formed.

Many of the overseas markets are also acting well. The German Dax made another new high in the past week, and several of the other country ETFs also broke out to the upside.

Sector Focus in the Past Week

The iShares Dow Jones Transportation (IYT), after completing its the continuation pattern the previous week, accelerated to the upside. It was one of the strongest sectors, up 2.6% for the week.

Both the weekly and daily On-balance volume (OBV) are positive, so further gains are likely. The quarterly R1 has been surpassed, with the R2 resistance now at $120.69.

The defensive sectors were the losers last week, led by the 3.0% loss in the Select Sector SPDR Utilities (XLU). Select Sector SPDR Consumer Staples (XLP) was down just slightly.

The small caps acted the strongest last week, as IWM was up about 2.2%, almost double the gains of SPY and QQQ. The Select Sector SPDR Consumer Discretionary (XLY) and Select Sector SPDR Industrials (XLI) were both up 2%.

The Select Sector SPDR Health Care (XLV) rebounded last week to close higher, and the volume was quite heavy, confirming the new all-time high.

As was mentioned last week, the Select Sector SPDR Materials (XLB) was on the verge of an upside breakout, and it was in fact able to close above resistance (line a). The upside breakout was confirmed by the OBV, which moved through its resistance (line c). Important support is now found at $38.47, which is the quarterly pivot.

Sector Rotation in the Past Week

The market has also seen a ”major sector rotation”, and the stocks that have been leading the market higher this year have been lagging. Cyclical sectors, like industrials, materials and financials, have been seeing the best gains as investors bet on better economic growth.

The market's been less about cyclical and defensive – and a lot more about domestic and international. If you are a domestic cyclical—retailer, housing-related, shale gas-related, transportation or media company -- these are heavy domestic businesses on the cyclical side, and they've done extremely well. They are outperforming.

Earnings Reports for the Past Week

With more than 90% of the market capitalization of the S&P 500 already out with Q1 earnings results, the reporting season is getting into its final stretch. As is typically the case each earnings season, most of the remaining companies left to report is in the Retail sector.

It’s been an ‘average’ earnings season, with some aspects that fall in the ‘below-average’ category. But overall, the Q1 earnings season has turned out to be not materially different from what we have been seeing over the last few earnings seasons.

Including the earnings releases after the market close on Thursday, May 9th, we have Q1 results from 453 S&P 500 companies. Total earnings for these 453 companies that have reported results already are up +3.3%, with 65.3% of the companies beating earnings expectations. Revenues are down -0.9%, with only 41.1% of the companies coming ahead of top-line expectations. The median surprise is a respectable +3.2% for earnings and negative -0.4% for revenues.

The earnings growth rate and ‘beat ratio’ (% of companies coming out with positive surprises) for these 453 companies is comparable what these same companies reported in 2012 Q4 and the last few quarters. But the revenue growth rate is lower, with the beat ratio particularly weak in the current period.

The composite growth rate for Q1, where we combine the results of the 453 companies that are out with the 47 still to come, is for a rise of +2.4% in total earnings on -0.8% lower revenues. This is better performance than what was expected ahead of the earnings season when total earnings growth was expected to be in the negative.

The predominantly negative tone of company guidance has prompted downward adjustments to estimates for the second quarter 2013, but estimates for the second half of the year have held up quite well. Total earnings in the second quarter are now expected to be up +1.4%, which is down from +4.8% in mid-March. As such, consensus expectations are for first half 2013 total earnings growth of +1.9% to be followed by +9.6% growths in total earnings in the back half, which flows through into 2014 (+11.4%).

Recent economic data from home and abroad will likely prompt a reassessment of these consensus expectations. But the big question is with respect to how the market would react to this expected downward adjustment to earnings expectations. It has essentially shrugged such revisions thus far, but we will have to wait and see what happens in the week ahead.


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Crude Oil

Crude oil had a wild session Friday. The July contract dropped as low as $93.62 before closing back above $96 per barrel. The close was just barely back above the quarterly pivot at $95.91.

A close above the early April high at $98.22 is needed to reassert the uptrend. The OBV is above its WMA, and shows a pattern of higher highs and higher lows (line d).

Precious Metals

The technical action of the precious metals with Thursday's close suggested the rally was running out of steam, but such a sharp drop was not expected. The SPDR Gold Trust (GLD) closed above its lows, but technically there are no signs of a bottom yet.

The Fed in the Past Week

Federal Reserve Chairman Ben Bernanke said the shadow banking system continued to pose a threat to financial stability, and that bank funding markets might still not be able to cope with a major default. In addition, Bernanke also said the central bank was closely monitoring asset markets for signs of excessive risk taking.

Economic Reports in the Past Week

The week was short on economic data and investors continued to focus on corporate earnings releases.

One interesting report was that of Industrial production in the US:-

“Industrial Production in the United States increased 3.50 percent in March of 2013 over the same month in the previous year. Industrial Production in the United States is reported by the Federal Reserve. Historically, from 1920 until 2013, the United States Industrial Production averaged 3.91 Percent reaching an all time high of 62 Percent in July of 1933 and a record low of -33.70 Percent in February of 1946. In the United States, industrial production measures the output of businesses integrated in industrial sector of the economy such as manufacturing, mining, and utilities.”

Industrial production in the US was stronger than expected last month. The chart actually shows steady improvement over the past three months. Globally, it is a mixed bag; while UK numbers were better than expected, those from Mexico were much weaker.

Tuesday

ICSC-Goldman Comparable Store Sales Index

The ICSC-Goldman comparable store sales index declined 1% in the week ended Saturday versus the prior week.

The Redbook

The Redbook index fell 2.5% month-over--month in the week ended April 28.

March Consumer Credit

March consumer credit was also out, coming in at $7.966 billion, well below the survey of $15.60 billion and the prior release of $18.139 billion.

Thursday

Jobless Claims

Initial jobless claims fell from 327,000 for the week ending April 27 to 323,000 for the week ending May 4. This came in below consensus estimates which called for an increase in initial claims to 336,000.

Continuing claims for fell to 3.005 million for the week ending April 27 from 3.032 million for the week ending April 20. This compared to consensus estimates of 3.019 million.

Wholesale Inventories

Wholesale inventories rose 0.4 percent for the month of March after falling 0.3 percent in February. This came in slightly above consensus estimates which called for wholesale inventories to increase 0.3 percent.

Friday

U.S. federal budget

The U.S. federal budget surplus came in at $112.9 billion in April, up from $59 billion in the same month in 2012. The government is running a $488 billion deficit for fiscal 2013, down from $720 billion in a comparable period in fiscal 2012.


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Conclusion for the Past Week

As already mentioned, the Dow industrials and S&P 500 continue to push against all-time highs. While some have said the mantra of "sell in May, and go away" isn't in play this year, others see stocks as being stretched and ripe for a correction. Additionally, Federal Reserve Chairman Ben Bernanke on Friday said the central bank was on the lookout for any excessive risk taking in investors’ "reach for yield."

Traders continue to act skeptical without being too bearish, as the market has been finishing days higher despite early declines. Once we get the first strong down day, their attitudes are likely to change significantly.


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