The Past Week in the Stock Market
May 20, 2013

The Past Week: Stocks Rally for 4th-Straight Week; Dow, S&P 500 Jump to New Highs!

Stock Market: Dollar Soars – Economy Improving!

Wall Street: New Fed Stimulus Talks!

by Ian Harvey

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May 20, 2013

Introduction

The stock market continued its march higher for a fourth week as investors focused on signs of improvement in the U.S. economy.

Stocks hiccupped this past week when the San Francisco Fed's Williams Thursday said tapering could come this summer, but for the most part, the market steadily moved higher. The Dow was down 42 points Thursday, but closed out the past week with strong gains, with the Dow and S&P 500 hitting fresh highs and all three major averages logging their fourth-straight weekly advance, boosted by a pair of positive economic reports.

For the past week, the Dow Jones Industrial Average (DJI) is up 1.6 percent to a new high of 15,354.

The Standard & Poor's 500 Index (SPX) closed the past week at 1,667, spiking nearly 150 percent since the financial crisis when the index hit a low of 666.79 on March 6, 2009.

Individual economic data points are proving to be volatile at times, but the average slope of the trend is positive -- things are improving at a slow rate.

On the economic front, consumer sentiment gained in May to the highest level since July 2007, according to the Thomson Reuters/University of Michigan index. And leading indicators rose in April, hitting its highest level in nearly five years, according to the Conference Board, suggesting an anticipated growth slowdown would be temporary.

Adding to positive sentiment, JPMorgan boosted its year-end price target for the S&P 500 to 1,715, sharply above the bank's original expectation of 1,580, which the index crossed above last month. So far in 2013, the index has surged more than 15 percent.


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Investor Concerns in Regard to the Fed in the Past Week

Stocks pulled back in the Thursday session, with the S&P 500 snapping its four-day win streak, amid mounting concerns the Federal Reserve may begin tapering off its bond-buying program.

However, the uncertainty caused by the Fed's discussion of an exit could create volatility, but the reality is that when it happens, it will occur simultaneously with economic improvement.

Thursday's comments, in the past week, by the Fed's John Williams and Charles Plosser suggested they were both open to reducing asset purchases in the near-future.

Cyclical Sectors in the Past Week

Even though the market seems to be overbought, it could keep going up for now, with cyclical sectors driving it.

Cyclical sectors have been the laggards and now are catching up. Financials were the best performers of the past week, up 3.7 percent, followed by industrials, up 2.2 percent. The telecom and utilities sectors, which led the market higher earlier in the year, were the week's laggards, up 0.4 and 1 percent respectively.

Many analysts expect the stock market to continue to move higher, but express the concern that it's showing signs of wear. One major concern is the fact that the S&P is 12 percent away from its 200-day moving average, which is a stretched valuation.

• The Dow Jones Industrial Average (DJI) soared 1.56 percent, to settle in the past week at 15,354.40

Cisco was the biggest gainer on the Dow for the quarter, and Intel was the worst weekly performer.

• The Standard & Poor's 500 Index (SPX) gained 1.98 percent in the past week, to finish at 1667.47.

All key S&P sectors finished in positive territory for the past week, led by financials and industrials.

• And the Nasdaq Composite Index (COMP) added 1.82 percent for the past week, to sit at 3498.97.

The COMP is up 15.9 percent for 2013 so far. On Friday, the Nasdaq closed at its highest level since October 2000.

The S&P 500 & Nasdaq have each had gains of at least 1 percent in each of the last four weeks. The last time that happened for the S&P was back in October 2011 and the last time the Nasdaq rose at least 1 percent for four-straight weeks was in February 2012.

Among other indexes for the past week, the Russell 2000 index (RUT) of small- and mid-cap stocks also surged to a record close. The index closed up 10.94 points, or 1.11 percent, at 996.28.

The dollar index was up 1.3 percent, and the 10-year yield ended the past week at 1.94 percent.

The Markets Ending May 17, 2013

CBOE Market Volatility Index (VIX) ), widely considered the best gauge of fear in the market, couldn't hold its perch above 13, as it shed 0.6 point Friday, or 4.7%, to settle at 12.45, back south of its 10-day moving average.

The VIX lost 1.1% on the past week.

Options Indicators

Even at the present levels that have been achieved, a popular options gauge shows investors are placing optimistic wagers on the stock market, positioning for the current run-up to extend for the next three months.

Earlier this past week, the Credit Suisse Fear Barometer, known as the CSFB Index, fell 11.4 points over the past two weeks - the largest decline on record - and is now at a one-year low of 21.73.

The indicator essentially tracks investors' willingness to pay for downside protection with zero-premium collar trades that expire in three months, using S&P 500 index (SPX) options.

This is an unusual phenomenon to see as at these levels as there are very few indications (based on options activity) that investors are expecting a pullback.

Also the CBOE Market Volatility Index (VIX) ), Wall Street's fear gauge, is down more than 1 percent for the week.

The options market is a popular place for investors to hedge against a sudden fall in the stock market. Among the most popular strategies are put options on the S&P 500 index, and call options on the VIX, which generally moves inversely to the S&P 500.

World Markets in the Past Week

Major European equity indexes climbed to highs last seen five years ago or more. This was helped by a rally in automakers' shares, which rose on signs of a revival in domestic sales.

Also, stocks on both sides of the Atlantic were boosted after a survey of U.S. consumer sentiment in early May rose more than economists had expected, with more Americans giving favorable views about their financial and economic prospects, particularly among upper-income households.

In a separate report by an industry group, a gauge of future economic activity also suggested the expected U.S. slowdown will be temporary, with the index rising in April to a near five-year high.

The two reports were encouraging after a raft of data on Thursday had suggested U.S. economic growth is cooling.

The dollar's strength was largely attributed to the euro, which fell to a six-week low on talk the European Central Bank could introduce negative deposit rates, a move that effectively would make banks pay to park their cash overnight with the ECB. The ECB had no immediate comment.

The U.S. Dollar Index (DXY), which measures its value against a basket of six major currencies, rose to 84.371, its highest in nearly three years in the past week. Around midday, on Friday, in New York, the dollar index was up 0.81 percent at 84.266.


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Earnings Reports for the Past Week

So far, 93 percent of S&P 500 companies have reported quarterly results, with 67 percent of firms topping earnings expectations and 24 percent missing forecasts, according to the latest data from Thomson Reuters. If all remaining companies report earnings in line with estimates, earnings will be up 4.8 percent from last year's first quarter.

Meanwhile, sales have come in 1 percent on average.

Company News

• Kansas City Southern will replace Dean Foods in the S&P 500 after the market close this coming Thursday.

• J.C. Penney (JCP) shares slid after the ailing retailer reported another massive loss.

The losses came during a quarter in which J.C. Penney announced the departure of CEO Ron Johnson, a former Apple (AAPL) retail executive hired in 2011 to revive the floundering chain.

Mike Ullman, the former CEO who took back the reins from Johnson, pledged to reemphasize the company's private brands and improve the performance of its online store.

• On the higher end of the retail spectrum, Nordstrom (JWN) shares sank after the company reported weaker-than-expected revenue growth and trimmed its sales outlook.

Where Earnings Stand To-Date!

Here is the summary for the 465 S&P 500 companies that have reported Q1 results, as of Friday May 17th, 2013.

Source: Zacks Data; ‘Beat Ratio’ is the percentage of companies coming out with positive surprises; ‘Median Surp’ is the median % surprise.

As you can see, the earnings season has come to an end for 9 of the 16 sectors, and except for Retail, the other sectors are close to or more than 90% done as well. A couple of things stand out in the Q1 results: the pronounced negative revenue surprises and the weakness in the Technology sector.

The Technology sector’s growth rates and ‘beat ratios’ are weaker than the same for the S&P 500, as well as what the group reported in 2012 Q4. With 95.6% of the sector’s total market capitalization already out with Q1 results, total earnings for the sector are down -4.4%, with 63.5% of the sector companies beating earnings expectations (vs. the S&P 500 average of 65.4%). The revenue side for the sector isn’t that bad (up +4.5%), which goes on to spotlight the sector’s margin problems.

The composite growth rate for Q1, where we combine the results of the 465 companies that have come out with results with the 35 still to come, is for a rise of +2.2% in total earnings on -1% lower revenues. In terms of dollar earnings levels, composite earnings in Q1 total $251.6 billion, the all-time highest quarterly total.

Expectations for the second quarter have come down, though estimates for second half of the year still represent a material improvement in the earnings picture. Total earnings in 2013 Q2 are now expected to be up +1.2% on -0.7% lower revenues. This is a drop from the +3.9% total earnings growth expected in Q2 on +0.5% higher revenues in early April.

A similar though far less pronounced downward adjustment process has gotten underway for the second half of the year as well. Consensus expectations are for total earnings growth of +5.7% (down from +7.6% in early April) in 2013 Q3 and +13.5% (down from +14.3% in early April) in Q4. For full years 2013 and 2014, total earnings are expected to be up +6.1% (down from +6.8%) and +11.3% (down from +11.5%).

The charts below trends in earnings estimate revisions. Both charts represent the ratio of total number of upward revisions over the preceding four weeks to the total number of revisions (positive and negative). The first chart shows the current state of this ‘revisions ratio’ for 2013, while the second chart plots the ratio’s trajectory over the preceding 24 months.

Source: Zacks Data; the number of estimates represent totals for the 4-week period preceding 5/10/13.

The ratio doesn’t tell you the ‘magnitude’ of the revisions, only the direction. The ‘50%’ level is the dividing line between positive and negative trends, with readings above 50% implying more positive than negative revisions. But our analysis shows that readings between 45% and 55% don’t offer material insights into the magnitude of revisions. It is only readings above 55% and below 45% that offer bullish and bearish signals about the magnitude of earnings revisions.

Looked at that way, the aggregate 2013 revisions ratio for the S&P 500 is essentially in neutral territory. But a number of sectors do stand out. The positive revisions trend in Construction and Finance are not that surprising, but Consumer Discretionary sector’s strong showing is notable given all the macro headwinds. The positive trend in Aerospace is no less significant, particularly given the group’s supposed budget sequester exposure. Aerospace reported very strong Q1 results as well, as the ‘Earnings Scorecard’ chart above shows.

The chart below shows how the 2013 revisions ratio has evolved over time. We have featured the Technology (blue line) and Construction (orange line) sectors to contrast how the aggregate picture has evolved. As you can see, the aggregate ratio has been below or at the 50% line for quite some time.

Source: Zacks Data; 4-week estimates totals; the latest period is four weeks preceding 5/10/13.

IPO’s in the Past Week

Data analysis software maker Tableau Software skyrocketed more than 50 percent in their trading debut, valuing the company at $2.82 billion. Interest in data visualization software makers has increased after the successful debut of Splunk in April 2012.

A year since its IPO, social-networking giant Facebook remained the worst performer on the Nasdaq 100. The stock is still down more than 30 percent from its IPO price of $38 a share.


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Economic Reports in the Past Week

Monday

Retail Sales

Retail sales data came in stronger than expected for the month of April. Retail salesincreased 0.1 percent last month compared to a decline of 0.5 percent for March. This came in well ahead of consensus expectations which expected a decline in retail sales of 0.3 percent.

Excluding motor vehicle sales, retail sales fell 0.1 percent in April versus a decline of 0.4 percent in March. This came in slightly better than consensus estimates which called for a decline of 0.2 percent.

Business Inventories

Business inventories growth was unchanged in March for the second straight month. This compared to consensus estimates calling for business inventories to increase by 0.3 percent in March.

Wednesday

PPI

Producer prices fell for the second consecutive month, falling 0.7 percent in April compared to a decline of 0.6 percent in March. This was more than the consensus estimate calling for a decline of 0.5 percent.

On a core basis, which excludes food and energy, PPI was up 0.1 percent for April and in line with the consensus. That came in slightly below the 0.2 percent gain for March.

Industrial Production and Capacity Utilization

Industrial production declined 0.5 percent in April after rising 0.3 percent for the month of March. The consensus expected industrial production to fall 0.2 percent.

Capacity utilization was 77.8 percent in April versus 78.3 percent in March. This was the lowest level of capacity utilization since January. Economists expected the figures to remain unchanged at 78.3 percent. Manufacturing capacity utilization came in at 75.9 percent.

Thursday

Jobless Claims

Initial jobless claims rose to 360,000 for the week ending May 11 from an upwardly revised 328,000 for the week ending May 4. This compared to consensus expectations calling for an increase to 330,000.

Continuing claims fell to 3.009 million for the week ending May 4 from 3.013 million for the week ending April 27. This compared to the consensus estimate of 3.005 million.

CPI

CPI fell 0.4 percent in April after declining 0.2 percent for the month of March. This compared to consensus estimates calling for a decline in consumer prices of 0.2 percent.

On a core basis, which excludes food and energy, CPI rose 0.1 percent for the second consecutive month. This was slightly less than the consensus which expected prices to rise by 0.2 percent.

Housing Starts

Housing starts declined by 16.5 percent in April to 853,000 from a downwardly revised 1.021 million in March. This was the lowest number of housing starts since November 2012. The consensus had expected housing starts to fall to 970,000.

Philadelphia Fed

In a surprise reading, the Philadelphia Fed's Business Outlook showed that manufacturing activity in the Philadelphia region contracted in May. The index fell to -5.2 from 1.3 in April. The consensus had expected the Philly Fed Index to rise to 2.5.

Friday

U.S. Consumer Sentiment

A survey of U.S. consumer sentiment in early May rose more than economists had expected, with more Americans giving favorable views about their financial and economic prospects, particularly among upper-income households.

Prices for U.S. Treasuries added to losses after the Thomson Reuters/University of Michigan's preliminary reading on the overall index on consumer sentiment rose to 83.7 in early May from 76.4 last month, topping economists' expectations for 78.

The May reading was the highest level since July 2007.

Conclusion for the Past Week

With the broad S&P 500 Index (SPX) gliding once again into uncharted territory and posting four straight weeks of gains, the talk of Wall Street's rally inevitably hitting a ceiling is starting to get old.

Concerns about a technical correction have been a hot topic for weeks, especially as the rally accelerated in May - the S&P 500 is up 4.4 percent so far this month and up nearly 17 percent for the year. But as the three major U.S. stock indexes inch higher and higher to set record after record, many analysts are shrugging off the pullback worries -- read more about the week ahead!


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