The Past Week: Stocks Rallied More Than 1%!
Stock Market: Dow Reclaims 15,000 Level – Stocks & Dollar Rally!
Wall Street: U.S. Yields Jump On Jobs Data!
by Ian Harvey
July 08, 2013
A strong jobs report sent stocks higher Friday for the past week, capping a weekly gain for the stock market as investors set aside concerns about the Federal Reserve and focused on the improved outlook for economic growth.
U.S. stocks closed with sizable gains Friday following a choppy, post-holiday session, as a stronger-than-expected jobs report helped the main indexes achieve a second up week in a row, even as the 10-year yield rose to 2.73 percent, its highest level since August 2011. Stocks sold off early but ended the day up 1 percent, even as rates continued to rise.
In a bullish sign, the Standard & Poor's 500 Index (SPX) managed Friday to break above its 50-day moving average of 1,626 after testing it for several days.
Still, the more important area could be the Russell 2000 Index (RUT), which tracks small-cap stocks, 1,000 region. This area has held as resistance since May and won't go down without a fight.
With those areas breached on Friday, it may signal that there could be a strong July rally.
For the first day in five, the Dow Jones Industrial Average (DJI - 15,135.84) closed north of the 15,000 level, as market watchers responded favorably to the monthly jobs numbers. The index closed just off its intraday peak, up 147.3 points, or almost 1%.
The dollar index was up more than 1.5 percent in the past week and could continue to be supported by higher U.S. rates. It is also likely to stay firm against the euro after moves by central banks in the past week.
On the July 4 holiday, both the European Central Bank and Bank of England held regular rates meetings. With more bluntness than normal, they both emphasized that there would be no policy changes and that rates would stay low. That sent equity markets sharply higher and bond yields lower Thursday. At the same time, Portugal, which had worried the markets, managed to keep its coalition government together.
European markets gave up some of those gains Friday of the past week, but the tension of easier European monetary policy versus expected tightening in the U.S. weighed on the euro and should provide support for the dollar.
Friday's close marked the end of the first trading week in the third quarter, although it was cut short by the market's closure for the Independence Day holiday.
• The Dow Jones Industrial Average (DJI) rose 1.5 percent in the past week to finish Friday session at 15,135.84.
The Dow ended the past week above their 50-day moving average for the first time since June 20. The 50-day moving average is an important indicator of investor confidence.
For the year, the Dow is up 15.5%
• The Standard & Poor's 500 Index (SPX), widely used by mutual funds as a proxy for the stock market, gained 1.6 percent for the past week, to settle at 1,631.89.
On Friday, the S&P 500 closed above its 50-day moving average for the first time since June 19.
For the year, the S&P 500 is up 14.4%.
And the Nasdaq Composite Index (COMP) gained 2.2% in the past week, to end at 3,479.38.
The Nasdaq ended the week above their 50-day moving averages for the first time since June 20. The 50-day moving average is an important indicator of investor confidence.
For the year, the Nasdaq is up 15.2%.
• The CBOE Market Volatility Index (VIX) , widely considered the best gauge of fear in the market, settled below the 15 mark on Friday for the first time since May 30, giving back 1.3 points, or 8.1% on the day.
This past week saw the VIX surrender 11.7%.
World Markets in the Past Week
Equity futures initially got support from comments from central banks in Britain and the euro zone on Thursday signaling that, unlike the United States, they are in no hurry to unwind stimulus. Those bets reversed on Friday and European shares, which had their best day in 11 months on Thursday of the past week, fell broadly.
The FTSEurofirst 300 index .FTEU3 closed down 1.3 percent after it gained 2.4 percent on Thursday. The euro was down 0.6 percent against the dollar at $1.2831 after hitting $1.2805, its lowest since May 20. Against the yen, the dollar touched a peak of 101.22 yen, its highest since May 31. It was last at 101.19, up 1.2 percent.
While the U.S. central bank may be closer to pulling back on the bond purchases, Thursday, both the European Central Bank and the Bank of England offered forward guidance on policy for the first time, and said record-low interest rates would be maintained for a prolonged period.
Earnings Reports for the Past Week
Twenty-three S&P 500 companies have already come out with quarterly results, which include industry leaders like Oracle (ORCL), FedEx (FDX), Nike (NKE) and others. Accenture’s weak guidance reconfirmed what we saw in the Oracle report about macro issues weighing on corporate spending outlooks. Importantly, it puts us on notice about what to expect from IBM (IBM) and others in the coming days.
The Revisions Trends
The revisions trend appears to have lost some ground in the last few weeks, though it still remains in neutral territory as the charts below show. The key metric in all the charts is the ‘revisions ratio,’ which is the ratio of total number of upward revisions over the preceding four weeks to the total number of revisions (positive and negative) over that same period.
Here are two charts each for 2013 and 2014. The bar charts show the current state of the ‘revisions ratio’ (as of 6/28/13), while the line charts plot the ratio’s trajectory over the preceding 24 months. As you can see below, the revisions ratio for 2013 dropped to 47% from the prior week’s 49% level, while the same for 2014 dropped to 49% from 51% the week before.
The ratio doesn’t tell you the ‘magnitude’ of the revisions, only the direction. The ‘50%’ level (the white line) is the dividing line between positive and negative trends, with readings above 50% implying more positive than negative revisions. The 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.
As can be seen in the charts above, the revisions trend for the S&P 500 as a whole is still in neutral territory, the current level (47% for 2013) is down from four weeks back (56% at the end of May). Finance has been in bullish trend for weeks now and given the sector’s large role in the broader influence in the index as a while, has a bearing on the aggregate revisions trend. By the same token, the positive momentum in Construction and Aerospace has a lot less relevance to the broader index given these sectors’ smaller weightage.
Finance’s revisions ratio currently (as of 6/28) stands at 66% for 2013 (down from 69% the week before) and 70% for 2014 (down from 73%), signaling good times ahead for the sector. The trend makes perfect sense as higher interest rates may be a hindrance for other industries, but they are beneficial for the Finance sector’s earnings.
Flat net-interest margins have been a permanent feature of the sector’s -- particularly banking’s -- earnings picture in recent quarters. The Finance sector’s positive earnings outlook is a function of the rising trend in interest rates.
On the negative side, the revisions trend is decidedly in bearish territory for Business Services (13% for 2013 and 33% for 2014), Industrials (27% for both years), Basic Materials (22% and 30%), and Consumer Staples (25% and 31%). Estimates for Alcoa have come down recently as have the same for Peabody Energy (BTU), Freeport-McMoran (FCX) and Newmont Mining (NEM).
Economic Reports in the Past Week
• ISM Index
The ISM Index rose to 50.9 in June from 49.0 in May. This compared to consensus expectations which expected the ISM Index to rise to 50.5.
• Factory Orders
Manufacturing orders rose 2.1 percent for the month of May compared to a gain of 1.3 percent in April. This compared to consensus estimates that expected factory orders to increase 2.0 percent.
• ADP Employment Change
The ADP Employment report showed that the economy added 188,000 jobs for June compared to 134,000 in the prior month. This was well ahead of consensus expectations which called for a rise of 150,000 jobs.
• Jobless Claims
Initial claims decreased from an 348,000 for the week ending June 15 to 343,000 for the week ending June 29. This compared to consensus expectations which expected initial claims to stay at 348,000.
Continuing claims fell from 2.987 million for the week ending June 8 to 2.933 million for the week ending June 15. This compared to the consensus which expected continuing claims to fall to 2.955 million.
• ISM Services
The ISM Non-manufacturing index fell to 52.2 in June from 53.7 in May. This was the lowest reading for the index since February 2010, but recorded an expansion, nonetheless. The consensus expected the index to rise to 54.0.
• Nonfarm Payrolls
The Nonfarm payrolls report for June showed that the economy added 195,000 jobs. This was identical to the increase in recorded in May. The figures came in well-ahead of consensus estimates, helping spur another rally in the equity market. Economists had expected payrolls to rise 166,000 for the month.
Private payrolls rose 202,000, which was less than the 207,000 jobs that were added in the month of May. This was also significantly ahead of consensus expectations which called for an increase of 180,000 in private Nonfarm payrolls.
• Unemployment Rate
The unemployment rate for the month of June was 7.6 percent. This was unchanged compared to May, and in-line with consensus expectations.
• Hourly Earnings and Average Workweek
Aggregate earnings last month rose 0.6 percent. This was primarily driven by a better than expected 0.4 percent increase in average hourly wages, which came in ahead of estimates calling for a rise of 0.2 percent.
The average workweek remained unchanged compared to the prior month at 34.5 hours. This was exactly what the consensus expected. The labor participation rate rose to 63.5 percent versus 63.4 percent previously. The one basis point rise in labor participation equals 177,000 new jobs in the month, a solid if not spectacular figure.
Conclusion for the Past Week
With the jobs report out, investors now will focus on the start of second-quarter earnings season and additional news from the Federal Reserve next week. Alcoa (AA), which rose 1.3% on Friday, will kick off earnings season with its report after the market’s close on Monday. JPMorgan (JPM) and Wells Fargo & Co. (WFC) will deliver their quarterly reports at the end of the week, on July 12.
Earnings forecasts have been brought down markedly, so they won’t be that hard to beat, but investors will scrutinize revenue growth and guidance to see what they indicate about the U.S. economic recovery and global demand.