Stock Market: European Debt Still A Major Concern In The Week Ahead!
Wall Street: Earnings Will Make It A Busy Week!
by Ian Harvey
July 23, 2012
With Europe’s debt woes creating a feeling of gloom, stocks in the coming week could be vulnerable to the impact of slowing global growth on corporate America and the U.S. economy.Earnings from more than a quarter of the S&P 500 and the first look at second-quarter GDP could be key for the market, which benefited in the past week from the idea of more Fed easing . At the same time, worries about Europe returned at the end of the week as the euro sank and Spanish bond yields shot to record highs amid worries that Spain, itself, may need a bailout.
• European problems haven’t gone away,
• Volume’s been light,
• Earnings haven’t been that great!
The ongoing sovereign debt woes in Europe took center stage once again as euro zone finance ministers agreed to lend up to 100 billion euros to Spain so it can recapitalize its banks. Ten-year Spanish bond yields hit euro-era highs amid worries that the country will eventually run out of funds and need a sovereign bailout.
European stock market shares closed sharply lower, while the euro plunged to a two-year low against a basket of major currencies.
Although the US stock market got a boost in the past week from better than expected earnings, especially out of the technology sector -- most investors are not yet convinced.
The Investment Company Institute estimates that $540 million moved out of stock market funds in the week ending July 11. This was better than the prior week, when the outflow was $2.87 billion.
Bonds continue to be the big winner, as they had net inflows of $6.39 billion, with the majority in taxable bonds. The prevailing concern of investors is still on the return of their capital, not the return on capital.
• The Dow Jones Industrial Average (DJIA) gained 0.36 percent to finish at 12,822.
Pfizer (PFE) was the best performer in the blue-chip index for the week, while BofA led the laggards.
• The Standard & Poor's 500 Index (SPX) rose 0.43 percent to 1362, and
• the Nasdaq Composite Index (COMP) added 0.58 percent to finish at 2925.
**For a more in-depth look at the past week…..CLICK HERE…..**
The Major ETFs in the Past Week
The stock market rallied through the middle of the week, but pulled back towards the end. The major exchange-traded funds (ETFs) have edged higher through June and July, but volume continues to be an element of concern. Since the indexes put in a bottom in early June, this rally has been met with significant declining volume. The declining volume signifies little buying interest on this rise, and that it is more likely a bear market rally as opposed to the next wave higher in a longer term bull market.
Also, the indexes met with resistance last week, near the highs seen earlier in the month. This indicates we may be in for at least another short-term decline over the next week or two. The wrench in this outlook is that the June and July trend is higher, a continued push above resistance in the week ahead opens the door to a bit more upside.
…..”The financials may be an area to avoid considering the latest regulatory problems swirling around the industry with the widening Libor-fixing scandal which resulted in the ouster of Barclays (BCS) chairman and CEO in the past week…..”
- The Week Ahead in the Stock Market - July 09, 2012
Banks will stay a focus in the week ahead, when the House Financial Services Committee hears testimony Wednesday from Treasury Secretary Tim Geithner on banking regulation, but also on the Libor rigging scandal. Barclays (BCS) settled charges with U.S. and U.K. regulators that its traders rigged Libor for several years, and other banks are under investigation.
‘LIBOR - London Interbank Offered Rate’ is an interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market. The LIBOR is fixed on a daily basis by the British Bankers' Association. The LIBOR is derived from a filtered average of the world's most creditworthy banks' interbank deposit rates for larger loans with maturities between overnight and one full year.
The LIBOR is the world's most widely used benchmark for short-term interest rates. It's important because it is the rate at which the world's most preferred borrowers are able to borrow money. It is also the rate upon which rates for less preferred borrowers are based. For example, a multinational corporation with a very good credit rating may be able to borrow money for one year at LIBOR plus four or five points.
Countries that rely on the LIBOR for a reference rate include the United States, Canada, Switzerland and the U.K.
Geithner, as president of the New York Federal Reserve in 2008, had sent a letter to U.K. regulators, voicing concerns about the way Libor is set. Libor is the London Interbank Offered Rate, and is set by the banking industry.
The GDP Report Effecting the Stock Market
Friday’s U.S. GDP report, expected to show 1.5 percent growth for the second quarter, could have a major impact on sentiment within the stock market, even though it is a backward looking indicator.
The second-quarter GDP report may cause some concern if things are really slowing. Analysts are forecasting 1.2-percent growth for Q2, but if the number is weaker than expected, it could be troublesome for stocks. As mentioned earlier, investor nervousness may view this a risk for a recession – which is quite unlikely -- but if the market starts to price in a higher risk of recession, that’s a negative market event.
The Major ETFs in the Week Ahead
The mid-week rallies managed to push some of the ETFs to monthly highs, yet the bullish moves were unconvincing. The upward push had no follow through and gave way to morning selling on Friday (July 20).
Declining volume is also a concern; except for in the iShares Russell 2000, volume has been dropping from the May levels, creating a negative divergence with the price rally we have seen in June and July.
More upside could still arise, but the rally is likely to be stifled before we reach the 52-week high price levels. A move back towards support should be watched closely; if broken, a further slide in prices is likely forthcoming.
The trend of better-than-expected earnings will be put to the test in the week ahead when investors hope Apple (AAPL) can exceed already high expectations for the tech giant and Facebook (FB) reports its first quarterly earnings. And for the economy, Friday’s U.S. GDP report could have a major impact on sentiment.
Earnings in the Week Ahead
Among the other 138 S&P 500 companies reporting earnings – besides Apple and Facebook -- are Ford Motor Co (F), United Parcel Service (UPS) and Whirlpool Corp (WHR).
Apple accounts for a significant proportion of the overall earnings of Standard & Poor's 500 Index (SPX) components. S&P 500 earnings are expected to show a rise of 5.7 percent in the second quarter from a year ago. Excluding the maker of the iPad, the rise is 4.8 percent, according to Thomson Reuters data.
Apple's results, due Tuesday, could help stocks build on this week's gains and counter investor worries over the euro zone crisis.
Apple is a huge psychological component which has the ability to drive the whole tech group!
Apple's expected strong performance is mainly why technology earnings growth has held up better than other S&P 500 sectors. The expected growth rate for the sector has gone from 6.9 percent in April to 8.7 percent as of Friday, the data showed.
Apple's earnings for the quarter are seen at $10.38 a share, based on Thomson Reuters, which includes estimates from 43 analysts. That compares with a profit of $7.79 a share for the year-ago quarter.
Investors are likely to be just as keen to hear from Facebook when it reports on Thursday. Facebook's first results following its market debut could give investors another chance to indicate how they feel about the stock since its disappointing initial public offering.
Shares of Facebook, one of the most closely watched IPOs ever, lost ground after technical problems with its market debut on Nasdaq and as investors questioned its ability to rapidly increase advertising revenue.
Analysts said an earnings miss by Facebook could be disastrous for the stock, which closed Friday at $28.76, below its $38 offering price.
Investors are looking for executives to address a litany of concerns about the business, such as the efficacy of its online ads and the company's nascent efforts in mobile advertising.
Tech results also will be closely watched for signs of weak demand overseas, particularly from Europe. Other technology companies expected to report next week include Texas Instruments (TXN) and Amazon.com (AMZN). Of the S&P sectors, technology has the highest sales exposure to Europe at about 25 percent, according to a Bank of America/Merrill Lynch research note.
Economy in the Week Ahead
Friday’s U.S. GDP report, expected to show 1.5 percent growth for the second quarter, could have a major impact on sentiment, even though it is a backward looking indicator.
Early in the week ahead, flash PMI data is expected for China and Europe, which should how well manufacturing activity is holding up. Analysts are watching to see if there are any signs China’s slowdown is bottoming.
Spain will tap the markets Tuesday when it sells three- and six-month bills. It will also sell three- and five-year bonds on August 2. Spain's 10-year bond yields hit a euro-era high of 7.3 percent on Friday.
Conclusion for the Week Ahead
Though stocks did rally last week, the technical outlook actually has become a bit weaker. We may see some follow-through selling early in the week ahead, which will need to be watched closely. If there are more signs of technical weakness, it will suggest a more complex bottom formation is likely. This could mean a drop back to the late June and mid-July lows. Those stocks that show superior relative performance should hold up the best, while some of those stocks that disappointed the market with their earnings are likely to be the most vulnerable. Be sure to have your stops in place, and if you are over 70% invested in stocks, it would be recommended that taking some profits is in order.
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