The Stock Market Expects More Drama Heading Into Fourth Quarter!
Week Ahead: Worries Mount and Portfolio Adjustments!
Wall Street: U.S. Stocks Face Earnings And Data Hurdles!
by Ian Harvey
September 22, 2012
The third quarter could fade quietly away in the week ahead, as markets look forward to a more dramatic fourth quarter, with the election and pending "fiscal cliff" making it the trickiest period of the year.
The approaching quarter-end Friday could bring some portfolio adjustment as investors look to lock in some gains in a year where the stock market’s 16-percent rise has surprised just about everyone.
However, the U.S. stock market could undergo a struggle to stay close to nearly five-year highs next week as worries mount about third-quarter earnings and the stock market appears primed for a pullback from recent stimulus-driven gains.
It is for sure that the stock market is at a lofty level and is likely to attract investors hoping the market will ride out the year on a positive note. The Dow Jones industrial average and the benchmark Standard & Poor's 500 index remain close to highs not seen since December 2007. The S&P 500 is up 16.1 percent since the end of 2011.
It is possible that the stock market may suffer from a pullback in the week ahead. But whatever the pullback is, it's should be rather shallow! Any disappointment in key economic data that would reverse the market's feeling that the economy has stabilized, could trigger a 2 to 4 percent pullback.
Though the corrections in the major averages last week were not that severe, the weak close on Friday makes a further drop early this week more likely. Several stocks like Bed, Bath and Beyond (BBBY) and JCPenney (JCP) were hit hard, dropping 9.8% and 11.2% respectively on Thursday.
• The Dow Jones Industrial Average (DJI) finished the week with 0.1% loss to close at 13,579.47, its first loss in three weeks.
The DOW is up 3.7 percent for the month and 5.4 percent for the year.
Alcoa (AA) was the biggest weekly blue-chip laggard, while Kraft Foods (KFT) gained.
• The Standard & Poor's 500 Index (SPX) was off 0.4%, finishing the past week at 1,460.15.
The S&P 500 is up 3.8 percent for the month and 7.2 percent for the quarter.
The S&P 500 is up 16.1 percent since the end of 2011.
The S&P 500 has struggled with resistance at 1,460 to 1,465. The index's Sept. 14 close of 1,466 was its best finish since Dec. 31, 2007.
• The Nasdaq Composite Index (COMP) gave up 0.1%.for the past week, to finish at 3,179.96.
The COMP tagged a near 12-year best at the 3,196.93 mark Friday morning.
Seven out of the 10 key S&P sectors were negative for the week, led by financials. Telecoms rallied more than 2 percent.
**For a more in-depth look at the past week…..CLICK HERE…..**
The Major ETFs in the Past Week
Most of the major ETFs edged slightly higher last week, helped by Friday's quadruple witching, and despite a brief sell-off mid-week due to weak economic data. In the U.S., jobless claims unexpectedly rose to 382,000, while manufacturing in the Philadelphia region shrank for the fifth straight month in September. Looking ahead, a composite reading of U.S. leading indicators also showed a 0.1% downturn, which was worse than economist expectations of an even (0%) reading.
In the eurozone, manufacturing and services data came in weaker than expected. Markit's Purchasing Managers' Index (PMI), a gauge of business activity, fell to 45.9 in September, which was the lowest rating in over three years. Analysts believe that the region's economy is shrinking at a faster rate than the 0.2% quarterly decline seen during the second quarter of this year. While many traders are watching for an ECB rate cut to help the market next month, the increased tension in the region has led to higher bond yields and hurt stocks this past week.
TOP OPTIONS TRADES SINCE JULY 01, 2012
|DLTR Aug 110 Calls||32%||UIS Oct 17 Calls||79%|
|HSY Aug 70 Calls||56%||TSO Nov 25 Calls||54%|
|NKE Oct 92.50 Calls||49%||HLF July 47.50 Calls (again)||38%|
|FB Aug 25.00 Puts||500%||DISH Sept 30.00 Calls||100%|
|APPL Jan 13 650.00 Calls||71%||CSTR Oct 42.50 Puts||400%|
|LNKD Aug 92.50 Puts||30%||LNKD Aug 100.00 Calls||250%|
|SLV Nov 30.00 Calls||114%||JCP Nov 25.00 Calls||67%|
|GLD Nov 165.00 Calls||72%||LVS Dec 45.00 Calls||67%|
|GLD Oct 170.00 Calls||52%||MON Jan 2013 87.50 Calls||26%|
Overseas Influence on the Week Ahead!
Focus will remain on the Mideast and specifically Iran’s nuclear program in the week ahead, as the U.N. General Assembly meets, starting Tuesday. Europe will also stay in the headlines, as investors watch to see whether Spain will finally make a request for aid.
Speculation on Friday that Spain was moving toward a bailout request gave investors some relief. The debt-laden country, which is likely to stay in focus in the week ahead, said it was considering freezing pensions and speeding up a planned rise in the retirement age as it raced to cut spending and meet conditions of an expected international sovereign aid package.
Election Influence on the Stock MARKET for the Week Ahead!!!!
On most investors' minds are the upcoming election and what impact it will have on the markets and the economy. Whatever your political affiliation, it is definitely worth keeping an eye on Intrade.com.
One group of traders has already decided who they think will win the election. Last week was not a very good one for candidate Romney, but the tables could turn and maybe next week it will be President Obama’s turn. The chart below shows the current market data of those predicting an Obama win in the election.
The chart was in a broad trading range from May 2011 to September 2012, when it staged a high-volume breakout above the resistance at line a. Technically, this completes the bottom formation (lines a and b), with the initial upside target at $8.20. There is good support in the $6.20 to $6.50 area.
Intrade values the share price at either $10 or $0 once the election is over. Those who purchased the Obama shares will get $10 a share if he wins or $0 if he loses. Of course, you can also sell short, so anyone who doesn’t think Obama will win the election could sell the shares short around noon Friday at $7.18 and if Obama loses it would drop to $0.
Alternatively, you take the other side if you are predicting a Romney win. The chart of those predicting a Romney victory appears to show the completion of a double top formation (line a). This year’s uptrend (line b) was tested in July and August, but was decisively broken this month.
The solid uptrend from the 2011 lows (line c) has just been broken, as the price has dropped well below $3. The chart now shows heavy resistance in the $3.80 to $4 area.
Of course, this data should be taken as just one piece of information, although they were right in 2008 and called the very tight 2004 presidential race correctly. They even got each state winner right.
The Major ETFs in the Week Ahead
The major Exchange-Traded Funds -- ETFs -- appear to be largely overbought at current levels, with high RSI and MACD readings across the board. From a fundamental standpoint, this may have been caused by the U.S. Federal Reserve's quantitative easing program (QE3) announced last week, which led to a sharp jump in stock prices. Unfortunately, the effects of this program could take time to materialize, while the eurozone's optimism also appears to be fading. As a result, traders may want to consider taking some profit and keeping tight stops on their existing positions for the ETFs.
The Dow Jones Transportation Average Causes Concerns
The iShares Dow Jones Transportations (IYT) is still sending the strongest warning about the overall market, as mentioned two weeks ago in “The Week Ahead in the Stock Market".
The outlook has turned more negative this week, as after briefly exceeding the downtrend (line a), it dropped sharply. The previous low (line b) has been broken.
The relative performance has dropped to new lows, and shows no signs yet of bottoming. It was hurt last week by FedEx (FDX), which is now close to making new lows for the year. The on-balance volume (OBV) on IYT barely rose on the rally, and then volume picked up on the downside.
Profit Warnings for the Stock Market
Profit warnings from such high-profile U.S. companies as FedEx (FDX) helped cement the view last week that third-quarter results could be a drag on the market.
There have been some pretty negative pre-announcements, and those announcements for this time frame have been a little more than we've had in the past!
Estimates for S&P 500 companies' third-quarter profits have fallen sharply in recent months, and earnings now are expected to drop 2.2 percent from a year ago, according to Thomson Reuters data. It would be the first such decline in three years.
Outlooks for the third quarter are at the most negative since the third quarter of 2001, the data also showed. The negative-to-positive ratio for the upcoming earnings period stands at 4.3 to 1.
Third-quarter earnings aren't expected to start in earnest until after the second week of October, when Alcoa (AA) is expected to kick off the reporting period.
Investors are concerned surprises, such as…..
• Negative surprises on earnings,
• The chance that China's economy may be slowing faster than economists previously thought.
• The aggressiveness of the (Fed's) quantitative easing, and
• ….."What I'm worried about is what I don't know”
"GLOOM AND DOOM are Well and Alive"
The “Fiscal Cliff-Hanger” for the Stock Market Investor
The ”fiscal cliff” is the one-two punch to the economy that could occur if Congress doesn’t act on expiring Bush tax cuts, and the more than $100 billion in automatic spending cuts that will start Jan. 1, as part of the debt ceiling deal. Goldman Sachs economists said Friday that if the economy hits the cliff, and there are no adjustments to the expiration of Bush-era tax cuts, disposable income would be reduced by more than 4 percent in early 2013, with the biggest impact on the lowest and highest income groups.
If the tax cuts expire, income-tax brackets would go from the lowest at 10 percent and the highest of 35 percent, to a low 15 percent and high 39.6 percent.
Year-end tax selling could take on new meaning, if it looks like Congress will let the Bush tax cuts expire. The wealthiest Americans could pay 43.4 percent on dividends, instead of the current 15 percent, because a new tax that came with health care legislation taxes certain types of income at a rate 3.8 percent above the income tax rate.
With the 50-percent chance that the “fiscal cliff” will be hit, the already pricey dividend stocks like utilities, REITs and MLPs, will become less attractive.
Earnings in the Week Ahead
Some major companies are expected to report their latest quarterly results in the week ahead, including Walgreen Co. (WAG), Nike Inc. (NKE) and Micron Technology Inc. (MU).
Also, potentially the second-biggest initial public offering of the year is slated for the coming week.
Economy in the Week Ahead
A very busy calendar will include new readings on how consumers assess the economy and whether they are spending in the third quarter. Expectations are that consumers are feeling better in September and spent modestly in August.
The Conference Board's confidence index will be reported Tuesday. The final reading of September consumer sentiment and the report on August income and spending are expected Friday. Other important reports on tap for next week include new-home sales and durable-goods orders.
Housing data has been surprisingly strong in recent months and homebuilder shares have experienced massive gains. The PHLX housing sector index is up 62.3 percent since Dec. 31. But that strength has been offset by worrisome data on U.S. manufacturing, which had been among the economy's strongest sectors. The stubbornly high U.S. unemployment rate also has kept a damper on Wall Street's mood.
After last week’s poor showing it becomes apparent that the stock market needs a bigger catalyst to keep it going. This means for equity prices to get much better, there needs to be some validation coming from the economic fundamentals!
The late sell-off on Friday, combined with weakness in some of the key sectors, suggests that the correction is not over yet. It is possible that we will get another bit of Eurozone news in the week ahead to spook the stock market. And the action of the Dow Transports still needs to be watched closely.
Though there is plenty of economic data that could disappoint the markets, it would probably take several bad numbers to trigger heavier selling.
However, many strategists still see the market as overdue for a pullback after its summer run, even after Friday’s loss. They don’t think it’s going to be easy, smooth sailing between now and the election. Their expectation is between a two- to five-percent pullback in the near future.
On-the-other-hand, with the Fed's recent action followed a decision by the European Central Bank to support debt-ridden euro-zone nations by purchasing their debt, may provide a floor for the stock market, possibly through to year end.
With the Fed's decision out of the way, investors are also likely to turn their attention to other issues, including November's U.S. presidential election and looming decisions about U.S. fiscal policy.
Further Articles Relating to the Week Ahead
1. The Economy and Earnings in the Week Ahead – September 24, 2012
2. The Past Week Stock Market Results – September 24, 2012
3. The Major ETFs in the Week Ahead – September 24, 2012
4. Quantitative Easing and Its Effect on the Stock Market - Indicator of the Week, September 24, 2012
5. The VIX Ready to Move Higher! - September 26, 2012