Stock Market: Ready For A Raging Bull Run!
Week Ahead: Earnings Season &, Election Could Keep Stocks on Edge!
Wall Street: Can Energy Stocks Fuel The Next Market Rally?
by Ian Harvey
October 13, 2012
A tough earnings season and election politics could combine to make for a volatile stock market in the week ahead.
The second presidential debate takes place Tuesday night, and it has the potential to once more move the needle in a very tight race between President Barack Obama and former Mass. Gov. Mitt Romney.
It is interesting to note that Citigroup’s strategists have moved to “overweight” on U.S. equities.
Citigroup’s U.S. strategists expect the market to enter a ‘raging bull’ stock market next year, with 2013 year-end target on the S&P 500 of 1,615 -- that would take the index above the prior peak of 1,558 reached in 2007.
Investors are starting to realize that housing is turning – with a continuing expansion of technology through smart devices, there is a growth in the energy boom and also manufacturing competitiveness is returning!
The U.S. stock market is also not as dependent on Federal Reserve liquidity to continue higher as emerging equity markets are.
However, central bank-fueled gains took the stock market within reach of five-year highs in September, but now U.S. stock market participants are shifting their focus back to corporate outlooks, and the waters are becoming muddied.
Early earnings reports have underlined those concerns, which may be exacerbated when dozens of major companies - including Dow components General Electric, Microsoft Corp and International Business Machines Corp - report in the week ahead.
The questions on investors’ minds are:-
• “Is the stock market up solely because of QE?
• Or are earnings up?
• Is consumer spending at levels above those of 2007? and
• Are margins continuing to show impressive gains? “
The Fed liquidity has managed to put a floor under the market.
Besides earnings and the election, there is a series of important economic reports, including the Philadelphia Fed and Empire State surveys that will give a first look at how October is faring. Retail sales Monday should provide more insight into the consumer, after Friday’s consumer sentiment number saw a surprising jump to its highest level in five years.
China also releases data this week, starting with Monday’s inflation reports. Then on Thursday, China releases industrial production, retail sales and GDP.
It is obvious that the U.S. economy has been holding up while the global economy has really weakened over the last few months -- earnings are only telling us that and reinforcing it!
• The Dow Jones Industrial Average (DJI) closed out the week with a loss of 2.1%, marking its worst weekly close since the beginning of September.
• The Standard & Poor's 500 Index (SPX) fell 2.2 percent this past week, its biggest weekly percentage drop since June, on caution about the season after a number of bellwethers cautioned on their outlooks, including Chevron Corp and Alcoa Inc.
Profits are being dragged down by material and energy stocks. Material sector earnings are seen dropping 24 percent, and energy sector results are expected to slide 19 percent.
• The Nasdaq Composite Index (COMP) had a 2.9% weekly defeat -- its lowest weekly reading in two months.
For the year, the Dow is up 9.1%, with the S&P 500 up 13.6% and the Nasdaq up 16.9%.
AT&T (T) led the weekly blue-chip laggards, while McDonald's (MCD) finished higher.
**For a more in-depth look at the past week…..CLICK HERE…..**
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%|
The Major ETFs in the Week Ahead
Earnings in the Week Ahead
It’s all about corporate earnings at this stage. And on that count, it’s not so much about how companies do relative to third quarter expectations, but rather what kind of guidance they provide for the fourth quarter and beyond. The earnings-related anxiety so much on display in recent days primarily reflects how the earnings picture will evolve as a result of this earnings season.
We don’t have any discernible trend emerging as yet at this admittedly early stage, but do the stronger-looking earnings reports from banking bellwethers J.P. Morgan (JPM) and Wells Fargo (WFC) tell us anything about the broader third quarter earnings season? Of the two results, J.P. Morgan clearly came out ahead of expectations and has strong results, but we can’t say the same about Wells Fargo. The funny thing is that of the two banking giants, it is Wells that resembles more a traditional banking entity and not J.P. Morgan. As the London Whale episode of the recent past shows, J.P. Morgan is too complex of a banking institution for investors to properly size up. As such, while a solid earnings beat from J.P. Morgan is welcome, it doesn’t tell us much about how the earnings season will unfold.
We should also keep in mind that the Finance sector as a whole is expected to produce strong earnings growth in the third quarter, as it did in the previous one. Total Finance sector earnings in the third quarter are expected to be up 14.2% from the same period last year, the second highest growth expected of any of the 16 sectors; Construction is expected to have the highest earnings growth rate at almost 45%, but Construction is too small a slice of the total earnings pie at less than 0.5% of the total, whereas Finance is the second largest earnings contributor after Tech at almost 18% of the total. Excluding the strong growth contribution from Finance, the roughly 3% decline in total Third quarter earnings drops even further to a roughly 7% decline.
The stock market ramps into high gear in the week ahead, with 200 companies reporting results, including 80 from the S&P 500. It will be in much easier to comment on this reporting season by the end of the week, as by then we will have seen results from more than one-fifth of the S&P 500 members.
Third-quarter earnings season kicks into high gear in the week ahead with earnings reports from several financial and technology bellwethers. Also due are economic reports from across a spectrum of important sectors.
Citigroup (C) gets things rolling on Monday with Goldman Sachs Group (GS), Bank of America (BAC), American Express (AXP), and Morgan Stanley (MS) following.
Technology companies reporting in the week ahead include Google (GOOG), Intel (INTC), International Business Machines (IBM), Microsoft (MSFT) and eBay (EBAY).
Also on tap in the week ahead are Johnson and Johnson (JNJ), Coca Cola (KO), and Halliburton (HAL).
Economy in the Week Ahead
There is a full economic calendar in the week ahead, with retail sales, the Empire State Manufacturing Survey, and business inventories out on Monday. Then on Tuesday, we get the Consumer Price Index, which may be interesting, as the Producer Price Index last Friday was higher than expected at 1.1%.
Also out Tuesday are industrial production numbers and the Housing Sentiment Index. The charts on the homebuilding stocks do look overextended, so this report may be quite interesting. This report provides a reading not only on the demand for housing, but also the homebuilders' view of economic momentum, and therefore may impact the markets.
More data from this sector follows on Wednesday with housing starts, and then Friday brings existing home sales. Of course, on Thursday we get the jobless claims, which dropped sharply last week, but the report was discounted due to a lack of quarterly data from one state. On Thursday, we also get the Philadelphia Fed Survey on manufacturing, as well as the Leading Indicators.
Conclusion for the Week Ahead
Another Friday with a mixed close...which may reflect an indecisive outlook going into the week ahead debate. Many funds close their book at the end of October, so if they need to do new buying, they should be starting by the end of the week ahead.
Still, the major averages need several consecutive higher closes with good market internals to indicate that the correction is over. As this is a correction, a good opportunity has been presented to buy some of the diversified sector ETFs and stocks that have drawn back but are potentially sound as they test good support.
Confirmation that the correction is over before becoming a more aggressive buyer is essential at this stage. Be sure to have your stops in place and your buy orders in the market.
Further Articles Relating to the Week Ahead
1. The Economy and Earnings in the Week Ahead – October 15, 2012
2. The Past Week Stock Market Results – October 15, 2012
3. The Major ETFs in the Week Ahead – October 15, 2012