The Stock Market in the Week Ahead October 29, 2012

Stock Market: More Stormy Markets and Weather Ahead!

Week Ahead: Markets to Consolidate!

Wall Street: Jobs data, election may overshadow earnings!

by Ian Harvey


October 27, 2012

The stock market will navigate another big wave of third-quarter earnings in the week ahead, plus some major economic reports—and, most importantly, the October jobs report.

But nature may also play a role, with a late season hurricane threatening the East Coast along the Washington-New York corridor.

It’s too early to say what type of damage the storm could bring, but it could temporarily drive up gasoline prices.

Earnings season may be only half over, but the focus on profits should subside in the week ahead as investors turn their attention to the coming election and Friday's jobs report, the last major data release before the Nov. 6 contest.

More bellwether companies are scheduled to report results in what will be another "peak week" of the earnings season. Such a flurry of numbers normally holds Wall Street's attention and can lead to stock market swings. But volume and volatility may be slight next week, with stock market participants opting to remain on the sidelines ahead of the jobs data and the election.

The Churning Stock Market

It appears that the stock market is going to be just churning -- it’s going to be driven more by earnings news than election polls for the next couple of weeks.

A post-election stock market bounce is highly likely simply because it has removed one element of uncertainty. But no matter who wins, the 'fiscal cliff'” is still ahead.

Earnings have been mixed, with earnings per share figures coming in better than expected but revenues and guidance have been pretty bad, and the companies that have provided guidance have been less than enthusiastic about the outlook.

The Past Week for the Stock Market
It was a very rough week in the stock market, as the S&P 500 cracked the widely watched support at 1,420 on Tuesday. Prices closed the past week just above the next key support in the 1,395 to 1,400 area. Friday's close was mixed, as the major averages moved in and out of positive territory for much of the day.

The action in the past week clearly did some technical damage, and it has now been six weeks since the September 14 highs. The decline from the early April highs lasted nine weeks and took the S&P 500 9.8% down from its highs. A similar decline would last until well after the election, and the same percentage decline could take the S&P as low as 1,322, but I do not think that is likely.

Futures were sharply lower Friday ahead of the GDP report, but rallied in early trading before the sellers again took over. The short-term analysis suggests a near-term low is likely for the week ahead, if the futures did not make their lows early Friday.

The December S&P 500 E-Mini futures hit a low of 1,394.50 before the GDP report, which was still above the 38.2% support level at 1384.50. The Dow Industrials have just tested their 38.2% Fibonacci support level at 13,041, which makes it a pretty normal correction so far.

Still, the stock market correction has gone further than many expected. Last Tuesday's drop indicated an expectation of another push to the upside before the election, but this was not to be. The earnings reports, and more importantly, the increasingly negative corporate outlook, have turned the mood on the Street quite negative.

While the price action in some stocks has been quite ugly, the stock market is not yet that oversold. It will likely take a more broad-based drop before it can form a short-term oversold low. Typically, such a low is needed before we can actively start looking for an end to the correction.

The stock market slumped this past week, with the Standard & Poor’s 500 Index heading toward its first monthly decline since May, due mainly to companies from 3M Co. to DuPont Co. reported disappointing quarterly results and forecasts. Of the 273 S&P 500 companies that have reported quarterly earnings results, about 59 percent missed analysts’ estimates for sales, according to data compiled by Bloomberg. Almost 72 percent topped projections for earnings, the data show. Concern about a worsening picture for corporate results has sent the S&P 500 down 3.7 percent from this year’s high on Sept. 14. The index is still up 12 percent in 2012.

Even with equities falling, the Federal Reserve said the economy is still growing modestly and unemployment remains elevated as the central bank maintains $40 billion in monthly purchases of mortgage-backed securities. Outside the U.S., a survey showed a contraction in China’s manufacturing is easing and investors speculated the Bank of Japan will expand monetary stimulus next week.

Investors are also watching the U.S. presidential race. The latest Washington Post/ABC News tracking poll showed Republican Mitt Romney with 49 percent support among likely voters and President Barack Obama with 48 percent support, a result within the survey’s three percentage point margin of error.

Investors sold shares of companies most tied to economic growth this past week. Raw-material producers fell the most out of 10 groups in the S&P 500, losing 2.8 percent. Energy stocks slumped 2.4 percent for the second-largest drop. The Morgan Stanley Cyclical Index, a gauge of 30 U.S. stocks, erased 1.1 percent.

An S&P index of 11 homebuilders slumped 3.7 percent after a disappointing report on pending home resales.




• The Dow Jones Industrial Average (DJI) ended the week down 1.8%.
The Dow is down 2.5% for the month.

• The Standard & Poor's 500 Index (SPX) was down 1.5% to 1,411.94 for the week. The benchmark gauge for U.S. equities has retreated 2 percent in October, indicating it will end four straight months of gains.
The SPX is down 2% for the month.

• The Nasdaq Composite Index (COMP) fell 0.6%.
The Nasdaq is down 4.1% for the month.

However, despite the declines, the Dow is up 7.3% for the year, while the S&P 500 has gained 12.3%. The Nasdaq is up 14.7%

DuPont (DD) was the biggest weekly laggard on the Dow, while Intel (INTC)was the best performer.

The Stock Market Ending October 26, 2012

The CBOE Market Volatility Index (VIX – 17.06) ), widely considered the best gauge of fear in the stock market, lost 0.3 point, or 1.7% on Friday of the past week, and gave up its short-lived perch atop the 18 level, though its 200-day moving average continued to offer support. As the equities markets turned lower for the week, the VIX jumped 4.4%.

**For a more in-depth look at the past week…..CLICK HERE…..**

The Major ETFs in the Past Week

**A more detailed report can be obtained by ……CLICKING HERE…..**




The Week Ahead for the Stock Market

Uncertainty for the Stock Market Due to the “Fiscal Cliff’

Uncertainty about the election, the "fiscal cliff" and negative earnings news has been hitting the stock market. There is also an element of concern that if GOP challenger Mitt Romney wins, he might change the complexion of the now dovish Fed.

Romney is Wall Street’s preferred candidate but he is viewed as unlikely to retain Fed Chairman Ben Bernanke when his term expires in early 2014, and some traders are betting that change would result in a more hawkish Fed.

Corporate America is clearly concerned about what happens when Congress addresses the so-called "fiscal cliff," or the dual expiration of Bush-era tax cuts and the onset of automatic spending cuts Jan. 1.

That fear is believed to be holding back corporate spending, and it showed up as softer business investment in Friday’s report of third quarter GDP, even as the consumer stepped up spending.

Economists say that trend could slow down growth in the fourth quarter and into next year, particularly if the "fiscal cliff" is not resolved. Third quarter GDP was a surprisingly better 2 percent and was lifted by government spending.

Uncertainty can slow business activity but it does not necessarily lead to layoffs -- businesses will slow their spending down when uncertainty rises, but usually, a real shock is normally required for businesses to lay off hundreds of employees.

The Weather and its Effects on the Stock Market in the Week Ahead

The stock market will also have to contend with the weather.

Hurricane Sandy is expected to hit the U.S. East Coast early in the week ahead. New York City officials were considering closing down bus and subway lines in the week ahead. At the New York Stock Exchange, the plans call for business as usual. The exchange issued a statement on Friday saying it has contingency plans to have the market running, adding that it has back-up power generation facilities. The Big Board will make accommodations for critical staff and traders.

Rival marketplace NASDAQ OMX said in a statement that it has plans to make sure its systems are ready. It will communicate with its members before, up to and after the storm.




Austerity and Deflation and the Effects on the Stock Market

With the resurgence of the Romney campaign, which is considered to be more "business friendly," why are stocks so weak? The airwaves have been flooded with gloomy forecasts from business leaders who are focused on the fiscal cliff and high debt levels.

The fiscal conservatives favor more austerity, as they conclude that the increasing debt levels have to result in much higher inflation. Many are hoping that this will be like 1980, when Reagan's election spawned a 20-year bull market.

One election year that no one mentions is 1936, when the country was coming out of the only recession that was worse than the recent one. The debate was similar back then: Kansas Governor Alfred M. Landon wanted government regulation to be removed, and states be given more control. At the time, many businessmen challenged the programs of FDR, as they felt overtaxed and overregulated.

As noted in an excellent paper by Marshall Auerback from the Roosevelt Institute, "the Roosevelt administration reduced unemployment from 25% in 1933 to 9.6%% in 1936, up to 13% in 1938 (due largely to a reversal of the fiscal activism which had characterized FDR's first term in office)."

The author also notes that, "By 1936, many economists and financial experts (notably FDR's Treasury Secretary, Henry Morgenthau) feared the country would go bankrupt if the government kept deficit-spending." (A familiar ring to it!)

"And after all, they argued, the government deficits had "pump-primed" the economy. The private sector could now take off on its own and get back to close to the full employment level of 1928 to early 1929."

The chart of the Dow Industrials shows a nice uptrend from the 1934 lows.

There was little in the way of a correction in 1936, as FDR had a landslide victory, but the uptrend was broken in September 1937. By April 1938, the Dow had dropped over 50% from its highs. It was in 1938 that Roosevelt submitted a budget where the deficit had been eliminated...but unfortunately so had the recovery.

Though other economists argue about the conclusions of Auerback, it is interesting to note that in 1936, the path to austerity was widely accepted. Now there seems to be a similar view that inflation is inevitable and the hope is that by cutting the spending quickly, the inflationary spike won't be that bad.

Unlike a few years ago, no one now seems to be concerned about the threat of deflation -- yet most economists agree it is much harder to stop.

This chart of the deflationary cycle is quite interesting which shows various stages which look similar in ways to the recent past. With the recent debate over the policy with China, the Protectionism & Tariffs phase especially stood out. Hopefully, a deflationary period is not ahead of us.

The good news is that these concerns are unlikely to impact investors until 2013.

The Major ETFs in the Stock Market for the Week Ahead

**…..CLICK HERE….. for more detailed information…..**




The Key Events for the Stock Market in the Week Ahead

The economy will be on the front burner in the week ahead, as we get the widely anticipated monthly jobs report. Overall, the economic calendar is quite full, with the Dallas Fed Manufacturing Survey on Monday, followed by the S&P Case-Shiller Home Price Index and Consumer Confidence on Tuesday.

On Wednesday we get the ADP Employment Report, as well as the Employment Cost Index. In addition to the jobless claims on Thursday, the Productivity and Costs, ISM Manufacturing Index, and Construction Spending are also going to be released. On Friday, we also get the latest report on factory orders.

Third-quarter earnings will also continue to pour in. Bellwether companies scheduled to report include Hertz (HTZ), Ford (F), Pfizer (PFE) and Exxon Mobil (XOM).

Earnings in the Week Ahead

We have a great deal of earnings reports still to come. In fact, we have 716 companies coming out with results this week, including 106 S&P 500 companies. This means that by the end of this week we will have seen 75% of third quarter earnings results. The aggregate metrics will change over the coming days as more and more companies release results.

But it is unlikely that earnings will have toned down from the ‘disappointingly weak’ outcomes so far for this reporting season. When even companies like Apple (AAPL), Google (GOOG), Amazon (AMZN), Caterpillar (CAT) and DuPont (DD) come short of expectations, then you know that the earnings picture can’t be good.

Here is the current status of the 270 S&P 500 companies that have reported third quarter results as of Friday, October 25th. Total earnings for these companies are down 2.8% from the same period last year and only 61% of the companies are beating earnings expectations. Total revenues are down 2.3%, but only 30.7% of the companies are able to beat revenue expectations.

In a typical quarter, roughly two-thirds of the companies would beat earnings expectations, and close to 60% would come ahead of revenue expectations. In the second quarter of 2012 -- which by no means was a strong earnings season -- we had 68.3% of the companies that have already reported Q3 results beat earnings expectations.

On the revenue side, the ‘beat ratio’ was 39.3% in the second quarter. The average earnings and revenue ‘beat ratios’ over the last four quarters for this same cohort of 270 companies is 69% and 58.2%, respectively.




Investors have come to expect an ‘earnings surprise’ since management teams have fine-tuned expectations by under-promising and over-delivering. The third quarter earnings season thus far runs counter to this narrative, as the surprise this time around has predominantly been on the negative side. May be the redeeming feature of this earnings season is that the underperformance this time around restores our confidence in the earnings surprise all over again.

Total earnings for the 241 S&P 500 companies still to report results are expected to be up 1.2% from the same period last year. The composite growth rate for third quarter total earnings -- where we combine results for the 270 companies that have reported results with what is expected for the 241 companies – is for a decline of 1.1% and revenue decline of 2.5%.

Modestly down Tech sector earnings (down 0.3%) add to seven other sectors that have negative year-over-year comparisons. The predominantly negative tone of company guidance has started showing up in estimate revisions, but overall estimates for the fourth quarter and beyond remain elevated at present.

Total earnings are expected to grow 6.1% in the fourth quarter and in excess of 11% of in 2013. These growth expectations have come down from a few months back, but they still have more room to fall.

Economy in the Week Ahead

While earnings may no longer have much “newsy” value, we do have a bunch of market-moving economic reports on deck as well. The most important economic report coming out this week is the October non-farm payroll report coming out on Friday, but we also have the manufacturing ISM report and other key reports.

For more information and a list of key events and earnings in the week ahead………CLICK HERE…..




Conclusion for the Week Ahead

As was expected, the selling carried over to last week. Despite Friday's mixed close, we may see another push to the downside early in the week.

Even if stocks do bounce this week, the odds of further new correction lows are still high. The intermediate-term analysis suggests we should get a good buying opportunity in the next two to five weeks.

As for new recommendations, the current drop in the precious metals is a buying opportunity. More conservative investors could wait until we get new daily buy signals, which we do not have yet.

The other markets that look interesting are the emerging markets; though wait for a better entry in the China ETFs, which are now overbought. The Vanguard Emerging Markets Viper (VWO) is looking good.

Further Articles Relating to the Week Ahead

1. The Economy and Earnings in the Week Ahead – October 29, 2012

2. The Past Week Stock Market Results – October 29, 2012

3. The Major ETFs in the Week Ahead – October 29, 2012

4. Companies Reporting Earnings in the Week Ahead - October 29, 2012

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