The Stock Market Logs Weekly Loss; Apple Ends at $700!
Wall Street Takes Breather After Two-Week Rally
The Past Week: Ends Flat Despite Spain Hope, S&P Off For Week!
by Ian Harvey
September 22, 2012
Stocks tried to turn higher on Friday, but sold off in late trading to close the week lower. So far, the pullback from the post-Fed rally has been mild, with the major market averages down just slightly from the highs.
The stock market was more active than usual because of “quadruple witching expiration week," the quarterly settlement and expiration of four different types of September equity futures and options contracts. Expiration can lead to greater volume and volatility as players adjust or exercise their derivative positions.
The correction camp seems to be getting a bit more crowded lately, while many of the more outspoken bears, those who can’t make sense of the stock market rally, have become less vocal.
It is a concern that some of the long-term bears have changed their tune. In the past, this has often led to sharp stock market corrections.
Other than the violent drop in crude oil prices that began last Monday, it was not a wild week in the stock market, though crude lost over $6 per barrel.
New concerns surfaced over the looming Greece bailout confrontation. It has yet to be determined who will have to make concessions to ease their debt burden. Further deterioration has taken place in the Greek economy, and leaders are hoping to obtain a two-year extension of their deadline to implement austerity measures.
The Dow Jones industrial average and the benchmark Standard & Poor's 500 index remain close to highs not seen since December 2007.
• 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.
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 November crude-oil contract bounced late in the week, but still closed sharply lower, as it reached the next strong zone of support at $90 to $92.
The key support is at $87.50. It is too early to tell if the current drop is a buying opportunity or not.
The SPDR Gold Trust (GLD) closed the week at its best level since February, and looks ready to challenge the next major resistance in the $174 to $175.50 area.
The daily OBV (not shown) has confirmed the price action, and shows no signs yet of a top. The acceleration on the upside suggests it may soon be time to take some short-term profits in GLD and iShares Gold Trust (IAU).
The chart above shows the performance of GLD and Market Vectors Gold Miners ETF (GDX) going back to the start of 2007. It reveals that GLD is up close to 180%, while GDX is just up 37.8%. There may come a time when the technical action of the miners improves, but they are likely to get hit hard when gold does correct.
Gold settled up $7.80 to $1,778 an ounce on Friday.
Company News and Earnings for the Stock Market in the Past Week
• UnitedHealth Group (UNH) will replace Kraft Foods (KFT) in the Dow Jones Industrial Average after the close on Sept. 21. Kraft is spinning off its North American grocery business.
The change is the Dow's first since June 2009 when General Motors (GM) and Citigroup (C) were replaced by Cisco Systems (CSCO) and Travelers Companies (TRV).
• KB Home (KBH) surprised investors with a fiscal-third-quarter profit and said its revenue backlog rose to a four-year high as a strengthening housing recovery pushed up prices and demand.
KB Home earned 4 cents per share for the third quarter. Analysts on average expected a loss of 16 cents per share. Revenue was up 16% to $424.5 million.
KB Home's results came as housing starts rose 2.3% to an annual rate of 750,000 units.
While that's still about half of the historical average, the rate has jumped 57% since bottoming in March 2009.
• Apple (AAPL) eked out a gain to close above $700 a share as the tech giant's latest iPhone 5 hit stores around the globe, with mobile carriers reporting record demand.
• Meanwhile, Research In Motion (RIMM) tumbled to near nine-year lows after the BlackBerry maker announced service outages in Europe, the Middle East and Africa that lasted several hours.
• Some major industry bellwethers including FedEx (FDX) and Intel (INTC) lowered their outlooks earlier this month, citing a weak global economy.
• Alcoa (AA), which marks the unofficial start to earnings season, is scheduled to report on October 11.
• Among earnings, Darden (DRI) rallied after the parent company of Olive Garden posted earnings that topped estimates and reaffirmed its sales and profit forecast for the year.
Economic News for the Stock Market in the Past Week
On the economic front, the primary concern is the manufacturing sector, as purchasing managers' reports in the Eurozone, Germany, France, and China have all dropped below the 50 level. When these readings drop below 50, it indicates a contraction in business activity.
China’s did improve from the prior month, and the strengthening in the yuan last week was taken by some that their economy may be finally bottoming.
Last week’s Philadelphia Fed Survey surprised many. It rose to -1.9, well above the consensus forecast of -4.0. New orders were strong, the first positive reading since last May.
Overall, the housing data was strong. Though housing starts slipped a bit, existing home sales rose sharply again in August, to the highest rate since May 2010.
The leading indicators were also released last week by the Conference Board, and were down 0.1%. The LEI is a composite index of ten economic indicators.
The conclusion of the Conference Board was that “the pace of growth is unlikely to change much in the coming months.” Their long-term chart is still in its major uptrend, and it would take many months before it could top out.
‘The Index of Leading Economic Indicators (LEI)’ is intended to predict future economic activity. Typically, three consecutive monthly LEI changes in the same direction suggest a turning point in the economy. For example, consecutive negative readings would indicate a possible recession.
It is published monthly by The Conference Board and is considered an important index of future movements. When the index rises, analysts expect the stock market to continue to rise, and when it falls, they anticipate a fall in the markets. The components of the index change from time to time, but they generally include interest rates, price movements on the S&P 500, and the change in money supply. It is important to note that the index is not entirely accurate: it has, in the past, indicated downturns that never actually happened.
Overseas Influences on the Stock Market
The Bundesbank has continued to criticize the 'European Central Bank - ECB' bond-buying program, and the fact that their new headquarters is now $450 million over budget has not helped their image. The (IMF’s) board is also reported to be displeased with its large exposure to Greek debt, which may make further concessions difficult.
Outside funding is also tough. Last week, 12-week Greek T-bills were yielding 4.31%. On the plus side, Spain’s bond action went well, as they sold $6.26 billion worth of bonds.
Also, European Union authorities have been working behind the scenes to pave the way for a new Spanish rescue program and unlimited bond buying by the European Central Bank, the Financial Times said. The goal is to help Madrid craft an economic reform program that will be unveiled in the week ahead.
According to officials involved in the discussions, talks between the Spanish government and the European Commission are focusing on measures that would be demanded by international lenders as part of a new rescue program, ensuring they are in place before a bailout is formally requested.
The big question is, of course, if the conditions for any loans would be palatable in Spain, which already has Europe's highest unemployment rate -- 25.1%.
The NYSE Composite in the Past Week
The daily chart of the NYSE Composite shows that it dropped back to test the April highs (line a), and then tried to turn higher Friday. There is stronger support at 8,245 and the 20-day ’Exponential Moving Average’ (EMA), which is about 1.6% below Friday’s close.
The longer-term analysis of the NYSE advance/decline (A/D) lines continues to be positive for the intermediate term. On a short-term basis, the A/D line turned up Friday, and a move above the previous high would signal another sharp push to the upside.
The A/D line has support at the uptrend (line e) and the rising WMA.
Sentiment in the Past Week
Many individual investors are still not convinced about the stock market rally. Only 37.5% are bullish, while the financial newsletter writers have risen to 54.2% bullish, which continues to be uncomfortably high. Mutual fund flows indicate that the majority of the money is still flowing into bonds, not stocks.
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 the stock market last week.
1. The Economy and Earnings in the Week Ahead – September 24, 2012
2. The Week Ahead in the Stock Market – 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