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The Week Ahead in the Stock Market
January 02, 2012



In the Week Ahead the Markets to Focus on US Economy as 2012 Begins!

Twelve Months Later, Stocks Still Searching for Direction!

Unstable Europe -- Political Gridlock -- Volatile Markets!

Leadership from small- and mid-cap stocks needed to steady the market!



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happy new year 2012

A volatile 2011 may lead to a repeat performance in 2012 if the investor allows this to dominate their approach to profit making! Investors may see some of that volatility in the week ahead.

Markets start the New Year with a fresh wave of reports on the U.S. economy and that could temporarily help turn the focus away from Europe.

Important reports are due on jobs, manufacturing and auto sales in the week ahead.

As Wall Street prepares for another abbreviated holiday week, the harsh reality is that stocks are still staring up at formidable resistance levels. So, is 2012 shaping up to be a 52-week-long repeat of 2011 for investors -- or can the SPX finally make some serious headway on the charts in the New Year?

In the week ahead, it is recommended that you keep an eye on small- and mid-cap stocks as they face off with a few unconventional, but historically significant, moving averages.

The S&P 500, a measure of the biggest U.S. companies' market value, spent much of the year getting pushed up and down, flummoxing shorts and longs - and scaring investors, particularly the smaller investor, away from stocks. However, in the end, it finished about where it started.

But the S&P 500's tepid performance was encouraging, compared with other world equity markets -- the United States may still be seen as a safe haven.

It would be an excellent 2012 -- if the Standard & Poor's 500 Index (SPX) rises by 10% to 11% -- by next December but the odds are certainly favoring a challenging year at the least.

It is great that 2011 ended fairly well, with a strong rally in October and an OK rally in December. There were certainly some companies that did well -- McDonald's (MCD) gained 31% -- Apple (AAPL) rose 25% -- Humana (HUM) jumped 60% -- but 2011 was a challenge.

However, on the other side of the market coin -- Netflix (NFLX) hit $298.73 on July 13 but then dropped more than 75% by the end of the year -- Bank of America (BAC) fell 59% -- American Airlines parent AMR (AMR) sought bankruptcy protection and ended the year delisted from the New York Stock Exchange -- Zynga (ZNGA) went public at $10 on Dec. 15 and hasn't closed that high since -- Bank stocks, especially big-bank stocks, have been a let-down!

So, once again, we have the age-old-question – which way will the markets trade? Obviously it would be nice for the investor if the markets rallied but many more are predicting that the market could go "violently sideways," at least for the first half of the year.

With a spiraling debt crisis in Europe, political upheaval around the world, and crumbling creditworthiness in major industrial nations, 2011 was a tough year to know where to invest. 2012 is not likely to offer much respite; therefore the play will most likely be sideways.

For every rally built on improving economic figures in 2011, sell-offs were never far away on worries the European debt crisis would eventually drag the continent into a recession and perhaps the United States as well. That could continue in 2012.

China and other fast-growing emerging markets can no longer be leaned on as those economies slow. In 2011's last half, the poorest-performing sectors outside of banks were most connected to global growth - materials, energy and industrial companies.

A growing realization that the global economy is unstable led to a great deal of uncertainty which fed substantial volatility in 2011. Despite the S&P's flat performance; there were 66 trading days when stocks moved in a 2 percent range. In 2008, when Lehman Brothers collapsed during a global financial crisis, there were more than 130 trading days when stocks swung that much. But that led to a flight from equities by retail investors.

U.S. equity funds had outflows in every month since May. More than $483 billion left U.S. mutual funds in 2011 through the year's second-to-last week, even though the U.S. market outperformed foreign stocks late in the game.

The Past Week

Despite a remarkably eventful year, stocks crossed the finish line for 2011 within striking distance of their 2010 closing levels. With the S&P 500 Index (SPX) perched just fractionally south of where it started last January, it's best to write off 2011 as one long, crazy roller-coaster ride based on European debt and Congressional stonewalling.

The Dow Jones Industrial Averages (DJIA) ended the year with a 5.5 percent gain at 12,217, but the broader S&P 500 and Nasdaq (COMP) registered their first annual declines since 2008. The S&P’s loss was very small, at 0.04 of a point, that it registered flat at 1257.60. The Nasdaq slumped 1.8 percent for the year to 2605.

On a positive, the S&P and Dow, both up more than 11 percent, had their best quarters since 2009.

The Markets Ending December 30, 2011

markets ending 123011



The Week Ahead

Some of the challenges will become apparent in the week ahead when financial markets re-open after the New Year's weekend and Iowa holds its presidential caucuses.

There are important economic reports, including the always-important monthly jobs report, due Friday. The market week begins Tuesday with December's report on manufacturing from the Institute for Supply Management and reports on factory orders and December auto sales on Wednesday.

On Thursday, many of the largest retailers will report December sales, the first time anyone will see if the holiday shopping season was a success or a bust. Weak reports will cast a pall on the markets. Watch Target (TGT), Costco Wholesale (COST), Nordstrom (JWN) and Macy's (M).

All that will help set up the big questions for investors in 2012 -- and may explain if the markets are going to trade "violently sideways" or not!

It's important to note, however, that if the markets trade violently sideways that this scenario may last until at least June, and then be set up for a big second-half rally.

The challenges of the year ahead will appear almost immediately, even in the week ahead, as investors watch Europe’s sovereign debt auctions and a meeting between the leaders of France and Germany on Jan. 9. Europe’s failure to contain its debt crisis spilled into financial markets in a big way in 2011, and that and slowing growth, pressured world stock markets, many of which suffered double digit losses.

The U.S. data in the week ahead will be a test for markets because generally improving U.S. data has been a bright spot. The economy, however, is widely expected to slow from the pace of 3 percent plus growth forecast for the fourth quarter.

Goldman Sachs economists, in a note Friday, said they do not expects the fourth quarter’s growth rate to continue and that rising oil prices could act as a brake on growth, as could fiscal policy and Europe. Europe’s impact alone could take 1 percentage point off of U.S. growth in 2012, they said.

But on the other hand, Goldman and some other economists see housing stabilizing and expect that it may bottom in 2012. There is also increasing optimism that companies and small businesses are getting ready to hire again. Goldman economists also expect the Fed to pursue another round of quantitative easing.

But the first big focus of the week ahead will be the nonfarm payrolls report, expected to show 150,000 jobs were created in December.

It is apparent that some of the factors that squeezed U.S. growth this year — higher gasoline prices and the impact of the Japanese earth quake and tsunami — have eased and that should help the hiring picture. The CBOE Market Volatility Index (VIX), generally seen as a measure of fear, was at 23.40 Friday but had been above 40 during the summer months.

December’s employment report is the most important, but there are also critical December sales reports from chain stores and auto makers. There are also ISM surveys for manufacturing and services sectors, which gives a good look at business activity and related hiring.

A Technical Viewpoint –' SPX to Capture Its 200-Day Trendline in the Week Ahead?'

"... a dash for equities is possible in the upcoming week, as underperforming fund managers chase stocks for fear of being left behind as the year quickly winds down, but the risk to the bulls is the 'obvious' taking place. In other words -- trendlines, moving averages and year-to-date breakeven points aside -- one could easily see how a plain-vanilla technician would view last week's rally as a shorting opportunity, with the SPX near the top of its range and the VIX at five-month lows."
- The Week Ahead in the Stock Market - December 26, 2011

The last holiday-shortened week of 2011 could be viewed as disappointing for bulls and bears alike. The "obvious" scenario mentioned above looked like it was about to take hold on Wednesday, as the S&P 500 Index (SPX - 1,257.60) dropped by 16 points on worries about an Italian bond auction the following day. But after the debt sale wasn't as bad as equity traders feared, the SPX rallied 14 points in Thursday's trading, nearly wiping out Wednesday's losses. In fact, last week's trading was essentially a microcosm for 2011, with a lot of drama in terms of sharp rallies and sharp declines. But in the end, just as the SPX finished the year virtually unchanged, the past four days' worth of thin trading resulted in a flat week, too.

As we look to 2012 in the week ahead, it appears the 1,260 area will again play an important role from a technical perspective. With the SPX closing 2011 at 1,257.60 -- after closing 2010 at 1,257.64 -- you can expect the index to continue to dance around its 2010 (and now, 2011) year-to-date breakeven level for the next few weeks. Plus, the popular 200-day moving average, currently situated at 1,258.82, hovers just above the year-end close. The SPX has failed to experience more than two consecutive closes above its 200-day moving average since this trendline was breached in late July, but a positive start to the New Year, particularly in the week ahead, could reverse this trend.

As a follow-up to last week, an encouraging sign for the bulls is the SPX trading above a trendline connecting lower highs in place since early July, as the CBOE Market Volatility Index (VIX - 23.40) continues to trade south of 24, which marks the 2011 "half high."

Daily Chart of SPX since May 2011
With 200-Day Moving Average

010212-SPX since June 2011



Discouraging for market bulls, however, is that leadership continues to be contained in the large-cap stocks. The S&P MidCap 400 Index (MID - 879.16) and Russell 2000 Index (RUT - 740.92) finished 2011 in negative territory, and are still trading below resistance at 900-920 and 750-770, respectively. It seems that if equities are to get anything done on the upside, leadership will come from the small- and mid-cap groups. Therefore, the RUT must break out above its pre-"flash crash" high of 750, and its first half of 2011 low of 770, while the MID must bust through its 2007 peak and first half of 2011 lows in the 900-920 area, before bulls can reasonably expect the shorts to feel pain and perhaps force some covering activity.

For those who like to follow uncommon moving averages that have shown importance in the past, you will find it of interest that the MID and RUT are currently fighting to overtake their 160-day moving averages, situated at 889.98 and 744.05, respectively. These trendlines capped a rally in October, and a breakout above these resistance levels would likely have bullish short-term implications for a play up to at least 920 on the MID, and 770 on the RUT, in a season favorable for small caps.

010212-MID since March, 2007



Daily Chart of RUT since January 2010
With 160-Day Moving Average

010212-RUT since Jan 2010



We head into 2012 with a mixed technical backdrop. The SPX is docked at a key resistance level, after trading above resistance during the past couple of weeks. Meanwhile, small- and mid-cap benchmarks linger just below major resistance zones of their own -- and, unlike the SPX, have not traded above these technical sticking points lately. While trading was thin last week, bulls might find it slightly encouraging that the market didn't experience a major smack-down, which has tended to occur on previous trips to current levels.

The January Effect in the Week Ahead

The key to the performance of the stock market is in the first five days of the year, usually a positive when new funds come into the market.

An up first week ahead in the market usually signals an up January and as goes January, so goes the year. Since 1945, whenever the market has been up in January it has been up for the entire year, 88 percent of the time. The market, for the record, was higher in January 2011.

The wild ups and downs of the stock market this past year made it particularly difficult for strategists who forecast year-end targets for the S&P 500.

Many U.S. equity strategists expect stocks to perform better in 2012 and have set higher targets for the S&P 500. The presidential election could be a factor in 2012, and the impact of Europe’s economic downturn on U.S. companies doing business there may also be a factor. Companies may also see margin pressure since commodities prices have come down.

The domestic economy looks relatively healthy, and relatively is a key word, for several reasons:-

• Credit conditions in the U.S. remain very favorable. The Fed has pretty much told us they won’t be raising rates for a while. They‘ve anchored rates at a low point. Corporates have great access to borrowing money at very attractive costs. Credit conditions are normally the best leading indicator of economic activity. They lead economic activity by about nine months.

• The Dow has lived up to its track record of scoring a gain in the third year of a presidential term, as it has since 1939. In the fourth year, it’s generally higher for an average gain of 4.78 percent.

• The super low yields in the Treasury market are another reason stocks could attract new money in the new year, even in the week ahead. On Friday, the 10 year was yielding 1.878 percent.

• Also in the past week, the dollar gained 0.7 percent against the euro. The euro was down 3.2 percent for the last year, and analysts expect it to have a turbulent 2012, maybe even in the week ahead.

• Oil prices, rising recently on a renewed focus on geopolitical tensions, slipped 0.85 percent to $98.83 per barrel. But Nymex crude was up 8.2 percent. Natural gas, meanwhile, was down 5 percent in the past week, falling below $3 per million BTU to $2.9890, its lowest price since September 2009. Natural gas is down 32 percent for the year.

• Energy analyst ‘s view the $3 level as a key psychological level for natural gas.

Earnings in the Week Ahead

Thursday is the main day in the week ahead for earnings, when the key reports are from Family Dollar Stores (FDO) and seed producer Monsanto (MON). The former will offer a view of U.S. consumers. The latter will tell us a bit about what the global economy is willing to pay for a basic food component -- animal feed.

Then, you'll be left to ponder what fourth-quarter earnings will look like. The basic view is that earnings may disappoint in the week ahead.

Wall Street analysts are expecting an 8.5% gain in fourth-quarter profits. That's down from a consensus for 15% growth in October. The fourth-quarter earnings season will start after the close Jan. 9, when aluminum giant Alcoa (AA) reports results.

The Jobs Report will Climax a big Week Ahead

The big report will come Friday with the December report on unemployment and nonfarm payrolls. The consensus estimates are for the unemployment rate to rise to 8.7% from 8.6% in November.

Nonfarm payrolls are expected to rise by about 150,000, after a bump up of 120,000 in November. That reflects strong reports on manufacturing during December. But don't expect any changes in wages.

The Key Events in the Week Ahead: More Housing Data on the Post-Christmas Docket

Monday

• Markets Closed

Tuesday

• 1000 am - ISM manufacturing (Dec)

• 1000 am - Construction spending (Nov)

• 0200 pm - FOMC minutes

Wednesday

• December monthly auto sales released by auto industry

• 1000 am - Factory orders (Nov)

Thursday

• December monthly chain store sales

• 0815 am - ADP employment (Dec)

• 0830 am - Jobless claims

• 1000 am - ISM nonmanufacturing (Dec)

Friday

• 0830 am - Employment (Dec)

• 1020 am - Boston Fed President Eric Rosengren speaks in Hartford, Conn.

• 1240 pm - Fed Gov. Elizabeth Duke speaks in Richmond, Va. on the economy and housing

• 0100 pm - Fed Gov. Sarah Raskin speaks in Baltimore on community banking supervision

Conclusion for the Week Ahead

The sentiment backdrop favors the bulls, after a year in which retail folks pulled $135 billion from equity mutual funds and short interest grew. Nonetheless, the SPX was flat for the year, outperforming many global equity benchmarks. The implication here is that domestic stocks could be the beneficiary of cash that comes out of emerging markets and back into the U.S., as investors evaluate their portfolios at year-end and find the risk wasn't worth the reward in other world markets.

On the fundamental front, corporate buyback activity remains brisk (buyback activity in the third quarter was 48% above last year's level), the consumer remains alive and well, with holiday sales surpassing expectations, and recent housing data has come in better than expected -- giving reason to believe that economic growth could surpass expectations, as skeptics fret over slowing growth and declining margins.

Therefore the bullish camp for 2012 is to be favored, given a sentiment backdrop that favors the bulls, while noting the risk of major benchmarks trading at or just below technical resistance. Another risk pertains to financial stocks, which have significantly underperformed amid ongoing analyst fanfare. There appears to be bullish opportunities in the utilities, retail and restaurant, and homebuilding groups. You should also keep a portion of your capital in outperforming, but underappreciated, Treasury bonds.

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