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The Week Ahead in the Stock Market
January 16, 2012



Week Ahead for Investors: The 3 E's and Housing!

Wall Street: It's earnings versus Europe for stocks!

U.S. Assets Starting to Move from Europe?

The technical backdrop continues to improve for small- and mid-cap equities!



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week ahead

The week ahead may tell investors if the rally has the strength to withstand the stresses of earnings and economic reports and the constant headache of Europe's debt crisis.

Stock investors will return to a tug of war between signs of domestic strength and overseas concerns in the week ahead as a batch of critical earnings reports, including reports from Goldman Sachs, eBay, Google and Microsoft, which looks to add credence to the idea the economy is improving, while credit rating downgrades in Europe will keep that region's difficulties in view.

So therefore, expect another roller-coaster week ahead. Thanks to the Martin Luther King holiday that will close U.S. markets, their European counterparts will get a chance Monday to react to Friday's downgrades of the debt of nine countries, including France, Italy, Spain and Portugal.

Equities have recently undergone a decoupling with respect to Europe's sovereign debt crisis as signs of progress in the euro zone, along with improving U.S. data, have pushed Wall Street higher on improved growth prospects. Financials have been a beneficiary of that rising tide, with Bank of America up 22 percent since the start of the year.

A housing rebound seems to be on the horizon and there are three reports in the week ahead which will help clarify whether the housing market is starting to mend.

The Past Week

The market ended Friday with its second weekly gain in a row. The Dow Jones industrials (DJIA) gained 0.5%, with the Standard & Poor's 500 Index (SPX) up 0.9%, and the Nasdaq Composite Index (COMP) ahead 1.4%.

So far this month, the S&P 500 is up 2.5 percent, while the Dow up 1.7 percent and the Nasdaq is up 4.1 percent.

Traders opted to celebrate the positive rather than dwell on the negative last week, as was obvious with speculators shrugging off Alcoa's (AA) first quarterly loss since early 2010, and instead focusing on the company's top-line beat and encouraging trade data out of China. This pattern was repeated several times throughout the rest of the week, with the major market indexes even paring their Friday losses in spite of credit-rating downgrades within Europe.



The Markets Ending January 13, 2012

markets ending 011312



The Week Ahead

Bank stocks will probably once again be a primary focus, as not only will European issues call the group's profit outlook into question, but many key names report results.

There will be more volatility in the week ahead with tension between earnings and Europe. There will be continuous ups and downs associated with Europe, and while earnings will continue to be relatively good, expect some slowing compared with 2011.

Downgrades could exacerbate the area's difficulties and bring concerns about how they might affect U.S. banks profits back to the forefront. However, the prospect of downgrades has been around for a while, so despite Friday's reaction, everyone was aware of the potential, and the impact was far less then expected, especially as corporate business trends remain strong.

Earnings reports from numerous bellwethers, in the week ahead, could reinforce the growth story. Bank of America Corp (BAC), General Electric Co (GE), Intel Corp (INTC), Goldman Sachs Group Inc (GS) and Microsoft Corp (MSFT) are among the names set to report.

Early reads have supported the idea that better times lie ahead. JPMorgan Chase & Co (JPM) said the domestic economy was strengthening even as its profit fell 23 percent, while Alcoa Inc (AA) rallied earlier in the week after giving a bullish outlook for the aluminum sector.

In the week ahead, when markets will be closed on Monday because of the Martin Luther King holiday, we will also see the release of the New York Fed's January manufacturing data, December readings on inflation from the Producer Price Index and the Consumer Price Index, as well as December housing starts.

Housing

Also, in the week ahead, we will see four reports relating to the health of the housing industry! There is a great deal of uncertainty surrounding housing-related stocks since the market bottomed in early October.

The Philadelphia Housing Sector Index (HGX), which tracks big homebuilders like PulteGroup (PHM), Ryland (RYL) and D.R. Horton (DHI), is up 11% so far in January. That's after falling 31% in the second and third quarters of 2011 and gaining 29.5% in the fourth quarter.

Shares of Home Depot (HD), Lowe's (LOW), Masco (MAS), which makes faucets and cabinets) and paint-maker Sherwin-Williams (SHW) have been rallying strongly since the summer at least. The one exception, which is worth considering: Whirlpool (WHR).

Obviously there appears to be an upward movement in the building industry. Building permits, which are better to study than housing starts, look like they've bottomed. Existing-home sales look like they've bottomed. But the problem with housing is that the great unknown is whether foreclosures are close to getting cleaned out.

You see that in home prices, which are still falling because of the pressure that prices of foreclosed homes exert on many markets, such as Florida, Arizona, California and Nevada. In Ohio, single-family home prices fell 7.2% in November. Take out the distressed-property sales, and prices were up 0.3%.

The data suggest that housing activity was better in the fall than the summer on a relative basis. (Home sales typically peak in June or July.) But we're still dealing with record-low levels of activity. Existing-home sales in November were off nearly 40% from their peak in 2005. Building permits are still off nearly 70% from their bloated high in mid-2005.

If there are gains on all these reports, that's a signal something is happening. You'll see it in increased single-family permits and starts and home sales.

It could well be that multifamily permits are telling us a rebound is forming. They typically start to expand nine months to a year before single-family starts. That seems to be occurring now.

This week brings four reports that will help clarify the situation:

• The Mortgage Bankers Association's weekly survey on mortgage applications on Tuesday. This index perked up a little in the week ended Jan. 6. It's been flat or declining, a reflection of consumer confidence.

• The National Association of Home Builders' confidence index on Wednesday. This should show some increasing confidence among homebuilders.

• The Commerce Department's December report on housing starts and building permits on Thursday. Expect a small gain.

• The National Association of Realtors' December report on existing-home sales on Friday. Expect a small gain.

A Technical Viewpoint for the Week Ahead –'

Stocks Improving, Despite European Woes'

"The S&P 400 MidCap Index (MID - 891.49) remains stuck below the key 900-920 range -- an area that marks the 2007 peak, 2011 breakeven and first-half 2011 lows, as well as its 200-day moving average. But all is not so bad in mid-cap land, as the MID closed the week above its 160-day moving average, which had capped rallies in October and December. The close above this trendline paves the way for a move into the 910-920 area in the coming months... "

"The Russell 2000 Index (RUT - 749.71) finally made a run at 750, its peak ahead of the 2010 "flash crash." The RUT ventured above 750 last week, but comes into the week trading slightly below this level. The index did close above its 160-day moving average at 742.09, after this trendline had capped a late-October advance ... sideline cash could be the catalyst for a breakout above "neckline" resistance in the 750-770 area, as there are a couple of potentially bullish inverse head-and-shoulders patterns developing that would push the index up to its all-time highs in the 850 area."
- The Week Ahead in the Stock Market - January 09, 2012

With both U.S. equities and Treasury bonds marching higher, despite signs of recession in Europe and debt downgrades, are domestic assets beginning to decouple from troubles in Europe? And/or, are market participants viewing rating-agency actions as belated, with equities significantly paring Friday's losses, regardless of news that Standard & Poor's downgraded France's triple-A credit rating amid rumors that other euro-zone nations could be next? For what it's worth, since the first day of trading after S&P downgraded U.S. debt in early August, the S&P 500 Index (SPX) has rallied 7.5%, while Treasury bonds -- as measured by the iShares Trust Barclays 20+ Year Treasury Bond Fund (TLT) -- have rallied an impressive 14.5%. That said, Friday's post-close news that S&P downgraded Spain, Italy, Austria, Portugal, Cyprus, and Slovakia, in addition to putting Finland on credit watch for downgrade, could make for an interesting open on Tuesday morning.

Nonetheless, U.S. equities managed to rally again last week, despite weaker-than-expected retail sales and jobless claims data. The price action of late should be viewed positively by bulls, as equities advanced amid headlines that could have easily pushed stocks lower. In fact, the technical backdrop continues to improve for small- and mid-cap equities; an area of the market which must display leadership, and has indeed been the case since late September.

For example, the S&P 400 MidCap Index (MID – 906.59) closed above the 900 mark for the first time since early November, and also closed above its 200-day and 320-day moving averages. These moving averages are situated at 906.35 and 905.42, respectively. The 200-day moving average has had some significance in the past, acting as support in August 2010 and capping rallies in September and December 2011. But work remains to be done, as the 910 area marks a 61.8% Fibonacci retracement of last year's high and low point, in addition to its October 2011 high, while the 920-925 area lingers above, which is the site of the 2007 peak.

MID since Sept 2010


The Russell 2000 Index (RUT – 764.20) made some significant headway this past week too, closing above the 2010 pre-"flash crash" high of 750 for the first time since late October. Additionally, the RUT closed above its 200-day moving average for the first time since late July, or about a week prior to the downgrade of U.S. debt. While the close above 750 is encouraging, the RUT, like the MID, is still facing potential overhead resistance. For example, a 61.8% Fibonacci retracement of the 2011 RUT peak and trough is right at current levels, while the 2011 first-half lows linger just above, at 775. But as mentioned last week, a breakout above this resistance would complete a bullish inverse "head and shoulders" pattern on a daily chart, even though some technicians were betting on the potential for a bearish "head and shoulders" formation to develop on a longer-term chart.

So, who are the buyers? As retail players continue to flee equity funds, it appears institutions and hedge funds are in accumulation mode. These market participants drove stocks higher from the March 2009 bottom, and signs suggest they are in the early stages of accumulation mode again, after moving into an underweight position in the second half of 2011. For example, evidence of accumulation is in the options market, where we continue to see more call buying than put buying on CBOE Market Volatility Index (VIX) futures. Fund managers will buy VIX calls to hedge long equity positions they are accumulating. In addition, fund managers are buying more put options relative to call options on broad-based equity exchange-traded funds that we follow, sending the combined buy-to-open put/call volume ratio higher from an extremely low level -- another sign of hedging. Plus, bullish price action is usually preceded by the ratio's turn higher from an extremely low level. The lower this ratio, the more underweight hedge-fund participants likely is which means there is plenty of sideline cash to fuel a rally in the week ahead.

20 day buy-to-open ratio-QQQ/SPY/IWM


In conclusion, technical resistance again lies just overhead, with the SPX knocking on the door of the round-number 1,300 level, so a short-term pullback or hesitation wouldn't be surprising in the week ahead. But, the sentiment backdrop continues to favor the bulls, as there is plenty of sideline cash and short-covering potential to push equity indexes through resistance.

The Key Events in the Week Ahead: Banks and Big Tech Earnings, Inflation and Manufacturing

The week ahead begins the acceleration of earnings reports for the fourth quarter.

Here is a brief list of some of the key events in the week ahead. All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.

Monday

• The market is closed in observance of Martin Luther King, Jr. Day.

Tuesday

Earnings: Citigroup, TD Ameritrade (AMTD), Wells Fargo (WFC). The key is whether problem loan rates, particularly in home loans, is coming down. JPMorgan Chase (JPM) suggested Friday they were.

Also Citigroup (C ), Forest Laboratories (FRX), McMoRan Exploration (MMR), Cree (CREE), and Linear Technology (LLTC) to report.

Economy:

Empire Manufacturing Index for January, from the Federal Reserve Bank of New York. Look for continued gains from December.

Wednesday

Earnings: Goldman Sachs (GS), Northern Trust (NTRS), State Street (STT), eBay (EBAY) and F5 Networks (FFIV). The latter is a big player in cloud computing. Goldman Sachs will probably show weak earnings because of reduced trading and investment banking revenue. And look for its exposure to Europe. Also reporting are US Bancorp (USB), Bank of New York Mellon (BK), PNC Financial (PNC) and Fastenal (FAST).

Economy:

Producer Price Index (PPI) for December, from the Labor Department. This should show few inflation pressures.

Industrial production and capacity utilization for December, from the Commerce Department. Disruptions last fall caused by Thailand flooding that damaged electronics plants should be clearing up. But utilities may be weak because of abnormally warm weather in December.

Thursday

Earnings: Advanced Micro Devices (AMD), American Express (AXP), Bank of America (BAC), Southeastern banking company BB&T Corp. (BBT), Google, IBM (IBM ), Intel (INTC -), Morgan Stanley (MS), Southwest Airlines (LUV), Union Pacific (UNP), Microsoft (MSFT), Intel (INTC), Google (GOOG), Southwest Airlines (LUV), Intuitive Surgical (ISRG) and BlackRock (BLK). Like Goldman Sachs, Morgan Stanley has suffered from reduced trading and investment-banking business. It also has been combating worries about Europe. Bank of America has lots of problems. Watch what it says about its troubled mortgage operations.

Economy:

• Philly Fed manufacturing Index for January, from the Federal Reserve Bank of Philadelphia. Like the Empire index, look for continued gains from December.

• Initial jobless claims

• Monthly housing starts and building permits

• December's consumer price index (CPI) and core CPI.

Friday

Earnings: Finally, the earnings calendar concludes with the latest quarterly results from General Electric (GE), Fifth Third Bancorp (FITB), Comerica (CMA), Schlumberger (SLB), SunTrust Banks (STI), and Parker Hannifin (PH).

Economy:

• Existing home sales.

Conclusion for the Week Ahead

When the week ahead is done, investors will know a lot more in regard to the markets future direction:

• If the banking system can withstand Europe!

• If the market has some gains ahead of it!

• Whether tensions with Iran will escalate into something dangerous!

• Whether the housing rebound is real!

However, at this point in time, market participants looking for signs of strength in the week ahead don't have to look far. Data has been bullish lately, including Friday's consumer sentiment reading at an eight-month high that sharply exceeded what was anticipated.

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