The Week Ahead in the Stock Market
January 23, 2012

Week Ahead: The Key will be Apple and the Fed

Wall Street: Economy Could Steer Stocks with Europe taking a Back-seat!

Sentiment and VIX Call Volume!

Large- and small-cap stocks alike ended the week north of significant chart levels – NOW WHAT?


week ahead

The Fed gets top billing in the week ahead, but barring any surprises, the steady wave of corporate earnings reports, such as Apple, Boeing, McDonald's, Starbucks and Chevron, and important economic data could be the real driver for stocks. Friday's GDP report will show how far the economy has come.

There are a dozen Dow 30 companies and about a quarter of the S&P 500 companies reporting in the week ahead, in industries ranging from pharmaceuticals to airlines to energy. Apple (AAPL), Boeing (BA), McDonald’s (MCD) and Procter & Gamble (PG) are among the more significant of those reporting.

Fourth-quarter GDP is reported Friday and is expected to come in around 3 percent, which would be the fastest pace since the second quarter of 2010.

Europe will also remain of interest, as investors wait for a deal between Greece’s government and private sector creditors. European finance ministers meet Monday and Tuesday.

The Past Week

It was a winning week for stocks, with Wall Street recovering nicely from Standard & Poor's downgrade tour of the euro zone. Despite the agency's words of warning, France, Germany, and Spain all conducted bond auctions without a hitch last week. Not even negotiations over restructuring Greek debt.

Chinese growth in the fourth quarter was better than expected. There was decent news on the domestic economy, and pleasant earnings surprises from Bank of America (BAC), IBM (IBM) and oil services giant Schlumberger (SLB).

As a result, the major equity indexes soared past significant technical sticking points with apparent ease, and the Dow wrapped up the week at its highest level since late July... just ahead of another memorable research note from S&P.

The S&P 500, a broad measure of the market valuation of the biggest U.S. publicly traded companies, is up 20 percent from its October closing low. It keeps climbing on a mixed bag of fourth-quarter earnings, improving U.S. economic data, and easing credit conditions in Europe. It now stands at its highest level since early last August.

The CBOE Market Volatility Index (VIX), a measure of what investors are paying to protect themselves against the risk of losses, is at its lowest level in seven months.

The market's gains last week were almost stealthy. There were no huge rallies, although the Dow twice ended with gains of nearly 100 points.

Stocks in the past week gained, with the Dow Jones industrials (DJIA) adding 2.4 percent to 12,720, and the Standard & Poor's 500 Index (SPX) rising 2 percent to 1315. The Nasdaq Composite Index (COMP) gained 2.9 percent to 2786.

The Dow is up 4.1 percent for the year so far, and the S&P is up 4.6 percent, the best mid-January performance since 1997. The Nasdaq, is up nearly 7% for the month.

The U.S. stock market is up better than 20% since its intraday lows on Oct. 3, 2011. The economy has hardly been so robust. The jobs market is starting to gain some traction, thanks in large part to auto manufacturing.

The Markets Ending January 20, 2012

markets 012012

The Week Ahead

The week ahead offers hazards but a bullish curve will definitely be apparent. The Federal Reserve, which meets Tuesday and Wednesday, will make history when it discloses its outlook on interest rates for the first time. The government will report on new-home sales for December and fourth-quarter economic growth. And a total of 117 components of the Standard & Poor's 500 Index (SPX) will report quarterly results in the week ahead.

The Fed in the Week Ahead

In the week's most important economic event, the Federal Open Market Committee, the Fed's rate-making body, will meet Tuesday and Wednesday. There won't be any change in interest rates in the short term. What will be of interest are two things:

• How the central bank releases its guesses on when it may start to raise interest rates. This is something entirely new for the Fed. For years, it moved interest rates up or down and didn't tell anyone. This new policy may roil bond markets until everyone gets used to it.

• Will the Fed engage in another round of quantitative easing -- buying Treasury securities to boost the economy? The market will continue to debate whether the Fed is going to do a third round of quantitative easing through further asset purchases, but most Fed watchers do not expect it to be announced at this meeting. Many believe the Fed will hold the door open for more easing, but not commit to it until at least the second quarter, if it does take that step.

The Fed will announce its rate decision at 12:30 p.m. ET Wednesday, and Chairman Ben Bernanke will hold a news conference at 2:15 p.m. ET.

Europe and the Week Ahead

Europe will also remain of interest in the week ahead, as investors wait for a deal between Greece’s government and private sector creditors. European finance ministers meet Monday and Tuesday.

However, it feels as if Europe continues to slip into the background as a driver of markets – we can only hope!

The move in 10-year yield above 2 percent, off its 2012 low of 1.83 percent earlier in the week, reflects the easing of fears about Europe, as Greece moved Friday toward a deal on debt restructuring with its private creditors.

Europe is still important to look at and follow as it may become an issue for markets again in March as European Union leaders adopt expected changes in their treaty to reflect greater fiscal integration and oversight.

A Technical Viewpoint for the Week Ahead –'Resistance Broken by a Rally from RUT and MID'

"...the technical backdrop continues to improve for small- and mid-cap equities, an area of the market we believe must display leadership, which has indeed been the case since late September. For example, the S&P 400 MidCap Index (MID) closed above the 900 mark for the first time since early November... 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...

"The Russell 2000 Index (RUT) 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... 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... 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."
- The Week Ahead in the Stock Market - January 16, 2012

During the past few weeks, much has been discussed about the continually improving technical backdrop of various broad-market indexes. Last week, this scenario continued, as the S&P MidCap 400 Index (MID - 930.62) closed Friday slightly above the 930 mark, and a shade above its absolute highs in 2007. Admittedly, bulls would like to see more than a four-point move above this 1997 apex -- but they can take some comfort in the fact that there wasn't a major rejection in this area during last week's ascent, as it was the first time this level was revisited since August, when a break below it drove furious selling. Previously, 930 had acted as support in the first half of 2011. The index continues to rally sharply from its 80-month moving average, touched back in October and should do in the week ahead.

Daily Chart of MID since January 1998
With 80-Month Moving Average

MID since 1998

Additionally, the Russell 2000 Index (RUT - 784.62) rallied above some potential areas of resistance. For example, the index climbed above its 320-day moving average, which is also the site of a 61.8% Fibonacci retracement of last year's high and low, plus the site of the pre-Lehman Brothers peak in 2008. Moreover, the RUT rallied above its 2011 first-half lows in the 675 area.

RUT since 2007

As discussed previously, the RUT's breakout above the neckline of an inverse "head and shoulders" formation now targets a move to the 850 area, which would push the index up to its 2011 highs. With hedge funds and active investment managers accumulating stocks, but not yet fully invested, such a target is achievable in the week ahead.

Meanwhile, the S&P 500 Index (SPX - 1,315.38) advanced above the 1,300 mark for the first time since July. It is now sitting just below the 1,320 area, where it was trading immediately ahead of the financial crisis in 2008. The SPX made a brief move above this level last year, but tended to encounter resistance in the 1,340-1,350 zones.

Finally, the PowerShares QQQ Trust (QQQ - 59.77) comes into the week just below major resistance in the 60 area. The 60 level is important, as it represents half the QQQ's March 2000 all-time high at 120. The 59-60 area has marked peaks in the QQQ since February 2011. The good news is, the exchange-traded fund (ETF) took out its 2011 peak by the slightest of margins on Friday to trade at its highest level since February 2001, as Microsoft (MSFT) and (INTC) rallied on well-received earnings news, even as Google (GOOG) plummeted post-earnings.

As mentioned last week, it appears hedge funds and institutions are shifting into accumulation mode from underweight positions, and this is when the market has tended to enjoy its best days. This activity is evidenced by the continued increase in call buying relative to put buying on CBOE Market Volatility Index (VIX - 18.28) futures, as fund managers purchase VIX calls to hedge long equity positions they are accumulating. In addition, fund managers are still purchasing a greater number of puts than calls on broad-based equity ETFs, in another sign of hedging activity, and should continue to do so in the week ahead.

It is quite noticeable, however, that the ratio of call buying to put buying on VIX futures, smoothed by a 20-day moving average (first chart below), is approaching highs at which the ratio has peaked and preceded market tops. However, upon further research, it's worth noting that the total buy-to-open option volume on VIX futures (second chart below) during the past 20 days is extremely small relative to the volume at past peaks last year. In fact, buy-to-open option volume on VIX futures is currently about half its 2011 peak, even as the call/put ratio approaches its highs. This would suggest that, while hedge fund activity has become more bullish of late, there are still a number of deep-pocketed players sitting on the sidelines.

VIX-012312- 20 day ratio


Therefore, the landscape remains bullish amid an improving technical backdrop. Plus, there is plenty of backing to push the market higher in the week ahead, as it is apparent that hedge funds are still underweight, and total short interest is considerably above year-ago levels.

The Key Events in the Week Ahead: Fed Meeting, Fourth-Quarter GDP in Focus

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.


Earnings: Halliburton (HAL), VMware (VMW), Western Digital (WDC), Texas Instruments (TXN), Zions Bancorp (ZION), Kansas City Southern (KSU), and CSX Corp. (CSX).

Halliburton is important to oil-and-gas stocks. It's up nearly 5% this month after falling 15% in 2011. TI is one of the biggest suppliers of chips used in cellphones.


• There are no major economic reports scheduled for Monday.


Earnings: McDonald's (MCD), Johnson & Johnson (JNJ), DuPont (DD), Travelers (TRV), Verizon Communications (VZ), Apple (AAPL), Yahoo (YHOO), Coach (COH), EMC Corp. (EMC), Harley-Davidson (HOG), and AK Steel (AKS).


• 10:00 a.m. Richmond Fed Survey

• 1:00 p.m. 2-year note auction

• FOMC begins 2-day meeting

• President Obama gives State of Union address


Earnings: Boeing (BA), United Technologies (UTX), Xerox (XRX), ConocoPhillips (COP), Delta Air Lines (DAL), US Airways (LCC), SanDisk (SNDK), and Netflix (NFLX).

Boeing and Netflix will get the most attention; Netflix shares are up 57% since bottoming on Nov. 25. ConocoPhillips will offer a glimpse of what Big Oil earnings will look like. Take a look at General Dynamics' outlook on defense spending.


• 10:00 a.m. Pending home sales (Dec.)

• 10:00 a.m. FHFA home price data (Nov.)

• 12:30 p.m. FOMC statement

• 1:00 p.m. 5-year note auction

• 2:00 p.m. Fed releases economic outlook

• 2:15 p.m. Fed Chairman Ben Bernanke holds press conference


Earnings: 3M Company (MMM), Caterpillar (CAT), AT&T (T), Under Armour (UA), Starbucks (SBUX), JetBlue Airways (JBLU), United Continental (UAL), Juniper Networks (JNPR), and Cirrus Logic (CRUS).

Starbucks shares are up 4.7% this month after rising 20.5% in 2011 and 25.8% in 2010. The question is if the big rebound from its crash in 2008 can be sustained.


• 8:30 a.m. Weekly jobless claims

• 8:30 a.m. Durable goods (Dec.)

• 10:00 a.m. New home sales (Dec.)

• 10:00 a.m. Leading indicators (Dec.)

• 11:00 a.m. Kansas City Fed survey

• 1:00 p.m. 7-year note auction


Earnings: Procter & Gamble (PG), Honeywell (HON), Chevron (CVX), Altria (MO), Legg Mason (LM), Newell Rubbermaid (NWL), Ford Motor (F), D.R. Horton (DHI) and Southern Copper (SCCO).

If the economy really is beginning to gather strength, Procter & Gamble, maker of Tide and other consumer products, is vulnerable. Ford tells us how confident consumers are.


• 8:30 a.m. Q4 real GDP

• 9:55 a.m. Consumer sentiment (Jan.)

A Bullish Stance for the Week Ahead

There are definitely positive signs for a more bullish stance, there are big changes afoot that are creating a more benign environment for stocks, such as:-

• The European Central Bank's long-term repo operations are succeeding in reducing stresses in the region's banking sector. Last week, three-month dollar Libor, the cost at which European banks can borrow dollars, marked its ninth straight day of declines.

• Analysts say heavy cash infusions from the European Central Bank since late last year and signs of revived willingness to lend by U.S. investors in the New Year show the banking system is flush with cash.

• The U.S. economy is looking stronger than thought, with notable movement in the long-dormant housing market, where sales of previously owned homes just rose to an 11-month high.

• In China, the engine of global growth whose manufacturing sector has been showing worrying signs of slowing, policymakers have demonstrated willingness to make conditions easier by lowering banks' reserve requirements.

• Banks' earnings have served as a positive catalyst for the stock market so far. The sector has been one of the market's leaders despite mixed earnings, a sign that investors' worst fears did not materialize.

• Of the approximately 70 companies in the S&P 500 that have reported earnings so far, 60 percent have exceeded analysts' estimates, according to Thomson Reuters data.

• More and more analysts are raising their year-end S&P 500 targets.

Conclusion for the Week Ahead

Use pullbacks as buying opportunities. In addition to earnings season heating up next week, other potentially market-moving events, in the week ahead, include a meeting of European leaders regarding a possible Iran oil embargo, and the Federal Reserve's newly detailed forecast of short-term interest rates. And, in two weeks, another European summit is scheduled, as investors continue to watch the ongoing negotiations between Greece and its bondholders.


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