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The Week Ahead in the Stock Market
January 30, 2012



Week Ahead: The Golden Cross is Hovering!

Wall Street: Jobs Report -- the Key to the Week and the Continued Rally!

Tech Strength a Problem for the Shorts!


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week ahead

The January rally ran into selling pressure as last week ended. The January employment report will cap a hectic week of earnings news, economic reports and Fed testimony and could add to the pressure.

Throw in the European leader’s summit Monday, a possible Greek debt deal and Chinese manufacturing data Wednesday and you get a week that could shake stocks out of their doldrums—one way or the other.

Also, the sentiment backdrop is flashing mixed signals. Fund managers appear to be growing more bullish, but it is important to note that retail investors have yet to find their way back into this market. With these potential buyers still apparently rooted to the sidelines, it is of some significance to outline the major support and resistance levels that could come into play for the SPX in the week ahead.

Less than halfway into the earnings season and with Greek debt talks over the weekend, payrolls data in the week ahead, and the S&P 500 near its highest since July, there's plenty of room for movement of the indexes in any direction! However, If a move backwards occurs, the benchmark's recent rally and momentum shift can allow for a pullback before the technical picture deteriorates.

The Past Week

The Federal Reserve made some minor waves last week, when policymakers opted to extend their forecast for ultra-low interest rates through late 2014. Traders were initially cheered, but a softer-than-expected GDP reading on Friday was a sobering reminder of the reasoning behind the Fed's accommodative stance. The S&P 500 Index (SPX) ended the week nearly unchanged, with equities taking a breather to consolidate some of their year-to-date gains. On the other hand, the tech sector was a notable pocket of strength, as evidenced by a major technical victory for the PowerShares QQQ Trust (QQQ).

Pretty much since early October, the stock market has moved higher. True, there have been hiccups, particularly in November and early December. But the rally emerged again and, by Wednesday, the Dow Jones Industrial Average (DJIA) had climbed 22.6% from its intraday day low on Oct. 3.

On Thursday, the index jumped nearly to levels last seen in May 2008. And then the blue chips -- and the entire market -- fell back and mostly moved lower again on Friday.

Even if the Dow finished down 0.5% for the week -- hardly a big decline -- Thursday's pullback was worrisome. You don't like to see breakouts stall out so quickly. So the week ahead will be a challenge.

On Friday, the S&P 500 and the Nasdaq Composite closed their fourth consecutive week of gains, while the Dow Jones industrial average dipped and capped three weeks of gains. For the day, the Dow dropped 74.17 points, or 0.58 percent, to close at 12,660.46. The S&P 500 fell 2.10 points, or 0.16 percent, to 1,316.33. But the Nasdaq gained 11.27 points, or 0.40 percent, to end at 2,816.55.

Stocks ended the past week mixed with the Dow Jones industrial Average (DJIA) down a half percent at 12,660; the Standard & Poor's 500 Index (SPX) basically flat at 1316, and the Nasdaq Composite Index (COMP), up 1 percent, as it benefitted from Apple’s sharp move higher on explosive earnings growth.

The Markets Ending January 27, 2012

markets ending 012712



The five-year note yield fell to its third record low of the week after the GDP report added to speculation the Fed could now move ahead with another round of quantitative easing. It was yielding 0.749 percent late Friday. The 10-year was yielding 1.891 percent, its lowest level of the week.

For the intermediate term, last week was positive for the stock market, as it does suggest that any decline will be well supported. There could be a sharply lower opening one of these days in the week ahead, in reaction to either Eurozone news or economic data.

The dismal year-to-year performance of many hedge funds last year suggests they did not participate in the rally in the stock market last quarter. Reports suggest they are still not invested, as many do not trust the volume because of the low volume.

Although the number of bulls has stayed fairly constant recently, the number of bears from the American Association of Individual Investors (AAII) survey has dropped from 23.6% to 18.9%. The market would be healthier if this enthusiasm was dampened during the week ahead.

As stocks have continued to move higher, there has been quite a bit of sector rotation. Expect this to continue in the week ahead, and investors will need to pay close attention to sectors when they establish new positions.

Even though the GDP report disappointed investors, as did Ford’s (F) earnings, there were several bright spots. On Friday, the latest reading on consumer sentiment from the University of Michigan/Thomson Reuters reported its fifth consecutive monthly gain.

economic index 013012


The Conference Board reported Thursday that the LEI, their index of ten leading indicators, rose 0.2%. Only three of the components were negative.

The chart of the LEI shows a very nice uptrend from the 2008 lows. The uptrend in the LEI (line a) was broken in early 2008. Also plotted is their Coincident Economic Index (CEI), which has continued to make higher highs since bottoming in 2009.

The Week Ahead

There are plenty of earnings reports to consider in the week ahead -- Exxon Mobil (XOM), United Parcel Service (UPS) and Amazon.com (AMZN) on Tuesday alone. Facebook is expected to file for an initial public offering. But the week ahead brings some hugely important economic reports, especially Friday’s jobs report. Any disappointment could prove disheartening.

And Europe is still a very dominant part of the picture in the week ahead! On Jan. 20, there were confident assurances that bondholders and Greece would cut a restructuring deal and avoid a debt default in March. A week later, the deal still hadn't been cut, and there are worries yet again that a Greek debt default could spread quickly to Portugal and perhaps Spain and Italy.

Therefore, the market begins the week ahead with that sense of unease.

There's also unease from the Federal Reserve's announcement that it doesn't see raising interest rates before late 2014.

Forecasting is an art at best. So, the worry is that the Fed will miss changes in economic conditions and not raise interest rates when it should. After all, few forecasters are right all the time, and most were wrong in 2008 -- including the Fed's economics staff -- in understanding how much havoc the bursting of the housing bubble would cause.

Plus, there's rising prices for crude oil, gold, silver and copper. Gold has risen nearly 11% in January; silver is up 21%.

The Golden Cross and Its Effect on the Week Ahead

Many market skeptics take notice when this technical indicator, a holy grail of sorts for many technicians, shows up on the horizon.

As early as Monday, in the week ahead, the rising 50-day moving average of the S&P 500 could tick above its rising 200-day moving average. This occurrence - known as a “Golden Cross” - means the medium-term momentum is increasingly bullish. You have a good chance of making money in the next six months if you put it to work in large-cap stocks.

In the last 50 years, according to data compiled by Birinyi Associates, a golden cross on the S&P 500 has augured further gains six months ahead in eight out of 10 times. The average gain has been 6.6 percent.

That means the benchmark is on solid footing to not only hold onto the 14 percent advance over the last nine weeks, but to flirt with 1,400, a level it hasn't hit since mid-2008.

The gains, as expected, would not be in a straight line. But any weakness could be used by long-term investors as buying opportunities.

"The cross is an intermediate bullish event. You have to interpret it as constructive, but caution needs to be adhered by people who take a bullish stance, if they have a short-term horizon."

The Jobs/Unemployment Report Dominates the Week Ahead

The jobs report for January is the key. Most economists are looking for the unemployment rate to hold at 8.5%, the same as in December. Payroll employment is expected to rise by another 150,000 jobs if all goes well.

A few suggest the rate may bump higher and the payroll gains will be smaller than expected. Seasonal employment for the holidays has ended, including temporary jobs at FedEx (FDX) and UPS.

Watch to see how much government payrolls fall back, particularly at the state and local levels. The declines in the sector are emerging as a significant drag on the economy.

Other Significant Occurrences in the Week Ahead

ISM manufacturing data and monthly auto sales Wednesday will be important. Chain stores report their monthly sales on Thursday. Fed Chairman Ben Bernanke’s testimony Thursday before the House Budget Committee will also be closely watched, as he is undoubtedly going to be asked about the Fed’s policies, its new forecasts and whether it has any plans to undertake another round of quantitative easing, or asset purchases.

A Technical Viewpoint for the Week Ahead

‘Investors and the Trust of a Low-Volume Rally?'

" ... the PowerShares QQQ Trust (QQQ) comes into the week just below major resistance in the 60 area. As you might remember from previous commentaries, 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 ratio of call buying to put buying on VIX futures, smoothed by a 20-day moving average, is approaching highs at which the ratio has peaked and preceded market tops. However, upon digging further, it's worth noting that the total buy-to-open option volume on VIX futures 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."
- The Week Ahead in the Stock Market - January 23, 2012

"According to [Investment Company Institute], mutual-fund investors pulled $804 million from domestic equity funds during the second week of January, which more than reversed the $734 million of net inflows that went into those same funds a week earlier. These readings continue to show extreme reluctance among mom-and-pop investors to dive back into stocks."
- The Wall Street Journal, January 26, 2012

Another technical battle was won by the bulls last week, with the popular PowerShares QQQ Trust (QQQ - 60.40) closing above the 60 level -- which represents half the all-time high achieved in early 2000. The advance above 60 came after a year-long battle in which the QQQ tried, but failed, to rally above this important level.

This technical breakout may have major significance, since many hedge fund managers are drawn to the technology group. In fact, a recent Goldman Sachs report estimated that just over 20% of net portfolio exposure among hedge funds is in the Information Technology group, and six of the top 10 largest holdings among individual equities are within this group. For those playing the short side, the technical breakout may be causing pain, and could trigger potential short-covering in the immediate future. And for those fund managers that are currently underweight equities, cash may be deployed toward this sector in the weeks ahead as the positive price action pulls them off the sidelines.

As discussed previously, it is still apparent that hedge fund managers are in accumulation phase, after coming into the year underweight equities. Furthermore, there is fresh evidence of hedging activity in the options market as stocks make their way higher. For example, the 20-day buy-to-open put/call volume ratio on the QQQ, SPDR S&P 500 ETF (SPY), and iShares Russell 2000 Index Fund (IWM) continues to advance from low levels. Fund managers will purchase IWM, QQQ, and SPY puts to hedge long equity positions they are accumulating.

Moreover, call options on CBOE Market Volatility Index (VIX - 18.53) futures are used to hedge long positions, since the VIX moves inversely to equities on sharp market declines. The VIX's 20-day buy-to-open call/put ratio continues to advance too, as call buying heats up. The direction of both of these ratios is indicative of a hedge fund community that is getting more bullish, sparking a bid for equities.

With retail investors still in denial, as evidenced by equity fund outflows, bulls will continue to depend on fund managers to drive stocks higher in the immediate term. That said, from a longer-term perspective, considerable sideline money from retail investors represents future buying power, but it is anyone's guess as to when they finally become believers -- new highs in the S&P 500 Index (SPX - 1,316.33 ), which would occur 200-plus points above Friday's close or new highs in the Nasdaq Composite (COMP - 2,816.55), more than 2,000 points above Friday's close? Or, perhaps it will take a major change in the daily headlines that have cast doubt on the future?

Regardless, it is of interest that some market watchers have voiced concern about the low volume during this rally, and how this may be a bearish indicator -- a similar scenario and the same kind of warning as when the market rallied from the 2009 bottom. A contrarian take could be that low volume is a signal that many participants, including hedge funds and retail investors, remain on the sidelines and thus can be viewed as future buyers.

In fact, it is quite noticeable that total volume on Dow Jones Industrial Average (DJIA - 12,660.46) components perked up ahead of the 2000-2003 bear market, and how low volume in 2003-2004 relative to prior months simply indicated a pause that preceded higher volume and higher stock prices into 2007.

Monthly Chart of DJIA since June 1998

Monthly Chart of DJIA since June 1998



Therefore, the overall picture remains bullish and reiterates the view that short-term pullbacks should be used as buying opportunities. Keep a continuous eye on hedging activity, as the hedge fund players can turn on a dime.

Potential short-term resistance for the SPX is at 1,320, the site of the pre-Lehman Brothers high in 2008, and 1,345-1,350, which was the site of resistance in 2011. Short-term support is in the 1,285-1,290 area, site of a late-October peak.

Daily Chart of SPX since December 2010

Daily Chart of SPX since December 2010



Elections and the Effects on the Market in the Week Ahead

Traders have become more interested in the presidential election, though many say it is not yet affecting stock prices and may not for awhile.

Florida’s Republican primary Tuesday could be a close race between former House speaker Newt Gingrich and former Massachusetts Gov. Mitt Romney, and it is getting a lot of attention.

Romney is the founder of Bain Capital and the preferred candidate of many on Wall Street, who disagree with President Obama’s policies.

Some analysts believe the market could have a negative reaction if Gingrich wins Florida, since they see Romney as the best Republican candidate to challenge President Obama.

Some strategists say the market could rally later in the year, once the uncertainty is removed and it becomes clear who might win the election, regardless of the candidate.

While it’s early days, the Intrade predictions market shows odds on Obama to win.

The Key Events in the Week Ahead: 'January Jobs Data Punctuates a Busy Week'

Earnings in the Week Ahead

Earnings reports are expected in the week ahead from more than a fifth of the S&P 500, with oil major Exxon Mobil reporting, as well as pharmaceutical heavyweights Merck and Pfizer, and a long list of others including Amazon.com, Blackstone, Aetna and MasterCard. A bright spot midweek may be the much-anticipated filing by Facebook for an IPO.

So far, about 37 percent of the S&P 500 companies have reported, with Thomson Reuters noting that just 59 percent beat earnings estimates, well below recent the 70 percent plus in recent quarters.

This is also the first quarter of the recovery where earnings growth is single digit.

Europe and the Week Ahead

European leaders meet Monday and are expected to finalize new budget oversight rules, as well as discuss strategies about ways to stimulate euro zone economies.

The euro was up 2.2 percent for the week, to 1.3219 and has risen more than 4 percent in the past two weeks.

The euro has risen, in part from a short squeeze, as the markets have become calmer about progress in Europe’s handling of its debt crisis.

The LTRO liquidity facility has protected European banks and spreads have come in dramatically on Italian and Spanish bonds. The market is awaiting the details on the size of the “hair cut” and other details of Greece’s expected deal with private sector debt holders.

Chinese Data and the Effect on the Market in the Week Ahead

Manufacturing PMI data for January will be released Wednesday and is expected to drop under 50, which would signal contraction.

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

Earnings: Wendy's (WEN), Hologic (HOLX), Plum Creek Timber (PCL), Mindspeed Technologies (MSPD), and Wolverine World Wide (WWW).

Economy:

• EU Leaders Summit

• 8:30 a.m. Personal Income/spending

• 8:30 a.m. Core PCE prices

• 10:30 a.m. Dallas Fed Survey

• 2:00 p.m. Senior Loan officer survey Q1

Tuesday

Earnings: Exxon Mobil (XOM), Amazon.com (AMZN), UPS (UPS), Mattel (MAT), Archer Daniels Midland (ADM), U.S. Steel (X), Valero Energy (VLO), ARM Holdings (ARMH), Biogen Idec (BIIB), Broadcom (BRCM), CIT Group (CIT), Illumina (ILMN), L-3 Communications (LLL), Oshkosh (OSK), and Tellabs (TLAB).

Exxon will be closely watched to see if its refining and marketing businesses are having the same kinds of problems that Chevron acknowledged in its report on Friday. With Amazon.com, the question isn't revenue. It will be profitability.

Economy:

• 8:30 a.m. Employment cost index

• 9:00 a.m. S&P/Case-Shiller home prices

• 9:45 a.m. Chicago PMI

• 10:00 a.m. Consumer confidence

• 10:00 a.m. State Street investor confidence index

• 10:00 a.m. Housing vacancies

Wednesday

Earnings: Marathon Oil (MRO), Marathon Petroleum (MPC), Allstate (ALL), AOL (AOL), Chipotle Mexican Grill (CMG), Qualcomm (QCOM), Electronic Arts (EA), Green Mountain Coffee Roasters (GMCR), JDS Uniphase (JDSU), Las Vegas Sands (LVS), BE Aerospace (BEAV), BMC Software (BMC), Concur Technologies (CNQR), Northrop Grumman (NOC), Corinthian Colleges (COCO), Shutterfly (SFLY), and Whirlpool (WHR).

Northrop Grumman's outlook depends on how it sees defense spending. Whirlpool should help investors understand the housing market.

Economy:

• January vehicle sales (throughout the day)

• 7:30 a.m. Challenger job cuts

• 8:15 a.m. ADP employment

• 8:30 a.m. Philadelphia Fed President Charles Plosser on the economic outlook

• 10:00 a.m. ISM manufacturing

• 10:00 a.m. Construction spending

Thursday

Earnings: International Paper (IP), Kellogg (K), MasterCard (MA), Merck (MRK), Allergan (AGN), Gilead Sciences (GILD), Boston Scientific (BSX), Beazer Homes (BZH), M/I Homes (MHO), Blackstone Group (BX), Acme Packet (APKT), NetSuite (N), Cavium (CAVM), Digital River (DRIV), Cameron International (CAM ), Cummins (CMI), CME Group (CME), Diamond Offshore Drilling (DO), Sunoco (SUN), Dow Chemical (DOW), Genworth Financial (GNW), New York Times (NYT), Royal Caribbean Cruises (RCL), and Starwood Hotels & Resorts (HOT).

Cummins will be watched most closely because it supplies diesel engines to the trucking industry. A slowing economy will slow diesel sales. One other to watch in the week ahead: Royal Caribbean (RCL). The question is if the Costa Concordia disaster off the coast of Italy is affecting cruise-line reservations.

Economy:

• 8:30 a.m. Initial jobless claims

• 8:30 a.m. Productivity/unit labor costs

• 10 a.m. Fed Chairman Ben Bernanke testifies before the House Budget Committee

• RBC Consumer Outlook Index

• January chain store sales

• 4:30 p.m. Fed balance sheet

• 4:30 p.m. Money supply

Friday

Earnings: Clorox (CLX), Tyson Foods (TSN), American Axle (AXL), Estee Lauder (EL), Simon Property Group (SPG), and Weyerhaeuser (WY).

Economy:

• 8:30 a.m. Employment report (January)

• 10:00 a.m. ISM Services

• 10:00 a.m. Factory orders

Conclusion for the Week Ahead

Stocks tried to correct on Friday in reaction to the GDP data, but rebounded from the worst levels. The Nasdaq closed higher, while the S&P 500 and the Dow Industrials were lower.

These are clearly very resilient markets, as those who have just turned bullish in the past month are chasing prices.

The risk in buying ETFs that track the major averages is high, as stops need to be wide and the odds of a sharp downdraft are still elevated. Another 200-point down day in the Dow is quite likely in the week ahead which will shake out the late buyers. This is also a great opportunity for those traders who like to chase the options market!

Look to buy stocks where the risk can be well controlled. It is obvious that the material sector (chemicals and steel), as well as technology hardware, have been well received. Biotech has had a great run, but the risk control in this sector is often difficult.

The red-hot sectors, like homebuilders and regional banks need to come back to important support before buying. Those stocks that are correcting now may be the leaders once the market averages finally correct.

If you already have nice profits in individual stocks, use further market strength to take some profits. This will allow you to raise cash for further opportunities down the road.

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