The Week Ahead in the Stock Market February 04, 2013

Week Ahead: The Rally To Continue!

Stock Market: Manufacturing, Housing & Earnings!

Wall Street: Cash Continues To Flow Into Stocks!

by Ian Harvey

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February 04, 2013

Introduction

January was clearly a bullish month for stocks -- the Dow has ridden a relatively smooth path to 14,000 since the end of December, and now traders are watching to see what's out there that could disrupt the road to new highs -- what are the expectations for the stock market in 2013?

The Dow Industrials and S&P 500 made new highs for the week and closed strong.

Analysts attributed the market's robust showing so far this year partly to a deluge of cash flowing into equities.

Investors poured $12.7 billion into U.S.-based stock mutual funds and exchange-traded funds in the latest week, concluding the strongest four-week flows into stock funds since 1996, data showed on Thursday.

Wall Street's current jubilant narrative is that a rush into stocks by small investors has sparked a "great rotation" out of bonds and into equities that will power the bull market to new heights.

Investors have added $20.7 billion to stocks in the first four weeks of the year, the strongest four-week run since April 2000, according to Lipper. But that pales in comparison with the $410 billion yanked from those funds since the start of 2008.

While market bulls believe the Dow 14000 landmark will serve as another crucial catalyst to lure retail investors back into the equity markets, more cautious observers believe it could signal that the recent optimism may be overdone.

Quick Reference:

Stock Market Expectations in 2013
‘The Past Week’
‘The Upcoming Week’
‘The Economy’
‘Earnings and Company News’
‘A List of Key Events’
A List of Companies Reporting
‘Sentiment Effect on Stocks’
‘Bonds’
‘The NYSE Composite’
‘Conclusion’

With a light week ahead for economic reports and the final major week of the earnings season, there is not much on the calendar in the week ahead to cause the stock market's bull to stumble.

In the week ahead, ISM non-manufacturing data are released Monday, and jobless claims are reported Thursday. Chain store sales will be watched for what they indicate about the consumer in January, after robust car sales Friday showed a still confident buyer. Disney, BP and Visa are among the companies reporting earnings.


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The Past Week

Stocks rose to five-year highs on Friday, with the Dow closing above 14,000 for the first time since October 2007, after jobs and manufacturing data showed the economy's recovery remains on track.

The index is now just about 60 points away from its all-time intraday high of 1,576.09.

The ISM manufacturing index report helped push the DOW to its current high, after it showed activity at a higher-than-expected 53.1 in January, up from 50.2 in December.

That came after January's employment report showed job growth, as expected, of 157,000 in January but revisions that put job growth closer to 200,000 in the fourth quarter.

The S&P 500, meanwhile, which had crossed the psychologically key 1,500 level the Friday before, continued its climb higher and was trading at 1,512. Bond yields slipped slightly, but commodities also rose in a risk rally, pulling metals and energy higher. The euro, the emblem of risk, briefly shot above 1.37, its highest level since November 2011.

Since Congress punted the "fiscal cliff issues," the market has been churning along, with the Dow gaining 7 percent since Congress' New Year's Day tax votes. Congress since has voted to push off the debt ceiling debate until May, triggering a relief rally.

Sparked by a mildly encouraging jobs report, the Dow Jones Industrial Average (DJI) surged to end the week strong, finishing at 14,009.79 after climbing 149 points, or about 1.1%.

It was the first time since Oct. 12, 2007 that the Dow closed above 14,000. Almost the entire Dow gained on the day, with 28 companies advancing -- led by Bank of America (NYSE:BAC), up 3.5%. Only two companies fell, with a disappointing earnings report pulling drug maker Merck (NYSE:MRK) down 3.3%. The Dow finished the week up 0.8%.

The Dow has risen about 114 percent since bottoming at 6,547 in March 2009. But it's the double-digit gains of 2012 that were most elusive to some investors who were soured on the market by its volatility, the continuing weak economy, and Washington's infighting and uncertain path, even more dramatic because of the election. Since hitting its 2012 low of 12,035 in June, the Dow has risen 16.4 percent, and it has gained 12.3 percent since its post-election low of 12,471.

In the past few weeks, as Congress addressed some fiscal concerns, the Dow has moved ahead with more momentum, rising 8.7 percent since Dec. 31.

The Standard & Poor's 500 Index (SPX) also closed higher, rising 15 points, or 1%, to close at 1,513.17 -- and was up 0.7% on the week.

The S&P 500 rose 5 percent in January, its best month since October 2011 and its best January since 1997, driving speculation that retail investors were flooding back into the stock market.

And the Nasdaq Composite Index (COMP) rose by 37 points (1.2%) to close at 3,179.10. For the week, COMP added 0.9%.

The Markets Ending February 01, 2013

CBOE Market Volatility Index (VIX) ), widely considered the best gauge of fear in the market, finished at 12.90, down a little more than a point, or 9.7%. The VIX broke its four-day streak of finishing north of 13. Friday's downturn pushed the VIX into negative territory for the week, as it fell 0.08%.

Earnings Reports for the Past Week

We have crossed the halfway mark in the Q4 earnings season - with results from 254 S&P 500 companies already out as of Friday, February 1, 2013. Note that these 254 companies are more than just 50.8% of the index's total membership - they account for 65.1% of the index's total market capitalization and bring in 68.7% of all Q4 earnings. In other words, while there are still plenty of reports to come, we have seen more than two-thirds of Q4 earnings already.

The reality is that the Q4 earnings season has turned out to be not as bad as many suspected. Leaving aside anemic earnings growth, on most other metrics the fourth quarter reporting season is quite good. Not only are the ratio and magnitude of surprises better than the previous quarter and comparable to the last many, the tone of management guidance has also been on the reassuring side.

Total earnings for the 254 S&P 500 companies that have come out with Q4 results are up +2.7% from the same period last year, with 66.1% of the companies beating expectations with a median surprise of +2.9%. There is no growth on the revenue side (actually up +0.03%), but plenty of companies came ahead of revenue expectations – the revenue beat ratio stands at 60.6% and the median revenue surprise is +0.9%. In terms of growth, the 'beat ratio' and median surprise, the Q4 season thus far is better than what this same group of companies did in the third quarter and in line with the average for the last four quarters. We should keep in mind, however, that the Finance sector is keeping the aggregate growth rate in the positive column. Excluding Finance, total earnings would be down -1.3% while total revenues would be down -0.9%.

The earnings growth of +2.7% for the 254 companies is better than what these same companies reported in the third quarter, but is lower compared historical averages. The most notable variance relative to the third quarter is in the performance of the Basic Materials and Energy sectors. With Exxon (XOM) and Chevron (CVX) results already out, we can safely say now that the Energy sector will have positive earnings growth this quarter after negative growth for the last several quarters. Total earnings for the 45.2% of Energy sector companies that have already reported Q4 results (these companies account for 85.3% of the sector's total Q4 earnings) are up +7.1%. Total earnings for the Basic Materials sector are up +20.7%, which follows a -25.3% decline in the previous quarter and a 4-quarter average earnings drop of -21%.

The composite growth rate for Q4, where we combine the reports that have come out with those still to come, is +1.6% for earnings and +0.4% for total revenues. These would be better than the flat finish in the previous quarter, but not in any material sense -- in fact, earnings growth essentially flat-lined in the last two quarters of 2012. Expectations for the coming quarters have come down, but they still represent a meaningful improvement from what we saw in 2012. Total earnings are expected to be down -2% in the first quarter, up +4.4% in the second quarter, up +7.6% in the third quarter and up +12.4% in the fourth quarter of 2013. For full years, total earnings are expected to be up +7% in 2013 and +11.5% in 2014.

Crude Oil

The April crude oil contract has had another good week closing up $1.50 a barrel. The weekly downtrend (line a) has been decisively broken, with the quarterly R2 resistance now at $100.90.

The weekly and daily OBV look strong, as volume surged in January. There is first good support now in the $94.50 to $95.80 area.

Precious Metals

The SPDR Gold Trust (GLD) had some wide swings last week, but was resilient as it rebounded Friday. This has improved the technical outlook.

Economic Reports in the Past Week

It was another week of mixed economic news. On the positive side, durable goods orders and the Dallas Fed Manufacturing Survey were both considerably better than expected. Also on the manufacturing front, the Chicago PMI came in at 55.6 while most were expecting just 50. This encouraging data was in line with Markit’s US Manufacturing flash report.

On the negative side, Consumer Sentiment took a dive to 58.6 from the prior month’s 65.1, which caught many forecasters by surprise. The chart shows that the prior lows and the uptrend have been broken, but higher stock prices could help stabilize the sentiment next month. The GDP was also negative at –0.1%, while most were expecting a 1% rise.

Interest Rates

The chart of the ten–year T–Note shows that yields did close above 2% last week. The resistance at 1.922% (line b) has been decisively overcome.

Bonds in the Past Week

The junk bond market had a rough week. But while a short–term peak may be in place, there are no signs yet that bonds have formed a major top.

The Week Ahead

Manufacturing and housing data will be in the limelight in the week ahead on an economic calendar otherwise bereft of clearly compelling news.

Fourth-quarter earnings season is winding down but some highlights include Yum Brands (YUM) and Humana (HUM) on Monday; Aflac (AFL), Archer Daniels Midland (ADM) and Disney (DIS) on Tuesday; Allstate (ALL), Time Warner (TWX), and Visa (V) on Wednesday; and the New York Times (NYT) on Thursday.

The Economy in the Week Ahead

Factory orders will be released Monday offering a gauge on new orders for both durable and non-durable goods. The manufacturing sector was one of several weak areas of Friday’s jobs report -- fewer than 10,000 new manufacturing jobs were created in January.

Redbook retail sales are out Tuesday, a small gauge of sales always important because consumer spending accounts for 70% of the U.S. economy.

The Mortgage Bankers’ Association releases its purchase applications index on Wednesday. The index measures mortgage applications with lenders and provides insight into housing demand.

The Federal Reserve has committed itself to low interest rates for several years to come in an effort to revive the long-dormant U.S. housing sector and some regions have recently shown signs of life with housing prices moving higher.


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Earnings and Company News in the Week Ahead

The week ahead brings in results from 471 companies, including 88 S&P 500 members. This includes operators like Yum Brands (YUM), Disney (DIS), Time Warner (TWX), Chipotle ( CMG), and many others. By the end of this week, we will have Q4 earnings reports from 342 S&P 500 companies or 68.4% of the index's total membership. But we have a fairly good idea already of how the Q4 earnings season has turned out (as mentioned earlier in this article).

A List of Key Events for 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: Yum Brands, Anadarko Petroleum, Clorox, Humana, Beazer Homes, Sysco, Simon Property, Baidu, Petrobras, Banco Santander, Hartford Financial, General Growth Properties, Torchmark, Leggett & Platt

Economy:

• 10.00 am Factory orders
• 2.00 pm Senior loan officer survey

Tuesday

Earnings: BP, Toyota Motor, Disney, Chipotle Mexican Grill, CME Group, Panera Bread, Shutterfly, UBS, Archer Daniels, Arm Holdings, Automatic Data, Cardinal Health, Becton Dickinson, Allergan, Church & Dwight, Teco Energy, Estee Lauder, Diamond Offshore, Eaton, NYSE Euronext, Arch Coal, Zynga, Take Two Interactive, Genworth Financial, Sirius XM Radio, Kellogg, Take Two Interactive, Aflac, Hain Celestial

Economy:

• 10.00 am ISM nonmanufacturing

Wednesday

Earnings: Visa, Arcelor Mittal, GlaxoSmithKline, News Corp, Yelp, NTT, CVS Caremark, Elan, IntercontinentalExchange, Marathon Oil, WR Grace, Madison Square Garden, Ralph Lauren, Time Warner, Akamai, Allstate, Green Mountain Coffee, Lincoln National, Tesoro, Renaissance Re, Mettler-Toledo, USG, Penske Auto Group, Cummins

Economy:

• No major reports today

Thursday

Earnings: Credit Suisse, Philip Morris, Sony, Statoil, Vodafone, Bunge, Cigna, Coca-Cola Enterprises, International Flavors and Fragrances, Starwood hotels, Cognizant, Teva Pharmaceuticals, Teradata, Sprint Nextel, Noble Energy, Scripps Network Interactive, Sigma Aldritch, KKR and Co, Mack Cali Realty, New York Times, Lazard, Snap-On, Coinstar, OpenTable, Columbia Sportswear, NCR, Primerica, XL Group, Activision Blizzard, LinkedIn, Carefusion, Hasbro, Hasbro, SunPower

Economy:

• January chain store sales
• 8.30 am Initial claims
• 8.30 am Productivity and costs
• 3.00 pm Consumer credit

Friday

Earnings: Nissan Motors, Brookfield Infrastructure Partners, Buckeye Partners, CBOE Holdings, Entergy, Moody's, AOL, Carlisle, Apollo Global Management, Corporate Office Property Trust

Economy:

• 8.30 am International trade
• 10.00 am Wholesale trade

CLICK HERE for a complete list of companies reporting in the week ahead.

.....or go to.....

CLICK HERE for a complete list of companies reporting in the week ahead.


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Sentiment Effect in the Week Ahead

Heading into another busy week ahead for earnings, the equity market is knocking on the door of all-time highs due to positive sentiment in stocks, and that can't be ignored entirely. The Standard & Poor's 500 Index ended the week about 4 percent from an all-time high touched in October 2007.

The “Wall of Worry” that faced the market in early January has disappeared, but still the market remains very resilient. A two–day correction is the most we have seen. The jobs report could have been a catalyst for a sharper pullback, but there is little in the way of regular reports to worry about in the week ahead.

According to American Association of Individual Investors (AAII), the bullish sentiment of individual investors backed off a bit last week, dropping to 48% from 52.3% the prior week. The percentage of bears was unchanged. The number of bullish financial newsletter writers rose slightly to 54.3%, with the bears unchanged at 22.3%.

With sentiment running high, investors who can afford to be a little more patient by adding equities in a measured way will be rewarded over the course of the full year.This could turn into a very good year but it’s probably not going to do it all in February.



The NYSE Composite in the Week Ahead

The weekly chart of the NYSE Composite goes back to 2004, and shows the bullish divergence in the weekly Advance/Decline line at the March 2009 low. The weekly trading channel goes back to 2011, with the upper boundary (line a) now at 9,492. This is about 6% above current levels

There is also resistance from 2008 at 9,694. One can also see that prices are well above the rising 20–week EMA at 8,444, consistent with an overbought market. This week, the Starc+ band will be at 9,106. The rising 20–day EMA is at 8840 and represents the first real daily support, with additional chart support in the 8674–8740 area.

The long–term view of the NYSE Advance/Decline shows that it is acting much stronger than prices, as it is already well above the highs made in 2007–2008, even though prices are not. More importantly, it shows a clear pattern of higher highs (line c). It has recently also broken out of its trading range.

The long–term uptrend (line d), is derived from the multiple bullish divergences that formed at the March 2009 lows. Neither the weekly nor daily Advance/Decline (A/D) line shows any signs yet of a top.

Conclusion for the Week Ahead

From Friday’s analysis of the large, mid–cap, and small–cap ETFs, it does appear that the mid–cap stocks are taking over leadership from the small caps. Therefore, this is one area that needs to be watched in the week ahead for new opportunities. One positive point for a continued rally is that the overall market has not given any sell signals, and Friday’s action certainly did not change this view.

The close Friday was impressive, and there is a chance that stocks can see another burst to the upside in the week ahead, or maybe longer, before we get a meaningful correction.


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