Week Ahead: Rally Will Be Tested!
Will the Recovery be Crush by Crude Oil?
Wall Street: US Data May Drive Stocks Higher Despite Oil and European Risks!
A rally on Wall Street will be put to the test in the week ahead, with the S&P 500 at its highest level since before the collapse of Lehman Brothers in 2008.
Stocks face the challenge of rising oil prices and headline risk from Europe, creating their annual winter pullback, but it could end up being the fresh economic reports on U.S. manufacturing and the consumer that drive markets in the week ahead.
While the swiftness and magnitude of the gains have created concerns that the market is due for a pullback, a break above 1,370, which was 2011's intraday high, could trigger more buying as investors fear missing out on further gains -- the sentiment is bullish and the money flow has gotten bullish!
Besides important economic data, earnings are due from some major market influencing companies, such as Lowe's, Costco and Transocean.
The Past Week
Stocks racked up a few new multi-year highs last week, although the major market indexes finished with relatively minor gains. Traders took heart in a generally decent slate of domestic economic data, but steadily rising oil prices sparked some anxiety about the fragile state of the recovery.
The Dow Jones Industrial Average (DJIA), in the past week, crossed the 13,000 mark for the first time since 2008 but failed to close above it. Stocks were up slightly, with the Dow up 0.3 percent for the week at 12,982. The Standard & Poor's 500 Index (SPX) was also 0.3 percent higher at 1365, finishing above its 2011 closing high of 1363 for the first time Friday but failing to break through its 2011 intraday high of 1370.
The Markets Ending February 24, 2012
The investor nervousness is growing in part because the market has gone up basically nonstop since early October. The Dow Jones Industrial Average (DJIA) are up nearly 25%. The Standard & Poor's 500 Index (SPX) has risen 27.1%, and the Nasdaq Composite Index (COMP) is up 28.9%.
The euro has been rebounding since Greece moved to adopt austerity measures and struck a deal on its loan conditions. The euro in the past week rose 2.3 percent to 1.3449, its highest close since Dec. 1. In the week ahead expect to see the euro move higher, as shorts is squeezed -- also expect to see further dollar selling.
In the past week, tensions surrounding the sanctions on Iran put pressure on oil prices, sending West Texas Intermediate to $109.77 per barrel, a gain of nearly 6 percent. Brent, the international bench mark, rose nearly 5 percent to $125.47. Gasoline prices have also been rising rapidly. The national average for a gallon of unleaded gasoline at the pump rose to $3.64 Friday, from $3.52 a week ago.
The energy sector was the best performing major S&P sector this past week, gaining 1.9 percent. It is up 8.6 percent since the start of the year but trails the double digit gains made by tech (14.8 percent), financials (12.6 percent), materials (12 percent) and industrials (10.2 percent).
The Week Ahead
Data in the week ahead includes auto sales, chain store sales and ISM manufacturing data. Fed Chairman Ben Bernanke also gives his semiannual testimony on monetary policy to Congress, starting before the House Financial Services committee Wednesday. Jobless claims, improved for a fifth week this past week, will also be an important indicator when reported Thursday. The February employment report will be released March 8, a week later than the usual first Friday of the month release date.
Testing of the Market in the Week Ahead
The market will face some big tests in the week ahead and maybe over the next few weeks, based on a number of factors:
• Will higher oil and gasoline prices affect consumer behavior?
• Will a weak earnings report shock the market?
• Can stocks continue to command high prices when fourth-quarter earnings have actually been a disappointment?
• What happens if something happens outside anyone's thinking?
In 2011, it was the Arab spring that saw governments fall in Egypt, Tunisia and Libya. There was the March Japanese earthquake, followed by more of the European financial crisis and political battles in the United States. All provided lots of real, often horrible drama -- and turmoil in markets until October when the markets began to rally.
There is one big factor to keep in mind that could tip the markets over this year -- probable military action by Israel and others against Iran. Those worries are the big reason why oil prices are rising and why lots of (supposedly) smart money is flowing into oil and gasoline futures, anticipating the blockage of the Strait of Hormuz and fuel shortages from Japan to the United States.
Another is what happens if outside interests intervene to bring some stability to Syria.
You can't predict an earthquake!
However, It is likely that a steadily improving economy will offset the impact of higher gas prices on the consumer. Last Friday, the Reuters-University of Michigan consumer sentiment showed a nice increase to 77.4, which was the highest reading since early 2008.
So far, the higher crude oil prices have not dampened the enthusiasm for stocks, as the markets continued to move higher again last week.
An Annual Winter Pullback for the Week Ahead
Early in the year, the stock market often briefly pulls back. It happened in 2010 and 2011. It happened in the years before the 2008 financial crash. And it seems that it will happen this year, possibly quite soon, even in the week ahead.
What's usually unknown is if one of these pullbacks is going to be very dramatic – with the exception of 2008 -- when it was pretty obvious bad things were going to happen -- and when it did happen the markets suffered greatly!
It is quite apparent that unease is growing in part because the market has gone up basically non-stop since early October – the crystal ball is having difficulties determining the future progress of the market direction!
G-20 Finance Ministers Meeting and the Continuing Euro Debacle
Also important for markets in the week ahead, is the weekend’s G-20 finance ministers meeting in Mexico, where officials are expected to discuss further funding for the IMF, to help its participation with the euro zone debt crisis. A deal was not expected this weekend.
There is a need for commitments to the Greek bond exchange from individual bond holders, and those are going to come out sporadically, as investors decide. Then the LTRO (special ECB lending program) will be announced Wednesday. They’re looking for a take up of more than 400 billion euros, as a sign banks are taking advantage of this, and as a sign they’re reducing their financing requirements for the year ahead.
The ECB lending program has been credited with being a spark for the stock market rally that has run since late December.
The Key Events in the Week Ahead:
Earnings in the Week Ahead
Earnings: Costco, Lowe's, Domino's Pizza, Staples are on the reporting schedule.
Just about all the big names have reported fourth-quarter results (or the equivalent).
The results have been a bit spotty. According to Thomson Reuters, earnings for S&P 500 companies are up about 9.4% this year. Take out Apple's blowout quarter, and the growth rate drops to 6.3%.
Industrial and technology companies have had the best earnings growth, about 17% year-over-year each.
But there have also been more earnings warnings than usual, and companies have cut their earnings guidance.
Gasoline Prices and the Effect on the Market in the Week Ahead
It is likely that rising oil prices will have a pretty marginal impact on the overall stock market. While the rising oil price could trip up stocks, it so far has not, and analysts note that absent a big spike due to geopolitical developments, the impact could be more muted than in the past. But Iran is the wild card. Barclays economists noted that the gasoline price hike should not create strong headline inflation, and it should not have as much impact on consumption as it did last year because households are stronger than in 2011 and the inflation risk is less. The economists noted the effect on growth of rising energy prices depends on the abruptness of the increase.
Economists also note that unlike last year, consumers have benefited from lower heating bills due to the unseasonably warm winter and steep drop in natural gas prices.
Technically, crude oil completed a double-bottom formation in October which at the time projected a move to $105.33 per barrel. That target was easily exceeded in the past week, and the chart shows that we have surged above the $104 level (line a) and closed well above $109 per barrel.
The long-term seasonal patterns in crude indicate that it typically bottoms in February. In 2011, the April high in crude oil prices correlated nicely with the high in the small-cap Russell 2000.
It‘s likely that prices will rise another $0.05 to $0.15 per gallon nationally in the next couple of days, based on current wholesale prices. At the same time, the amount of speculators flooding in to gasoline futures has never been greater. The Commodity Futures Trading Commission shows a record “long” bias in RBOB (gasoline) futures, and a surge in fund holdings in WTI futures and options. Speculative buyers increased their holdings by 2,790 contracts last week, and now hold a record long position of 107,644 contracts.
The Fed in the Week Ahead
We have to note two events involving the Federal Reserve. First will be the Wednesday release of the Fed's Beige Book report, compiled by the 12 Federal Reserve banks. The report offers a narrative look at the economy.
Second, Chairman Ben Bernanke will testify about the state of the economy starting Wednesday before the House Financial Services Committee.
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: Lowe's (LOW), Career Education Corporation (CECO), Cooper Tire & Rubber (CTB), Dendreon (DNDN), Human Genome Sciences (HGSI), Jazz Pharmaceuticals (JAZZ), Priceline.com (PCLN), Savient Pharmaceuticals (SVNT), SINA Corp. (SINA), Southwestern Energy (SWN), Valeant Pharmaceuticals (VRX), and Zagg (ZAGG).
• 10.00 am Pending home sales
• 10.30 am Dallas Fed survey
Earnings: AutoZone (AZO), Cablevision Systems (CVC), Domino's Pizza (DPZ), DreamWorks Animation (DWA), El Paso (EP), FirstEnergy (FE), Kodiak Oil & Gas (KOG), Office Depot (ODP), Sanderson Farms (SAFM), STEC Inc. (STEC), and Universal Display (PANL).
• 8.30 am Durable goods
• 9.00 am S&P/Case-Shiller home price index
• 10.00 am Consumer confidence
• 10.00 am Richmond Fed survey
Earnings: Costco Wholesale (COST), Finisar (FNSR), Joy Global (JOY), Liz Claiborne (LIZ), PetSmart (PETM), SodaStream International (SODA), Staples (SPLS), and Yingli Green Energy (YGE).
• European Central Bank emergency loan program auction (LTRO)
• 8.30 am Real Q4 GDP (second reading)
• 9.45 am Chicago PMI
• 10.00 am Fed Chairman Ben Bernanke gives semi-annual monetary policy report before House Financial Services Committee
• 2.00 pm Beige book
Earnings: Big Lots (BIG), James River Coal (JRCC), Foot Locker (FL), Kenneth Cole (KCP), Kroger (KR), Martha Stewart Living (MSO), Motricity (MOTR), and Wendy's (WEN).
• Monthly auto sales
• 0830 am Weekly jobless claims
• 0830 am Personal income
• 1000 am ISM manufacturing
• 1000 am Construction spending
Earnings: Genesco (GCO).
• There are no major economic releases scheduled for Friday
Conclusion for the Week Ahead
It has really been a tough market lately, but the combination of higher oil prices and deterioration in the financial stocks rings the bell for caution. There are still good buying – the key consideration right now for new investing, particularly if you are thinking about buying a stock or ETF, figure out where you would get out if it goes down.
Except for Russell 2000 iShares (IWM) ETF, all the other major indexes have recently made fresh 52-week highs. The trends all remain strong and with a number of factors pushing IWM to the upside, it too is likely to resume its upward course after completing this consolidation. The trend should continue to be traded until there is some indication - a price signal - that it is over. Support levels can be used to manage risk; if support is broken it indicates a further decline but should be kept in perspective of the larger trend.
If the Dow stocks are going to lead the next push to the upside, they may present some new opportunities, although those may be short-term trades.
”Success is simple. Do what's right, the right way, at the right time.”
”Success is simple. Do what's right, the right way, at the right time.”
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