The Week Ahead: Jobs Report To Be Important!
The Game Plan: The Question Still Remains -- Should You Be Buying or Selling?
Stock Market: DOW To Set New Records!
Wall Street: Roadbumps Still To Be Encountered!
by Ian Harvey
March 04, 2013
Economic data should be the main influence in the week ahead, with the February non-farm payroll report coming out on Friday.
Other major economic reports this week include the non-manufacturing ISM index for February and the January Factor Orders reports.
There will be a total of 188 companies reporting results in the week ahead, which includes 5 S&P 500 members. The major companies reporting in the week ahead include Kroger (KR), Staples (SPLS), H&R Block (HRB), Hovnanian Enterprises(HOV), Transocean (RIG) and Smith & Wesson (SWHC), Texas Instruments (TXN), Pandora (P), and Sarepta Therapeutics (SRPT).
Also, the Dow may move to greater highs in the week ahead but important economic reports and news from Europe could decide where it goes from there.
The February jobs report on Friday is the highlight of what promises to be a busy week ahead -- the expectation is for ‘headline’ gains of 151K, modestly lower than January’s 157K reading. The East Coast snow storms could potentially be a distorting factor in this month’s data.
But given the recent favorable momentum on the jobless claims front, it wouldn’t be unreasonable to look for a positive surprise.
After the unresolved Italian elections rocked stocks early in the past week, traders have been keeping an eye on developments in Europe and there are several key meetings of finance ministers and central bankers in the week ahead.
Expect the market to continue scoring gains and stocks still seem to be reasonably priced. The overall economy, the stock market, earnings, etc., are certainly looking less bad than they did a year ago. However, be prepared for a few bumps on the road to greater heights, but it's important to keep the big picture in mind — things are getting better!
Also expect the Dow to head into record territory soon and the S&P 500 could follow along as well. However, it is important to remember that big milestones sometimes trigger selloffs so it could be choppy after the Dow breaks through record territory. The Dow came within 15 points of the high Thursday.
• ‘The Past Week’
• ‘The Upcoming Week’
• ‘The Economy’
• ‘Overseas Influence on the Stock Market’
• ‘Earnings and Company News’
• ‘The Spotlight on Certain Companies’
• ‘A List of Key Events’
• ‘Sentiment Effect on Stocks’
• ‘The NYSE Composite’
• ‘Stock Selection is Critical’
Small- and mid-cap stocks hit lifetime highs in February. Now the Dow Jones industrial average and the S&P 500 are racing each other to the top. The Dow, made up of 30 stocks, is about 75 points - less than 1 percent - away from its record close of 14,164.53, which it hit on Oct. 9, 2007. The broader S&P is still 3 percent away from its closing high of 1,565.15, also reached on Oct. 9, 2007.
The advantage may be in the Dow's court. So far in 2013, it has gained 7.5 percent, beating the S&P 500 by about 1 percent.
"The Bulls and Bears seem to be both correct in their outlook for the week ahead, but one thing you can count on is continued high volatility, and therefore, for well-selected stocks to look more attractive than ETFs."
The volatile movement that has been apparent in the past few weeks has done little to resolve what seems to a debate between the bulls and bears on Wall Street. This has been going on the for the past few weeks leading up to Friday’s sequestration deadline – now the big question on most investors minds is:-
• How will stocks do in March?
• Also, should they be buying or selling?
As has been previously mentioned, the seasonal pattern is for stocks to correct for most of January before starting to turn higher in the first week of March.
Since 1950, the S&P 500 has closed higher in March 40 times, but has been lower only 23 times. In 2009, the S&P was up over 9%, which is the best year, while 1980 was the worst with a decline of over 10%.
• Although a new record high wasn't in the cards, it was a victorious day on Friday for the Dow Jones Industrial Average (DJI) as it rebounded from an earlier loss to close up 35 points, or 0.3%, at 14,089.66 -- a 0.64% gain for the week.
Home Depot was the strongest weekly performer, while Alcoa posted the biggest decline.
• The Standard & Poor's 500 Index (SPX) was up 0.17 percent for the week, at 1518, but it is still three percent away from its all-time high.
Among the key S&P sectors, Telecoms led the gainers for the week, while financials lagged.
• And the Nasdaq Composite Index (COMP) added 9.6 points on Friday, or 0.3%, but finished the week up only 0.25% at 3,169.74.
CBOE Market Volatility Index (VIX) ), widely considered the best gauge of fear in the market, finished Friday session at 15.36, down 0.2 points, or nearly 1%.
The VIX finished the week up 8.4%.
Many may be surprised at what has transpired in many of the other world markets. As mentioned last week, many overseas markets topped out at the end of January.
• The iShares MSCI Germany Index (EWG) is now down 1.2% for the year, for instance, after being up 6% just over a month ago.
• The Vanguard MSCI Europe (VGK) is up just 0.5% for the year.
• The Vanguard FTSE Emerging Markets ETF (VWO) is now down 2% in 2013.
Many of the world markets do show typical corrective patterns. When they are completed, it is likely to be a positive sign for the US markets.
The iShares Dow Jones Transportation (IYT) made another new high in the past week, after correcting as low as $103.03. That was a correction of over 3.8%, but most of the damage occurred in just two days. Following a new high on Thursday and IYT closed the week with a 0.7% gain.
The Select Sector SPDR Financials (XLF) and the Select Sector SPDR Energy (XLE) were the weakest sectors last week, down 0.5% and 0.7%. XLE may have already completed its correction, and if it retests the lows it will look attractive.
The two best performers were the Select Sector SPDR Consumer Discretionary (XLY) and the Select Sector SPDR Health Care (XLV).
The Select Sector SPDR Consumer Discretionary (XLY) held in a tight range during the market correction, testing the breakout level (line a). It is now very close to making new highs for the year. The weekly Starc+ band is at $53.50.
The relative performance confirmed the highs early in the year, and the RS line has just moved back above its WMA. The OBV staged another upside breakout early in the year (line c), and is acting stronger than prices.
The Select Sector SPDR Health Care (XLV) did make a new high for the year last week at $43.78, and continues to act very strong technically. The weekly Starc+ band and the upper boundary of its trading range (line d) are now in the $45.20 area.
The RS line held above its WMA on the correction, making new highs this past week. The OBV looks even stronger than it did for XLY, as it is rising sharply.
The defensive Select Sector SPDR Utilities (XLU) was up 0.7%, while the Select Sector SPDR Consumer Staples (XLP) were down slightly.
The Russell Value Index is up 7.6 percent for the year so far, outpacing the Russell Growth Index's 5.7 percent rise. Within the realm of the S&P 500, the consumer staples sector led the market in February, gaining 3.1 percent.
Earnings Reports for the Past Week
The reality of the Q4 earnings season is that it has turned out to be not as bad as many suspected. Leaving aside anemic 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, but the tone of management guidance has also been less worrisome than was the case in the third quarter reporting season.
Total earnings for the 486 S&P 500 companies that have come out with Q4 results, as of Friday March 1, are up +2% from the same period last year, with 64% beating expectations with a strong median surprise of +3.4%. Stripping out the unusual revenue growth at Prudential Financial (PRU) and Express Scripts (ESRX), total revenues are up +1.5%, with 58% of the companies beating revenue expectations, with a median revenue surprise of +0.7%.
The selling in crude oil has continued this past week. Since crude often leads the stock market, this is a concern. After completing the double top formation when it broke support at $95.53 (line a), it has plunged to the $90 level.
The OBV broke its support, and is well below its declining WMA, but overall the market is acting oversold. The strength of any rally will be important.
Trading in the metals recently has been crazy -- sharp rallies have been followed by equally sharp declines. The weekly and daily technical outlook for gold, silver, and the gold miners is negative -- there are no signs that the current selling is over.
Economic Reports in the Past Week
On the economic front, the pace of growth in the U.S. manufacturing sector edged up to 54.2 from 53.1 in January, exceeding forecasts for a pullback to 52.5. A reading above 50 signals expansion in manufacturing.
Consumer sentiment was better-than-expected in February at 77.6, according to a survey from Reuters/University of Michigan. Economists polled by Reuters expected the University of Michigan Consumer Sentiment reading to be 76.3.
Meanwhile, construction spending declined by 2.1 percent in January to a seasonally adjusted annual rate of $883.28 billion, according to the Commerce Department, missing expectations for a gain of 0.4 percent, according to a Reuters poll. It was the first monthly decline since March 2012.
And personal income fell more than expected in January, dropping 3.6 percent, missing expectations for a decline of 2.2 percent, while personal spending edged up 0.2 percent.
Treasurys saw buying this past week as investors sought safety, and the 10-year was yielding 1.85 percent late Friday, well below its recent range near 2 percent.
Of course, lowering rates would also weaken the euro, and could eventually push it back to last summer’s lows in the $1.20 area.
Earnings and Company News in the Week Ahead
While earnings may not be in the headlines, we will have a total of 188 companies coming out with results this week, including 5 S&P 500 members. By the end of this week, we will be close to the finish line, having seen Q4 results from 491 S&P 500 companies or 98.2% of the index’s total membership. As mentioned above, the major companies reporting this week include Kroger (KR), Staples (SPLS), H&R Block (HRB), Hovnanian Enterprises (HOV), Transocean (RIG) and Smith & Wesson (SWHC).
Expectations for the coming quarters have started coming down, but they still represent a meaningful improvement from what we saw in 2012. Total earnings are expected to be -4.1% in the first quarter, +4.8% in the second quarter, +7.4% in the third quarter and +12.9% in the fourth quarter of 2013. What this means is that the market is looking for flat earnings growth in the first half of 2013 (only +0.3%), but expects a +10.2% jump in the back half of the year.
For the full-years 2013 and 2014, total earnings are expected to be up +6.8% in 2013 and 11.7% in 2014. The bottom-up ‘EPS’ estimates for the S&P 500 currently stand at $109.50 for 2013 and $122.28 for 2014.
A List of Key Events for the Week Ahead
• Texas Instruments (TXN) will release a mid-quarter update Thursday. Analysts at Wedbush expect the release to be positive for shareholders. They have an Outperform rating on the stock and a $39 price target.
“We look for Texas Instruments to raise guidance to higher end of range,” Wedbush notes.
• Rather than a mid-quarter update, Pandora (P) will release its full earnings Thursday. Consensus expectations call for a loss per share of $0.05 on revenue of $122.63 million. Over the last three months, shares of Pandora have rallied nearly 40%.
Analysts at Albert Fried like Pandora and believe that it is a “great company” but acknowledge that it might not be the best stock for investors. They have a Market Perform rating and $13 price target.
Pandora is an intriguing stock simply from perspective of how hated it is -- about one-fifth of its shares have been sold short (bet against). The company faces growing competition from the likes of Rhapsody and Spotify, not to mention tech giants like Microsoft and possibly Apple. Despite the growing competition, Albert Fried's lead Pandora analyst Rich Tullo isn't concerned.
• H&R Block (HRB) will also put out a full earnings release Thursday. Analysts are expecting the company to post a loss per share of $0.01 on revenue of $563.6 million. As it is currently the heat of tax season, the company's guidance might be equally as important as its actual earnings.
In fact, analysts at Compass Point Research believe its results will literally be “meaningless.” Compass Point has a Neutral rating and $28 price target. They note that most tax returns are filed in February and that there have been “IRS-driven” delays slowing things further. The make or break earnings release for H&R Block shareholders will likely come three months from now.
• Biotech investors should look to Thursday for Sarepta Therapeutics' (SRPT) earnings release. Analysts expect the company to post a loss of $0.29 per share on revenue of $6.71 million.
Yet, as with smaller biotech companies, progress on its upcoming drugs may prove to be more important than its earnings release. Its drug Eteplirsen -- for the treatment of DMD -- is currently undergoing clinical trials.
“Congressional delegations in Pennsylvania and Vermont are pushing the FDA for approval for their constituents with children who have DMD,” said Zach Prensky, the editor of Little Bear Research. Prensky owns shares of Sarepta.
• Earnings in the Week Ahead: Transocean, Boyd Gaming
• 8.00 am Fed Vice Chair Janet Yellen speaks on monetary policy at NABE policy conference
• 1.15 pm Fed Gov. Jerome Powell speaks on Too-Big-to-Fail at NABE conference
• Earnings in the Week Ahead: Verifone, Bank of Nova Scotia
• 8.15 am Richmond Fed President Jeffrey Lacker on policy
• 10.00 am Nonmanufacturing ISM
• Earnings in the Week Ahead: Brown Forman, Staples, PetSmart, Hovnanian, Vail Resorts, American Eagle Outfitters, Big Lots
• 8.15 am Philadelphia Fed President Charles Plosser on economy
• 8.15 am ADP employment
• 10.00 am Factory orders
• 2.00 pm Beige book
• Earnings in the Week Ahead: Kroger, Pandora, Smithfield Foods, H&R Block, Cooper Cos.
• 8.30 am Initial claims
• 8.30 am International trade
• 8.30 am Productivity and costs
• 3.00 pm Consumer credit
• Earnings in the Week Ahead: Ann, Foot Locker
• 8.30 am Employment report
• 10.00 am Wholesale trade
International Economic Reports for the Week Ahead
Euro-zone finance ministers meet on Monday and Ecofin, the broader group of European Union finance ministers meet Tuesday. Analysts expect to see discussion at the meetings about:-
• Italy -- they'll try to bring down the market's anxiety as it could take a while for Italy to form a government, keeping markets on edge.
• Reports on how Portugal is doing, Greece and Cyprus -- there could be noises that the euro group is willing to extend their budget targets for another year -- which could help Spain and France.
After the European finance ministers meetings on Monday and Tuesday, then the ECB, BOE, BOC RBA and BOJ will be scheduled for meetings.
The European Central Bank could signal there's scope to cut rates when it meets Thursday because of the weakening economic picture for countries other than Germany.
Analysts expect the Bank of England to announce that it's expanding its quantitative easing program when it meets Thursday.
The Bank of Japan meets Wednesday and Thursday and it is the final meeting run by outgoing BOJ Gov. Masaaki Shirakawa, so no actions are expected.
The Bank of Canada meets Wednesday, and it may drop its tightening bias -- they've held it for over a year and markets are sort of pricing in an easier policy out of Bank of Canada.
Sentiment Effect in the Week Ahead
Sentiment toward the economy has improved, and some of the Eurozone stock markets still have positive weekly technical patterns which is good for the week ahead.
Most of the news on the US economy was quite good last week. Consumer confidence saw a sharp ten-point improvement from last month, and the ISM Manufacturing Index was strong on Friday. Manufacturing also picked up in both the Chicago and Richmond areas. It was a bit weaker in Dallas.
The housing data was also strong as the S&P Case-Shillar Housing Price index showed a nice increase as both New home Sales and Pending home sales beat economist’s estimates. The GDP and Durable Goods data were both disappointing.
However, it appears that a lot of traders that are interviewed regularly on the financial networks remain skeptical, if not downright bearish on the market. It would likely take a move to new highs in the S&P 500 before they changed their tunes.
The sentiment numbers improved last week. Only 28.3% of those surveyed by the AAII are now bullish. This number stood at 52.3% in January. The failure to resolve the sequestration could turn them even more negative this week. The financial newsletter writers also have turned more cautious: 46.3% are bullish, down from 54.7% a month ago.
The NYSE Composite in the Week Ahead
The long-term weekly chart of the NYSE Composite shows the recent high of 9,004. Up to Tuesday’s early low, it had dropped 3.3%. It has held well above the 20-week EMA at 8,596, as well as the stronger support from last September at 8,515.
There is initial resistance now at 8,947, which was last Monday’s high. The next major resistance from 2008 is in the 9,400 area, followed by 9,724. The all-time high from October 2007 stands at 10,311.
The weekly NYSE Advance/Decline line broke out to the upside in January as the resistance (line c) was overcome. It has continued to make new highs, and shows no signs yet of a top -- good for the week ahead. On the chart, you will notice that in the past, similar breakouts corresponded with rallies that lasted more than just a month or two, and the A/D line typically warns in advance of a deeper correction.
Stock Selection is Critical in the Week Ahead
In looking at many of the individual stocks, similar divergences are evident. The Dow Industrials did the best in February, and the technical evidence confirms last week’s view that it was taking over a leadership role.
The chart of Exxon Mobil (XOM) shows that it peaked at $91.93, with a recent low of $87.70, which was a 4.6% decline from the high.
Then you have stocks like Verizon Communications (VZ), which broke through resistance on February 20 and has rallied over 4%.
This type of divergence makes stock selection critical. It especially makes investing in ETFs geared to a particular market segment or average less rewarding.
Conclusion for the Week Ahead
The market is at a stage that is acceptable to the investor -- when you get into this next phase or middle phase of a bull market, bad news or perceived bad news or bad stories come out and the market seems not to care. We're seeing more and more of that, ever since we got through the fiscal cliff, through the election, and less worry about Europe – the last 12 months have been traumatic.
Now, the Dow's relative strength owes much to its unique make-up and calculation, as well as to investors' recent preference for buying value stocks likely to generate steady reliable gains, rather than growth stocks.
But the more defensive stance illustrates how stock buyers are getting concerned about this year's rally. While investors don't want to miss out on gains, they're picking up companies that are less likely to decline as much as high-flying names - if a market correction comes.
However, despite the markets steady growth, signs are evident that investors are becoming concerned about the rally's pace which is evident in the options market, where the ratio of put activity to call activity has recently shifted in favor of puts, which represent expectations for a stock to fall.
There is some put hedging in the financials, building up for the past month. The put-to-call ratio representing an aggregate of about 562 financial stocks is 1:1, when normally, calls should be outnumbering puts.
Investors have no shortage of reasons to crave the relative safety of blue chips and defensive stocks. Although markets have mostly looked past uncertainty over Washington's plans to cut the deficit, fiscal policy negotiations still pose a risk to equities.
The $85 billion in spending cuts set to begin on Friday is expected to slow economic growth this year if policymakers do not reach a new deal. Markets so far have held firm despite the wrangling in Washington, but tangible economic effects could pinch stock prices going forward.
The International Monetary Fund warned that full implementation of the cuts would probably take at least 0.5 percentage point off U.S. growth this year.
The volatility certainly picked up last week, but it should not be as wild in the week ahead. The decline in some of the averages and many of the stocks has been enough to relieve the market’s overbought status.
Last Monday’s drop took the major A/D lines below their prior lows, which generally means a deeper correction. However, Tuesday’s sharp rally brought the A/D lines back above their previous highs, which flipped the short-term outlook back to positive.
The worst of the selling may now be over, but the wide ranges in the averages makes them less attractive than individual stocks. Core holdings in the health care, consumer discretionary, and financial ETFs continue to do well, but for new buying, stocks look best for the week ahead. Once it is clear that the correction is over, it will be a good time to adjust the stops on your positions to under the recent lows.