Week Ahead: Jobs Report Will Make or Break Markets!
Wall Street: Stocks Keep Rallying!
Stocks have proven the pessimists wrong so far in 2012. And the February jobs report could be just the ticket to keep the bulls going in the week ahead.
The February jobs report and Europe will command the most investor attention, along with reports on factory orders and the service economy. Apple will show off its new iPad. Earnings are due from Dick's Sporting Goods (DKS) and Brown Forman (BF.B).
But The February employment report is the key to the continued uptrend -- a double whammy for markets and the economy may be presented unless it meets high expectations in the week ahead.
The Past Week
This week left many investors concerned. The Dow Jones Industrial Average (DJIA) couldn't move anywhere once it closed at 13,002 on Tuesday. This is the first time the DOW has closed above the 13,000 mark since May 2008. The Dow finished the week down 5 points at 12,977.
The Standard & Poor's 500 Index (SPX) closed at a four-year high on Tuesday and another four-year high on Thursday and then stalled. However, despite this set-back, the SPX is up for eight of the last nine weeks and finished the week up 3 points at 1369. A positive sign was the MACD histogram for the S&P 500 Index (SPX), on a monthly chart, officially move above the zero line on Thursday, March 01.
The Nasdaq Composite Index ($COMPX -0.43%) briefly topped 3,000 on Wednesday but failed to hold that level. Its Thursday close of 2,989 was its best since December 2000. The Nasdaq was up 12 points at 2976 for the week.
But a worrying sign was the nearly 3 percent decline in the Russell 2000 Index (RUT) in the past week.
The Markets Ending March 02, 2012
The Week Ahead
The five-month stock rally has been built on a string of improving economic data that suggests U.S. corporate profit growth will remain intact, according to some analysts.
Job growth is a big part of that picture. It has lagged most other parts of the U.S. economy, a point frequently raised by Republican presidential hopefuls.
But strategists have been calling for a pullback, especially since indexes are hitting new milestones, as stated above, and the fourth-quarter reporting period is winding down.
Some say staying on this path may be possible with further supportive news on the economy.
It appears that the rally will continue as long as better economic information continues -- we are seeing some sustainable improvement in the economy therefore there is going to be some continuation in the rally.
The week ahead may result in a sizable market move, one probably determined by Friday's big jobs report. A good report -- with, say, more than 200,000 jobs created and a decline in the unemployment report from January's 8.6% -- should prove rally worthy. If this does not eventuate then the pullback, that is being touted, will most likely occur!
It may well be a week of tension over Iran's nuclear program that could generate more volatility in crude oil and gold, not to mention worries about Europe.
Expect a lot of excitement Wednesday when Apple (AAPL) is expected to introduce a new iPad model and maybe its long-awaited Apple TV.
Market Consolidating or Stalling in the Week Ahead
The stall in the major indexes can be interpreted two ways:
• The market is consolidating and waiting for a catalyst to move higher -- a bullish jobs report in the week ahead.
• The market is toppy and just needs a shove to fall back – the expected pullback.
Most analysts see this scenario: The toppiness will lead to some sort of pullback. The major averages are up around 25% since October, a big, fast move. The Nasdaq is trading 11.4% above its 200-day moving average, which is a bit high. The index's relative strength index, which measures current performance against past returns, is close to a high.
But there isn't the worry associated with the market as occurred, for example, in 2000 or 2007!
The Dow Jones Transportation Average (DJT), a leading economic indicator, has been sliding. So has the Russell 2000 Index (RUT), which tracks small stocks. A declining Russell suggests the market leadership is narrowing -- leadership is only effective when it broadens.
The Russell 2000 iShares (NYSE: IWM) ETF, representing the Russell 2000 index, finished down on the week and also penetrated support. Since early February the ETF has been moving sideways between $83.31 and $81. The $81 area was support but was broken on Friday, indicating a downside target of $78.70. This is very near the 50-day moving average and also quite close to the trendline that began back in October. If the price moves above $83.31 the target is $85.50. At this time, the breakout higher (above $83.31) is not likely in the week ahead, as IWM has been relatively weak compared to the other indexes recently. The break below support is significant, especially since the index was unable to rally in recent weeks while the other indexes pushed higher.
The Jobs Report for the Week Ahead
The jobs report is Friday, but already traders have flagged it as necessary fuel to take the market higher. Weekly claims data has shown continued improvement in the employment picture for nearly two months, and economists expect that a total 210,000 nonfarm payrolls were added in February, below the 243,000 reported for January.
That would mark three straight months of solid job gains -- the U.S. unemployment rate is seen steady at a three-year low of 8.3 percent.
The jobs report, in the week ahead, is extremely important for the continuing economic recovery, but most people are feeling that that has been getting better already, and that’s probably why the market is doing so well!
The Fed and Quantitative Easing in the Week Ahead
Even though the U.S. economic data was a bit mixed in the past week, with slightly weaker durable goods and ISM manufacturing data, the market is no longer hanging on to the idea of another round of quantitative easing (QE). Fed Chairman Ben Bernanke’s Congressional testimony Wednesday and Thursday highlighted continued concern about the economy but he did not give any indication that the Federal Reserve had plans for more easing.
It seems that the market was expecting another dovish surprise and they didn’t get it -- that was a re-evaluation of the current position, and in that context we’re at a point now where the markets view everything as being negative for U.S. rates ... which will stall U.S. rates from going up sharply in the near future, but here is a chance for the euro zone rates to work a little lower, particularly in the week ahead.
Sideline Monies and the Market Correction
The majority of financial experts who appear on the cable networks seem to be getting more bullish, as some seem to be less certain we will see a correction. The forecasts for the major averages keep getting raised, and you hear comments like “US stocks are ridiculously undervalued.”
However, it appears that there is a majority of individual investors who are not convinced about the stock market continued rally in the week ahead and beyond – maybe the memories of 2008 are still too upsetting! The Wall Street Journal chart below shows that they have continued to move money out of stocks as the market has moved higher. Even at the end of 2010, when the market was rising sharply and was technically strong, investors were still moving out of stocks.
The most recent AAII survey of individual investors shows that now just over 45% think the market will be higher over the next six months. Once the market corrects, this number should drop well below 40%. The financial newsletter writers are more bullish, although unchanged last week at 51.1%.
The lack of buying by individual investors means that there is lots of cash on the sidelines…but it will probably take a significant rise in interest rates to coax them back into stocks.
The lack of interest can’t be blamed on the economic news, as it was generally positive—and had been for most of February.
Consumer sentiment hit its highest level in over a year, and on the retail side, many stores showed surprisingly strong growth in February, with high-end retailer Nordstrom (JWN) reporting same-store sales were up over 10%. Also last Wednesday, the preliminary report on fourth-quarter GDP beat analysts’ expectations – so why does this situation exist?
Gasoline Prices and the Effect on the Market in the Week Ahead
The direction of oil and gasoline prices is another big factor for the markets in the week ahead. Oil in the past week rose above $110 per barrel, but slipped back down to under $107 on Friday. Traders are watching any developments related to Iran, and they are very interested in a meeting Monday between President Barack Obama and Israeli Prime Minister Benjamin Netanyahu, who is speaking Monday evening in Washington.
Ahead of the meeting with Netanyahu, Obama Friday warned Israel against a pre-emptive strike on Iran. But he also warned Iran it could face an attack from the U.S. if that’s what it takes to stop it from developing a nuclear bomb.
Gas prices reached a national average of $3.74 per gallon Friday, 10 cents higher than a week ago and nearly 30 cents higher than a month ago. The last time gasoline spiked was in 2008, which accompanied many other negative factors to work against the consumer and consequently the markets.
Even though, while gasoline prices are rising, so far consumer sentiment is holding up. The difference this time around is other prices are stable.
A major event in the energy world in the week ahead is the annual five-day CERA Week energy conference, which starts Monday in Houston. One of Monday’s speakers includes Dallas Fed President Richard Fisher.
Primary Elections and the Effects on the Market
Investors will also be focused on the Super Tuesday primary elections in 10 states in the week ahead, which may help to identify a clear front runner for the GOP nominee to challenge President Obama.
There are two other elections investors are watching:-
• Polling was held Friday in Iran’s first national vote since the 2009 elections, which led to protests against President Mahmoud Ahmadinejad.
Early results Friday night showed that conservative rivals of Ahmadinejad were elected in many constituencies, suggesting he will face a more difficult relationship with parliament in his remaining two years. Final results are expected by early in the week.
• In another election this Sunday, Vladimir Putin was expected to win back the presidency of Russia, despite an active opposition. While he is expected to succeed, Putin will be under pressure to make changes, analysts said.
Europe and the Dollar in the Week Ahead
Europe will stay in the headlines as markets watch whether private investors decide to accept Greece’s debt restructuring terms by Thursday. Greece’s bailout hinges on the decision, and there is speculation it could result in default. However, further muddying the waters is the Greece downgrade on Friday by Moody's Investor Service, but Spain said its finances are not struggling.
There is an expectance that Greece will default, triggering a credit event, but that the impact will not likely be major for markets as it’s expected.
The European Central Bank's liquidity program is likely to keep pressure on interest rates. It appears that there is aggression in shorting the euro as the positive effect of the liquidity program on the euro has taken place and now we get the actual negative impact ... lowering interest rates through the euro zone. That is just one reason that many believe the dollar is ready to start moving higher, maybe as early as the week ahead.
It appears that the market is at a point where good news for the U.S. economy is good news for the dollar ... not necessarily against commodity currencies but against the euro, the Swiss franc and Sterling! The dollar was up 1.9 percent against the euro (at 1.32) and 2 percent against the Swiss franc in the past week.
The Economy and Earnings
It's hard to argue with economic data -- a stronger U.S. economy will create jobs and improve profits. That is seen as the key driver for the stock market's gains.
Even though the percentage of companies beating analysts' profit expectations is down from recent quarters, earnings growth for the fourth quarter is still at 9.4 percent, above a Jan. 3 growth estimate of 7.9 percent.
Earnings growth is down from recent quarters as well, but analysts said an improving economy will keep that growth from slowing too quickly, and will help offset any negative effects from Europe's fiscal troubles.
The Key Events in the Week Ahead
The Jobs Report is Everything in the Week Ahead
As often noted, the Labor Department's jobs report, due before Friday's open, is the most important economic report of any month. The question in February is whether the modest strength seen in the late fall and January will continue.
Most economists see nonfarm payrolls rising by some 220,000, a bit less than January's 243,000, with the unemployment dropping to 8.2%. That would reflect strength in the auto sector and other areas of manufacturing and maybe some improvement in construction.
A big worry is if there's too much euphoria in the week ahead, especially with crude oil at $106 a barrel and the price of retail gasoline up 14% this year.
A hint of what the jobs report will say will come Wednesday with the ADP National Employment Index, which tries to gauge trends in private-sector jobs, and Thursday with the government's weekly report on jobless claims and the Challenger Gray & Christmas report on layoffs.
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: Steinway Musical Instruments (LVB), AMAG Pharmaceuticals (AMAG), Arcos Dorados (ARCO), Fuel Tech (FTEK), Giant Interactive (GA), NutriSystem (NTRI), and VeriFone Systems (PAY).
• 10.00 am ISM nonmanufacturing
• 10.00 am Factory orders
Earnings: AeroVironment (AVAV), Analogic (ALOG), Chesapeake Utilities (CPK), Dick's Sporting Goods (DKS), MAKO Surgical (MAKO), Pandora Media (P), Shuffle Master (SHFL), STAAR Surgical (STAA), United Natural Foods (UNFI), and Vail Resorts (MTN).
• There are no major economic releases scheduled for Tuesday.
Earnings: Brown Forman (BF.B), American Eagle Outfitters (AEO), Canadian Solar (CSIQ), Children's Place (PLCE), Ciena (CIEN), Flotek Industries (FTK), Fresh Market (TFM), Geron (GERN), H&R Block (HRB), Hot Topic (HOTT), Hovnanian Enterprises (HOV), Men's Wearhouse (MW), and Sequenom (SQNM).
• 8.15 am ADP employment
• 8.30 am Productivity and costs
• 3.00 pm Consumer credit
Earnings: Canadian Imperial Bank of Commerce (CM), Aeropostale (ARO), Anheuser Busch-InBev (BUD), Buckle (BKE), Dynegy (DYN), Eagle Bulk Shipping (EGLE), Emergent BioSolutions (EBS), Fuel Systems Solutions (FSYS), JinkoSolar (JKS), Quiksilver (ZQK), Renren (RENN), Smith & Wesson (SWHC), Smithfield Foods (SFD), Suntech Power (STP), and Williams-Sonoma (WSM).
• 8.30 am Initial claims
Earnings: Ann (ANN), BioScrip (BIOS), Citi Trends (CTRN), and Novavax (NVAX).
• 8.30 am Employment report (Feb)
• 8.30 am International trade (Jan)
• 10.00 am Wholesale trade (Jan)
Conclusion for the Week Ahead
Expect the action to be even more volatile this week, as the battle between investors and those hedge funds that are short continues. The action of the Russell 2000, as mentioned above, sends a strong warning that investors should not get caught up in the euphoria at current levels. However, there is further risk that the investor could be left on the sidelines as the markets seek new and higher levels!
Stocks generally drop faster than they rise, and heavy selling could be triggered by some news event -- it’s difficult to tell what that event might be – maybe Greece, Iran or the jobs report!
If the markets do go into correction mode then it is possible that we will see more than a 3% to 5% correction if a correction actually comes to fruition!
One area to concentrate on is the ETFs of S&P 500 SPDRS (NYSE: SPY), DJ Industrial Average (NYSE: DIA) and PowerShares QQQ (Nasdaq: QQQ), which all remain in strong uptrends. Trendlines and support levels can be used as profit-taking signals, as a breach of these levels shows something may be changing. The trend is up, though, and these three indexes have not shown signs of weakness yet. As discussed above, IWM on the other hand broke below support last week while the other indexes pushed higher. This signals IWM is relatively weak compared to the other indexes at the present time.
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