The Week Ahead: Market Bulls Should Keeping Running!
The Game Plan: Run With The Rally!
Stock Market: Retail Sales and Inflation!
Wall Street: Buy Not Sell!
by Ian Harvey
March 11, 2013
With the Dow Jones Industrial Average closing at yet another new record high on Friday, and the Fed providing new optimism about the economy, Wall Street bulls are likely to continue their record run in the week ahead.
The week will be light on corporate earnings, but retail sales and inflation data will stand out in a in the week ahead. Traders are also watching $66 billion in Treasury auctions after a dramatic jump in rates took the 10-year yield to 2.06 percent by Friday, an 11-month high. The Treasury auctions 3-year notes Tuesday, and longer-dated 10- and 30-year bonds Wednesday and Thursday.
Only a handful of major companies will release earnings during the week, but investors should pay attention to earnings from The Men's Wearhouse (NYSE: MW), Costco (NASDAQ: COST) and Majesco (NASDAQ: COOL).
• ‘The Past Week’
• ‘The Upcoming Week’
• ‘The Economy’
• ‘Earnings and Company News’
• ‘A List of Key Events’
• ‘The Spotlight on Certain Companies in the Week Ahead’
• ‘Expectations for March’
• ‘Sentiment Effect on Stocks’
• ‘The NYSE Composite’
Four years after hitting bottom in the financial crisis, the Dow soared to a new high in a bank-led rally in the past week, and traders now expect bulls to charge ahead toward the S&P 500's all-time closing high of 1565 in the not too distant future.
“Stronger-than-expected employment numbers fueled the sixth straight day of gains in the stock market.”
A surprisingly strong employment report, showing 236,000 jobs created in February, added strength to stocks and lifted the dollar Friday.
Stocks finished higher across the board Friday with the Dow setting a new record high and all three major averages up more than 2 percent for the week, boosted by a stronger-than-expected monthly government payrolls number.
The S&P 500 climbed for its sixth straight day, putting it less than 1 percent from an all-time closing high. The benchmark S&P index rose for its ninth positive week out of the last 10. All three major stock indexes racked up their biggest weekly gains since the first week of the year.
• Dow Jones Industrial Average (DJI) notched its sixth consecutive win, ending at 14,397.07 on Friday, up 2.2%. The Dow ended the week of Dec. 31 up 3.8%.
The Dow broke its 2007 closing high on Tuesday. Friday's gain was the Dow's sixth in a row, its second six-day winning streak in 2013.
For the year, the Dow is up 9.9 percent.
Bank of America was the strongest weekly performer, while Caterpillar posted the biggest decline.
• The Standard & Poor's 500 Index (SPX) ended the week at 1,551.18, up 2.2%, after tagging a fresh five-year peak of 1,552.48.
For the year, the S&P 500 is up 8.8 percent.
The S&P has been up nine out of the last 10 weeks. The S&P financial sector, up 3.4 percent was the best performer, after government stress-test results showed that most major institutions could withstand a severe recession. Banks should stay a focus in the week ahead, as the Fed's ruling on individual bank capital plans will be released Thursday after the closing bell.
All 10 S&P sectors finished higher for the week, led by financials and consumer discretionary.
• And the Nasdaq Composite Index (COMP) was up 2.4 percent to settle at 3,244.37, after touching a 12-month high of 3,248.70.
For the year, the Nasdaq is up about 7.5 percent.
CBOE Market Volatility Index (VIX) ), widely considered the best gauge of fear in the market, finished Friday session at 12.59, down points 0.5, or 3.6 %.
The VIX finished the week down 18%.
Last week was a pretty quiet in the Eurozone, and as expected, the market leading DAX Index did complete its corrective pattern, but is still below its all time highs from 2007. Expect developments in the Eurozone to trigger some stock market selling in the coming months.
This week for a change the SPDR Diamond Trust (DIA) made a new all-time high along with the iShares Dow Jones Transportation (IYT).
In January, some were concerned that the failure of the Dow Industrials to make a new highs with the Transports meant that stocks could not go higher. However, the technical evidence indicated that the Transports were quite strong, and that it showed no signs of topping out.
IYT was up close to 3% last week as the 3.8% pullback to the $103.03 level on February 26 was all the correction this market needed. It still looks strong technically.
The Select Sector SPDR Financials (XLF), Select Sector SPDR Energy (XLE), Select Sector SPDR Consumer Discretionary (XLY), and Select Sector SPDR Energy (XLE) were the best performers last week as they were up 3% or more.
The daily chart of the Select Sector SPDR Financials (XLF) made convincing new highs last week after briefly breaking its uptrend (line a) on the correction. This is a good example of why breaking a trend line is not always negative as XLF held well above the 38.2% support on the correction.
The weekly chart of the Select Sector SPDR Materials (XLB) shows that it broke the weekly downtrend, line b, in early January. On the February correction, it retested the downtrend before turning higher. It is still below its early 2013 highs.
Earnings Reports for the Past Week
On most conventional measures, the Q4 earnings season turned out to be pretty good!
The market appears to be happy with what it saw in Q4 earnings. A major reason - expectations. They fell enough in the run up to the reporting season that coming ahead of them proved to be fairly easy. This shows that earnings growth turned out to be better relative to expectations immediately before the reporting season started (early January), but significantly lower compared to expectations in early October.
That said, the Q4 growth rates are better than the third quarter, but are significantly lower compared to the average of the preceding four quarters.
The May crude oil contract appears to be bottoming out as it dropped to monthly pivot support at $89.77 before turning higher. There is next strong resistance in the $94-$95 area. There are a few energy stocks that have quite good charts..
Precious metals stabilized last week, and while silver looks the best technically, it needs one strong up day to confirm that a bottom is in place. Gold is still lagging for now, and needs further consideration.
Economic Reports in the Past Week
The strong monthly jobs report immediately sparked talk Friday that the Fed could pull back on quantitative easing because of an improvement in the employment picture, but Fed watchers disagree. The Fed is buying $85 billion a month in Treasury and mortgage securities, and the program is widely credited with lifting stock prices.
Stocks enjoyed their best weekly performance of 2013 on Friday after the government reported the nation's unemployment rate fell to 7.7% in February, the lowest rate since December 2008.
At the same time, the Labor Department said a surprising 236,000 jobs were created in February. Most economists had been looking for a gain of 165,000 at most.
The report also said the economy added 246,000 private sector jobs. It was the third month in the last four that this category had topped 200,000.
The positive jobs report could be a signal that the economy may be getting strong enough to bring the national unemployment down further. The rule of thumb that economists have used is that 200,000 or so new jobs a month are needed to lower the unemployment rate.
The jobless rate hasn't been below 7% since November 2008, when the full force of the recession upset the economy. Also, the Federal Reserve has promised to keep rates at ultra-low levels until the unemployment drops below 6.5%.
A pleasant surprise in the report was that the construction sector added 48,000 jobs in February, the most since March 2007. That total includes a small gain in residential construction, which has been slow to recover from the housing bust.
In addition to the jobs data last week the ISM Non-Manufacturing Index rose to 56, which suggests that the economy is growing nicely and will continue to do so. The chart shows that it is well above the key level of 50 and a move above the November high of 60.9 would be very positive. The generally volatile factory orders came in weaker than expected.
The yield on both the 10-year T-Note and the 30-year T-Bond closed at their highest level in almost a year. The daily chart of the T-Bond yield shows that it retested its former downtrend (line a) and its 20-day EMA before moving sharply higher. This may mean that the flow out of bonds and into stocks has picked up, which would be a very bullish development.
Earnings and Company News in the Week Ahead
Expectations for the Coming Quarters
Ever since the Q4 earnings season got underway, analysts have been cutting their estimates for the first quarter of 2013. Driving this trend has been management guidance, which was relatively less negative this time compared to the quarter before, but was nevertheless predominantly on the weak side.
The table below provides the expected earnings growth rates and what we got in the preceding quarter and year.
Instead of growth rates, take a look at the absolute dollar levels of earnings in the chart below - for 8 quarters (four actual and four expected) and 7 years (five actual and two expected).
What we can see from this data is that earnings essentially flat-lined over the last three quarters, but are expected to bottom in the current quarter. And then start going up - in a big way.
Expectations are for flat earnings growth (up only +0.3%) in the first half of the year, but a ramp up in the back half to a growth pace of +10.2%. This growth momentum is expected to carry into 2014, giving us earnings growth of +11.7% that year after the +6.8% gain in 2013 and +3.8% growth in 2012.
The market has a ways to run, but there are risks as the second half of the year approaches. Saturday marks the four-year anniversary of the market bottom, when the S&P hit an intraday low of 666 – the “devils number”.
Stocks were helped by Congress last week pushing concerns about a budget battle into September, from an earlier March deadline on the continuing resolution to fund the budget. But that issue could heat up in the fall and weigh on the market.
There is also potential for U.S. corporate earnings to reflect more of the weakness in Europe, with about 12 percent of revenues for the S&P 500 companies coming from Europe. Stronger U.S. data may cause the market to react to the idea that the Fed will stop its extraordinary policy easing, but it appears that the market's rally has been liquidity driven.
There is an expectation that the S&P will rise above 1600, but the market's climb into record territory may not be the catalyst.
• Warehouse retailer Costco is set to report earnings Tuesday. Analysts currently expect the company to post earnings per share of $1.06 on revenue of $25.13 billion.
Analysts at Morgan Stanley like Costco, even with shares hovering around 52-week highs, and have an Overweight rating on the stock.
“While we see the risk-reward as balanced for the quarter, we see Costco poised to deliver consistent ~16% earnings growth this year,” Morgan Stanley notes.
• Also reporting on Tuesday will be video game maker Majesco Entertainment. Trading near $0.50 per share, it quite literally has become a penny stock, and could soon run into delisting issues if shares do not trade back above $1.
Analysts expect the company to post a loss per share of $0.03 on revenue of $28.7 million.
Wedbush is conflicted on the name, noting, “We recommend that investors take a wait-and-see approach...we continue to believe that the company is one hit game away from significant appreciation beyond its current share price, [but] it is not clear that such a game is included in its pipeline.”
Wedbush has a Neutral rating on the stock and a $1 price target.
• Men's Wearhouse will release earnings Wednesday. Analysts currently expect the retailer to post a loss per share of $0.05 on revenue of $610 million.
John Kernan at Cowen Group is skeptical. Earlier in February, he downgraded Men's Wearhouse to Neutral on concerns the company could issue weak guidance.
“We are concerned that flat to negative same-store sales may have continued into 2013, and that initial guidance may disappoint given a slower same-store sale environment across retail,” Kernan notes.
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.
• Earnings: Dick's Sporting Goods, Urban Outfitters, CVREnergy
• No major reports for Monday
• Earnings: Costco
• 7.30 am NFIB
• 10.00 am JOLTs Job Openings
• 1.00 pm $32 billion 3-year auction
• Earnings: Express, Men's Wearhouse
• 7.00 am Mortgage applications
• 8.30 am Import prices
• 8.30 am Retail sales
• 10.00 am Business inventories
• 10.30 am EIA oil inventory data
• 1.00 pm $21 billion 10-year auction
• Earnings: Ulta Salon, Aeropostale, Krispy Kreme
• 8.30 am Weekly jobless claims
• 8.30 am PPI
• 9.00 am Fed Gov. Sarah Raskin at NeighborWorks Symposium
• 10.30 am Natural gas inventories
• 1.00 pm $13 billion 30-year bond auction
• 4.30 pm Fed's capital review of banks
• Earnings: No major earnings reports
• 8.30 am Empire State manufacturing survey
• 9.00 am Treasury international capital flows
• 9.15 am Industrial production
• 9.30 am Dallas Fed President Richard Fisher speaks
• 9.55 am Consumer sentiment
International Economic Reports
Germany's CPI will be released early Tuesday. Economists currently expect the index (which measures inflation) to rise 1.5% on a year-over-year basis. Later, investors will get reports on the state of manufacturing in the United Kingdom: industrial production, manufacturing production, and trade balance will be released early Tuesday.
Then, on Wednesday, New Zealand's central bank will make a decision on interest rates (economists expect them to remain unchanged) and Australia will report its unemployment rate.
Expectations for March
What is likely to be expected in March is a “choppy market.” If this occurs, it will make it difficult for those who invest in index-based products while stock pickers who concentrate on entry levels and risk should do much better.
The seasonal analysis of the S&P 500 using data going back to 1937 supports this view. This chart shows that the typical seasonal tendency is for a high around March 6 (in blue), then a low around March 14 (in purple) followed by another high on the 21st with a low at the end of the month. It would be surprising if there isn’t at least one-two sharp down days this month.
Most investors who are not in the market are wondering whether it is too late to buy or if they are long, should they be selling. Countless articles focus on the popular, but not really accurate view that the public always buys at market tops and sells at market bottoms.
Below is a chart showing that stock ownership, despite the rally from the March 2009 lows, was still well below historically high levels. Though the public’s exposure to stocks has increased in the past few month we are not close to the sentiment extremes that were observed in 2000.
One also should not forget what happened in 2012 as this updated chart shows the several wide swings in the SPY that occurred in 2012. The SPY is now up over 15% since the November 2012 lows and is already close to the yearly double-digit gain.
Since most of the upside targets from Wall Street strategists have already been reached or exceeded, expect to see some upward revisions in the coming weeks.
Even though the technology sector has been out of favor for the past few months, it has been the star performer since the 2009 lows as it is up over 149% followed by the small cap Russell 2000 IWM.
Both have clearly done better than the S&P 500, but of course, they are more volatile and therefore have more risk. The improvement in the relative performance of the Dow tracking SPDR Diamond Trust (DIA) in the past few weeks suggests it may overtake SPY in the coming weeks.
Sentiment Effect in the Week Ahead
There are still some skeptics voicing their opinions, but there has been quite a change in sentiment since Christmas when headlines like these seemed to dominate the news....
"Consumer Confidence Tumbles Over Fiscal Cliff; Economy Next?"
"So Much For 'Happy Holidays'"
"Time For A Few More Bear Call Spreads"
The current market sentiment is a bit too euphoric and the great numbers on unemployment Friday gave most even more reasons to be bullish. Both the weekly and daily charts of key technical indicators are positive, and even though there is an expectation for more new market highs in the months ahead, it will not be easy.
The individual investors did not get much more positive last week as the bullish% rose to 31% up from 28.4% the following week with 38.5% now bearish. Even the financial newsletter writers apparently are not convinced as the bullish percentage dropped to 44.2% last week down from 46.3%. The bearish percentage is quite low at 21%, which means that many are just looking for a correction.
The NYSE Composite in the Week Ahead
The daily chart of the NYSE Composite shows the test of the daily Starc band on February 26 with the higher close. The up gap opening last Tuesday completed the correction and the starc+ band is now at 9144.
The next major resistance from 2008 is in the 9,400 area with additional at 9,724. The all-time high from October 2007 stands at 10,311. The NYSE Advance/Decline (A/D) line reversed back above its WMA at the end of February and made a series of new highs last week. It has continued to lead prices higher.
The 20-day ’Exponential Moving Average’ (EMA) is at 8912 with key support now in the 8700 area.
Bonds in the Week Ahead
Expect bonds to consolidate in the week ahead, after the past week's surprisingly steep rise in yields, and inverse drop in prices.
The auctions will be a litmus test, as they always are. Especially after a week where NFP (nonfarm payrolls) and ADP (private sector jobs report) are strong, you see investors a little bit worried about taking down supply.
While bond prices moved lower and stocks rose in the past, there were no signs of the "great rotation" of money out of bonds into stocks, as some analysts have been expecting. Two weeks ago, we had bad news, and this past week we had good news. Treasurys ebb and flow with the news, not so much the fundamentals. They're an instrument between flight-to-safety, and 'risk on, risk off.’
It's too early to say that yields are on a longer-term upswing. Maybe if the S&P can make new highs, and keep them for the rest of the month and April, then we could be looking at higher yields in the summer.
Conclusion for the Week Ahead
As mentioned in previous articles I have mentioned that you should be looking to buy not sell. Even though there will be choppy trading in the major averages this month, expect that many stocks will go against the trend. Many remember that the S&P 500 was flat in 2011 as the green line on the chart indicates. On the other hand McDonald’s Corp. (MCD) rose from $76.60 to close the year at $100.33 as the chart shows its strong uptrend.
The best approach to picking stocks will be to target stocks that have positive weekly and monthly technical patterns but have undergone retracements. The bullish action last week is likely to spur more movement into stocks, but for those who are looking at an index tracking fund, stick with the dollar cost averaging approach.
For those who have not been in the market, I would recommend concentrating on high-yielding large-cap stocks.
It is not recommended getting into something like the Spyder Trust (SPY) or SPDR Diamond Trust (DIA) at this time and would only consider them if we get a decent pullback.