The Week Ahead: Bulls Set For Higher Run With Support Of Fed!
The Game Plan: Low Valuations Provide Big Profit!
Stock Market: Retailers, Oracle, FedEx to Report Earnings!
Wall Street: Dow Has 10-Day Winning Streak And Positive 4th-Straight Gain! !
by Ian Harvey
March 18, 2013
The Federal Reserve could add more momentum to the market rally in the week ahead, keeping the Dow on track for its best first quarter since 1998.
There are four housing reports in the coming week but the Fed is the main event. It holds a two-day meeting, which ends with the release of its policy statement, economic forecasts and a press briefing by Fed Chairman Ben Bernanke Wednesday afternoon.
Analysts, however, are expecting a pullback soon after, and have been looking for one for weeks. But the DOW has kept moving higher, moving strongly through its all-time high on March 5, and is still gaining. The Dow was up 0.8 percent for the week, finishing at 14,514, despite a slight loss of 25 points Friday.
It is more likely that a pull-back/correction will occur mid-April when we're likely to start to see disappointing data, and we get closer to earnings. There are just a few earnings, including Nike, FedEx and General Mills.
The stock market is also watching Apple (AAPL), which gained 2.8 percent in the past week, as investors increasingly believe it may have bottomed. There is also continuing speculation that Apple could announce dividend or stock buyback news, since Monday is the first anniversary of Apple's dividend announcement.
• ‘The Past Week’
• ‘The Upcoming Week’
• ‘The Economy’
• ‘The Fed Ahead’
• ‘Overseas Influence on the Stock Market’
• ‘Earnings and Company News’
• ‘A List of Key Events’
• ‘The Spotlight on Certain Companies’
• ‘Expectations for the Coming Quarter’
• ‘Sentiment Effect on Stocks’
• ‘The NYSE Composite’
• The Ides of March and Its Effect on the Stock Market
• A List of Companies Reporting
• ’A Stock Market Resilience For March According To History’
• Stock Market Correction Ahead - Providing Buying Opportunities!
• Stock Market Expectations in 2013
A breakthrough to new highs for the stock market in the week ahead is entirely likely if the Fed comes and goes, and people like what the chairman says at the press conference.
Stocks have soared in 2013, with the Dow Jones Industrial Average (DJI) climbing almost 11 percent to hit a series of new all-time highs while the Standard & Poor's 500 Index (SPX) has jumped 9.4 percent, falling just short of its all-time closing high after rising for 10 of the past 11 weeks. And yet, analysts for the most part see equities as fairly cheap.
The rally has slowed, however. In the last eight trading sessions, the S&P 500 has managed a daily gain of more than 0.5 percent just once.
Taken on its own, analysts see potential for more gains in the U.S. stock market, based on metrics like earnings prospects and valuation. The forward 12-month price-to-earnings ratio for the S&P 500 is currently 13.5, which is about 9 percent less than the October 2007 ratio of 14.8 when the S&P last hit a record.
This means that stocks are cheaper than they were at the time of the last high, and at the same time, alternative assets like bonds are much more expensive.
The S&P 500's earnings yield - a reverse of the P/E ratio - currently stands at 7.1 percent, compared with 6.41 percent for the BofA Merrill Lynch US High Yield Index. That's an anomaly in the markets - the earnings yield has generally been lower than a benchmark junk-bond yield because it measures the risk of owning the highest-quality stocks versus the expected return on the lowest-quality bonds.
The current P/E ratio is also below the historic average of 14.8, according to Thomson Reuters data dating back to 1968. The S&P 500 would need to rise to about 1,647 to become in line with the historic average - about 5.6 percent above current levels, according to Standard & Poor's.
Interest rates remain near record lows while dividends are growing, another way that stocks are outshining bonds.
Stocks closed out the past week with a gain, but the S&P 500 fell short of recovering its 2007 closing high. The S&P closed up 0.6 percent at 1560, short of the 1565 record closing level of October 2007. But analysts expect the S&P to cross that threshold soon and take aim at the all-time intraday high of 1576.
The Dow is up 10.8 percent so far this quarter, and historically when the first quarter is sharply higher, the market ends the year with a gain. In the 12 times the Dow was up more than eight percent in the first quarter since 1950, the Dow finished positively every time and finished with double-digit gains ten times.
• Dow Jones Industrial Average (DJI) rose 0.81 percent for the week to finish at 14,514.11.
Boeing was the best weekly performer on the Dow, while Home Depot sagged.
• The Standard & Poor's 500 Index (SPX) climbed 0.61 percent, to finish at 1,560.72
Among key S&P sectors, financials closed higher for the week, while telecoms slumped..
• And the Nasdaq Composite Index (COMP) edged up 0.14 percent to end at 3,249.07.
CBOE Market Volatility Index (VIX) ), widely considered the best gauge of fear in the market, finished Friday session unchanged on the day at 11.30.
The VIX finished the week down 10.2%.
The Eurozone markets had a good week, as the German Dax index completed its correction ahead of the US markets, as was expected in February's "weekly update". The Dax is up about 0.5% more than the Spyder Trust (ARCA: SPY) so far in March, and is still acting quite positive.
The EU summit has generated little news so far, but there still seems to be an impasse between those favoring austerity and those favoring growth. This has been the main topic since the Italian elections a few weeks ago. But expect more news out of the Eurozone sometime this month that may upset the stock market.
The iShares Dow Jones Transportation (IYT) was again the stellar performer last week, up close to 2%. Out of its five industry groups last week, the truckers are the laggards. There are a few stocks in this group that have reached first good support, and new buy signals may be achieved in the week ahead.
The best-performing sector ETFs last week were the Select Sector SPDR Financials (XLF) and the Select Sector SPDR Energy (XLE), both up around 1%.
Several of the sector ETFs, like the Select Sector SPDR Consumer Discretionary (XLY), Select Sector SPDR Technology (XLK), and Select Sector SPDR Health Care (XLV), were weaker than the market on Friday. The Select Sector SPDR Financials (XLF) were down just a fraction on Friday.
Earnings Reports for the Past Week
In the most recent quarter, the average dividend yield for S&P 500 companies was 2.19 percent, more than the 1.89 percent yield in the fourth quarter of 2007, the period of the last market peak, according to Standard & Poor's. In 2012, 403 S&P 500 components paid a dividend, the highest number since 1998.
The S&P 500 is also trading well below its intrinsic value, another metric of earnings-based valuation that estimates where a security should trade, based on its expected growth trajectory over the next decade or more.
The index is seen as having a price to intrinsic value ratio of 0.85, according to Thomson Reuters StarMine, which means it would have to rise 15 percent to be in line with its earnings growth trajectory. More than two-thirds of companies are below their intrinsic value, including some of the biggest.
The May crude oil contract bounced off its monthly pivot support at $89.77 two weeks ago, and was up over $1.50 per barrel last week. The daily analysis is positive, and the weekly technical studies could turn positive this week.
The SPDR Gold Trust (GLD) managed to close the week a bit higher, but is still locked in a trading range between resistance at $156.80 and support at $150.81. The daily downtrend is now at $160.80.
The daily OBV has been above its WMA for the past six days, but is still below its downtrend (line b). Its WMA is starting to turn up, but it is not convincing enough to buy. The weekly OBV is still below its WMA.
Economic Reports in the Past Week
Last week's news on the economy ended on a sour note. The preliminary reading on consumer sentiment from the University of Michigan fell from 77.6 in February to 71.8 for March. This compared to consensus estimates which called for the reading to hold steady at 77.6.
This took away much of the bullishness from Wednesday's 1.1% gain in retail sales. The chart shows a very strong uptrend, which favors continued improvement despite the apparent short-term fears over the budget cuts.
Friday's Empire Manufacturing Survey was generally positive, and industrial production also beat the consensus estimates
The Fed in the Week Ahead
A series of stronger-than-expected data, including February's 236,000 non-farm payrolls and the surprise 1.1 percent jump in retail sales, has sent Treasury yields rising and has stirred speculation about the Fed's plans for easing. But Fed watchers do not believe the data has been strong enough to turn the Fed from the path of "Quantitative Easing (QE3)" or its ultra-low rates policy.
Still, traders are watching for any sign that the Fed is even discussing ending its easy ways. The minutes of recent meetings have revealed that some Fed members would like to end easing sooner rather than later and are concerned that it may no longer be effective. Those comments in the December and January minutes have had an effect on the bond market.
But on Friday, traders bought Treasurys into the close, driving the 10-year yield to 1.99 percent, a sign to some that the market is anticipating a dovish Fed on Wednesday.
It is likely that Ben Bernanke's objective will be to convey the idea that the Fed is not about to take the punch bowl away because the party hasn't even started yet in terms of economic growth, and given the high level of unemployment – the markets are feeling better, employment statistics are looking better, but the economy has not taken off yet to a sustainable scenario.
One thing the Fed may do is adjust its forecast. For instance, in December it expected to see 2.3 to 3 percent GDP growth this year, but it could tweak that to include a hit from the sequester. The ”sequester” is the automatic spending cuts that were put into effect when Congress failed to act on a spending plan. In the coming week, Congress is expected to work toward adopting a continuing resolution to keep the government running through May, from the current March 27 deadline.
Expect the Fed will probably maintain next year's forecast of 3 to 3.5 percent GDP growth.
It is probable that the statement will be very similar to the January Fed statement.
Housing is one bright spot that economists point to as a source of momentum for the broader economy, including in hiring. It is also propping up consumer spending and confidence, despite headwinds from high gasoline and higher taxes. If the Fed were to wind down some of its purchases this year, it would probably continue its purchases of mortgages to keep the housing market rebound intact.
If the economy starts to pick up substantially then maybe at the July Humphrey Hawkins (Congressional testimony), Bernanke might make some comments about the economy getting better.
Earnings and Company News in the Week Ahead
Retailers will continue to dominate the earnings cycle in the week ahead, with about a dozen major retail companies slated to report.
It will be a few more weeks before the first quarter reporting cycle gets into high gear, but the earnings season will actually get underway in the week ahead. Alcoa (AA) typically gets credit for kick-starting each earnings season, but that’s not really accurate -- the ‘official’ earnings season generally gets underway before Alcoa’s report comes out, as mentioned above.
Expectations for the Coming Quarter
As has been the case at the start of recent quarterly earnings cycles, expectations for the first quarter earnings season remain quite low. Total earnings for companies in the S&P 500 are expected to be down -3.9% from the same period last year. This would compare to actual earnings growth of +2% in the fourth quarter. The key variance between the first quarter and preceding quarter is in the expectations for the Finance and Tech sectors.
Finance has been a key driver of earnings growth over the last several quarters. Total earnings growth for the S&P 500 in the fourth quarter of 2012 drops from +2% to +0.5% (when Finance is excluded from the index’s results). But Finance earnings are expected to drop -9.8% in the first quarter from the same period last year following the +10% growth in the fourth quarter. Earnings in the Tech and Energy sectors are expected to be down -4.6% (vs. +1.3% in Q4) and -8.9% (vs. +3.6% in Q4), respectively.
Stepping back from these expectations and taking a big-picture view of earnings, it becomes clear that earnings growth has been essentially flat, particularly outside of Finance, since the second quarter of 2012. This underwhelming trend carries into the first quarter, but we start getting a rebound from the second quarter onwards and a material ramp-up in the back half of the year.
What this means is that the market expects the first quarter of 2013 to serve as an earnings growth bottom. Current consensus expectations put earnings growth in the second quarter at +3.7%, in the third quarter at +7%, and an impressive +13% in the last quarter of the year.
Therefore, the market is looking for double-digit earnings growth in the back half of the year, which continues into 2014. And if these expectations have to come through, then we need corporate managements to shed light on how and where the growth will come from. It has been a while since we have seen uplifting guidance from management teams as a majority of the companies providing guidance over the last two quarters guided lower. Guidance is always key, but it is even more important this time around given how strong expectations are for the rest of the year.
• General Mills (GIS) is expected to report earnings per share of $0.57 on revenue of $4.36 billion. Closing at $46.27 on Friday, General Mills shares have rallied more than 11% in the last three months.
Deutsche Bank has a Buy rating on General Mills and a $49 price target. Analysts believe General Mills to be fundamentally undervalued, arguing that it should trade at a premium to its peer group.
“Based on its leading brands, strong margin management, and increasingly international presence...we reiterate our Buy opinion,” Deutsche Bank states.
• Oracle, too, has been a solid performer over the last quarter, rallying nearly 14% -- more than the broader S&P 500, which is up just a bit more than 9% over the same period.
Analysts are looking for Oracle to post earnings per share of $0.66 on revenue of $9.38 billion. Both Canaccord Genuity and Goldman Sachs like Oracle, with both firms giving the company Buy ratings.
Canaccord is particularly bullish on Oracle, writing that the company was “set up well for a 10-20% run.” Analysts at Canaccord have a $42 price target on Oracle and believe that the market misprices it relative to other large cap techs.
Goldman Sachs isn't as positive as Canaccord, with only a $39 price target. Still, Goldman expects a “solid report” and believes that “improvement in hardware could also serve as a catalyst for the shares in the near term.”
The company also has inked a few major acquisitions lately, agreeing to buy telecommunications-equipment maker Acme Packet Inc. (APKT) in a deal valued around $1.7 billion and software firm Eloqua Inc. for roughly $810 million.
• Wet Seal Inc. (WTSL), which reports Thursday, had forecast its fiscal fourth-quarter loss would be at or near the low end of its guidance, as the struggling women's apparel retailer posted another substantial drop in same-store sales.
The company, which operates its namesake and Arden B stores, has undergone a substantial leadership transition after hedge-fund manager Clinton Group Inc., a major shareholder, agreed to drop its proxy fight with the company in exchange for naming four board seats.
Since then, Wet Seal has named a new chief executive, lost its chief operating officer to resignation and unveiled a series of cost-cutting efforts as it works to improve its finances. The company is expected to return to profitability in the new fiscal year.
• Williams-Sonoma Inc. (WMT), parent company of Pottery Barn and West Elm, is expected to report stronger earnings Tuesday. The home-goods retailer has posted steady revenue growth, but has struggled with an underperforming namesake brand and margin pressure from an intensely competitive environment.
Williams-Sonoma recently launched a plan to develop its online and international sales, upgrade its supply chain and expand its West Elm business. Despite the heavy spending, the company's profit margins have shown improvement.
• Hostess Nears Bankruptcy Sales -- the fate of Twinkies, Wonder Bread and other beloved Hostess brands will be in a bankruptcy judge's hands Tuesday.
Apollo Global Management LLC (APO) and Metropoulos & Co. have offered $410 million for such snack cake brands as Twinkies, Ho Hos and Ding Dongs, as well as five bakeries and equipment.
Metropoulos & Co.'s Evan Metropoulos, whose family owns Pabst Brewing Co., said he hopes to quickly return Twinkies and Hostess's other snacks to store shelves, where they have been missing since their maker launched its liquidation last November.
• Also in the week ahead, Patriot Coal Corp. (PCXCQ) will ask the St. Louis bankruptcy court for permission to pay nearly $7 million in bonuses to the employees it is counting on to shepherd it through an "increasingly difficult" time.
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 in the Week Ahead: No major earnings reports for Monday
• 10:00 am: NAHB housing index
• Earnings in the Week Ahead: Adobe Systems, Tumi, DSW, FactSet
• Fed begins two-day meeting
• 8:30 am: Housing starts
• 8:30 am: Building permits
• Earnings in the Week Ahead: FedEx, General Mills, Jabil Circuit, Oracle
• 7:00 am: Mortgage applications
• 10:30 am: Oil inventories
• 2:00 pm: FOMC rate decision
• 2:15 pm: Fed Chairman Ben Bernanke press briefing
• Earnings in the Week Ahead: Nike, Lululemon Athletica, Ross Stores, Worthington Industries, Silver Wheaton
• 8:30 am: Jobless claims
• 9:00 am: FHFA home price index
• 10:00 am: Existing home sales
• 10:00 am: Philadelphia Fed survey
• 10:00 am: Leading indicators
• 10:30 am: Natural gas inventories
• Earnings in the Week Ahead: Darden Restaurants, Embraer, KB Home, Tiffany
• No major economic reports for Friday
International Economic Reports
Sentiment Effect in the Week Ahead
There was a big change in sentiment for individual investors last week. The bullish percentage jumped from just over 31% to 45.4%. The financial newsletter writers also became more bullish, up to 50% from 44.2%.
Even more interesting-and potentially a concern for the market-is that the number of bears dropped to 18.2%, so the spread has widened significantly.
The NYSE Composite in the Week Ahead
The weekly chart of the NYSE Composite continues to look strong after the prior week's breakout from the five-week trading range. The weekly Starc band is just 2% above Friday's close.
The weekly NYSE Advance/Decline (A/D) line broke through its resistance (line c) at the start of the year, and made further new highs last week. It is still well above its rising WMA.
There is first weekly support in the 8,930 to 9,000 area, with the rising 20-week ’Exponential Moving Average’ (EMA) at 8,684.
Conclusion for the Week Ahead
It was another great week for the stock market, which left investors either euphoric or nervous. The ten-day winning streak for the Dow hadn't been equaled since 1996, but ended Friday. The gain in 1996 was a bit better, as the Dow was up 4.8%, versus a 3.4% gain through last Thursday's close.
In 1991, there were 11 consecutive higher Dow closes, as it gained over 9% to finish the year strong. The Dow continued higher for the first month of 1992 before it topped out.
By looking at technical details of the stock market there are no signs yet that a top is in place. Friday's performance did not change this view-but, it is important to have a clear exit strategy, whether you are trading long or short.