The Week Ahead in the Stock Market
March 26, 2012

Stocks enter the final week of what’s shaping up to be the best first quarter in 14 years, with little hope the second quarter can match its gains.

The week ahead could also signal if the market has peaked or is just taking a breather. Earnings from Lennar, Walgreen and Paychex will help answer the question. So will reports on pending home sales and Chicago Purchasing Managers Index.

Portfolio managers will be doing some last-minute shopping for winners from the big U.S. stock market rally as they take part in the quarter-end ritual of window dressing -- the activity could help stocks resume their upward course in the week ahead.

The Dow Jones Industrial Average (DJIA) fell for the third week in the last four and suffered their worst weekly performance since Dec. 16, but it is still up 7 percent for the quarter. The Dow finished the week down 1.2% at 13,081. It hit a closing high of 13,239 on Monday and faded for the next three days and rallied modestly on Friday.

The Standard & Poor's 500 Index (SPX) finished at 1,404 on March 16, its best close since June 2008, but ended this past week at 1,397, but it is up 11 percent since the start of the year.

The Nasdaq Composite Index (COMP), up 17 percent for the quarter, was up 0.4 for the week, ending at 3067. The Nasdaq 100 (NDX) was up 0.6 percent this past week to 2728, higher for a twelfth week and its longest winning streak since 1999. The Nasdaq's "Relative Strength Index"”, another way to see if something is overbought, is at 74.30, the highest level since Feb. 17. An RSI reading above 70 traditionally says something is overbought.

The S&P 500 and Nasdaq Composite Index had similar performances: up on Monday, struggles for three days and small rallies.

The S&P 500 and Nasdaq are selling more than 10% above their 200-day moving averages, often a signal that an index is overbought.

Apple (AAPL) closed above $600 for the first time on Monday but ended the week at $596.05.

Gains this quarter have been broad-based, with most of the 10 S&P sectors on track to end the quarter in positive territory.But the S&P 500 financial sector index <.GSPF> and the S&P technology sector index <.GSPT> stand out, with gains so far of 21 percent for the financials and 19.9 percent for techs. The more defensive S&P 500 utility and consumer staples sectors have underperformed, with the utility index <.GSPU> down 3.9 percent and the consumer staples index <.GSPD> up 3.7 percent so far.Still, the S&P energy sector <.GSPE>, a cyclical sector that tends to gain with the economy like financials and technology, is up just 4 percent for the quarter so far.

Also, after starting out the past week slightly positive, most of the index ETFs, with the exception of the PowerShares QQQ ETF (Nasdaq: QQQ), had fallen off in the latter part of the week. The Nasdaq 100 index ETF has been the strongest of the indexes so far this year and is continuing to show relative strength compared to the other index ETFs. The entire index ETFs remain in uptrends, although current prices are in close proximity to the upward trendlines on a few of the ETFs, indicating strength could be waning and if the trendlines break, a further correction is possible in the week ahead.

The euro in the past week gained 0.7 percent, and was at 1.327 Friday. Treasury bond yields meanwhile were lower on the week, with the 10-year at 2.23 percent Friday.

On Friday, Nymex WTI crude and Brent were both more than a percent higher on reports that 300,000 barrels a day of Iranian oil is now off the market, and rumors of increased military readiness by Israel, which an Israeli official denied. Brent was down slightly on the week at $125.13 per barrel, while WTI was off 0.7 percent for the week at $106.87 per barrel. Gasoline continued to climb at the pump — to a national average of $3.889 per gallon — and in the futures market.

RBOB futures rose 0.8 percent to $3.385. The CFTC reported Friday that there was all-time high open interest in RBOB gasoline futures in the week ended March 20. According to Citi Futures analyst Tim Evans, overall managed money net long positions in U.S. petroleum markets declined by 15,814 contracts, but exposures remain in overbought territory, with net long positions of 405,190 contracts, the equivalent of 405.2 million barrels.

Also, stocks were in pause mode last week, as fears over a slowing Chinese economy scared some out of stocks as well as crude oil, which dropped sharply. The latest data on manufacturing from both China and Europe spooked some investors.

Several weeks ago, Chinese Premier Wen had cut the GDP target to 7.5% for 2012, from 8% in 2011. But only a week later, Nomura Securities raised their forecast from 7.9% to 8.2%. In their opinion, further lowering of interest rates and the bank reserve requirement will turn the economy around.

Though China’s GDP growth is well below the 14% high of 2007, their growth is still clearly the envy of the world. Many are expecting a further collapse of real-estate prices to crush the economy. However, it is unlikely that after working so hard to make China a world economic power that leaders will let the economy crash.

The week ahead marks the end of the quarter, which has often had a positive bias for stock prices. It may be a battle this time between those who are selling to lock in profits and those who are trying to dress up their portfolios.

There are also a few earnings in the week ahead as Total (TOT) and Walgreen (WAG) report Tuesday, and Best Buy (BBY) and Research In Motion (RIMM) report Thursday. Also earnings from Lennar (LEN),and Mosaic (MOS) will test investors' optimism for a continued rally!

The focus in the week ahead will be on the U.S. economy and whether the improvement seen in employment will show up in other data. There are reports on consumer sentiment and personal income and spending, as well as durable goods and Chicago purchasing managers data.

The economic data has been starting to disappoint a little bit, after this past week’s string of housing reports -- providing a bit of a key as to the market correcting a bit -- whether that continues in the week ahead becomes a mythical question?

Portfolio Dressing in the Week Ahead

Window dressing typically involves investors grabbing some of the quarter's best performers to dress up their portfolio listings – and some of the last-minute buying is likely to come from the hedge fund community.

Hedge funds, by and large, have not been believers about the improvement in the domestic economy ... so they've been very much out of the market. Yet, now with the first quarter looking like the best first quarter since 1998, they've got a huge gain to catch up – this may be the catalyst to enhance the rally in the week ahead and move on from the correction of last week!

Also, retail investors may boost the market in the week ahead as they have probably also noticed that they've missed a lot by having kept their money in Treasuries and other fixed-income assets over the quarter -- the realization that the surge in yields has resulted in a significant loss of capital for them may have presented itself!

Europe’s Effect on the Market in the Week Ahead

By the end of the week ahead, Europe could once more be a concern as European finance ministers meet Friday to hash out the structure and size of its bailout funds. Traders have been watching Spanish and Italian bond yields rising in recent sessions. Spain is expected to have budget news on Friday, and that is being monitored since Spain recently said it needed to run a bigger than expected deficit.

The Fed and the Week Ahead

The Federal Reserve could also be an influence in the week ahead as more than a half dozen speeches are expected from Fed officials, the most important of which comes Monday morning at 8 a.m. ET, when Fed Chairman Ben Bernanke speaks to the National Association for Business Economics. Bernanke has seemed less dovish, or less certain about another round of quantitative easing in recent comments, so markets will be watching this speech closely.

The Direction of Oil in the Week Ahead

Another big factor in the coming week will be how oil behaves.

Crude oil, basis the May contract, was hit hard last week. It dropped from Monday’s high of $108.70 to a low of $104.50 on Thursday. Still, the daily chart shows that it is still in a broad trading range, as it continues to test the breakout level (line a).

A close above $109 should confirm a resumption of crude’s uptrend, with the next resistance in the $110 to $111 range. The next major upside targets from the flag formation are in the $115 to $116 area.

Oil prices can be a threat and according to analysts a level for WTI (West Texas Intermediate) of $112, as potentially problematic -- identified a few weeks ago. This level has to be reached and maintained for four weeks before it becomes a problem -- at that level, consumers are spending 13 percent of their disposable income on a combination of food and energy – this is where consumers say ‘enough is enough, I have to cut back,’ and that becomes a problem!

'West Texas Intermediate - WTI' is defined as Light, sweet crude oil commonly referred to as "oil" in the Western world. WTI is the underlying commodity of the New York Merchantile Exchange's oil futures contracts.

WTI is considered a "sweet" crude because it is about 0.24% sulfur, a lower concentration than North Sea Brent crude. WTI is high quality oil that is easily refined.

Precious Metals in the Week Ahead

The SPDR Gold Trust (GLD) gapped higher on Friday, but is still in a downtrend. The sentiment picture discussed last week still suggests that there is a need to see further weakness and a drop back to stronger support before gold can bottom out.

The buying zones of sensibility could be hit in the next few weeks, but currently there are no signs yet that the decline is over. The drop in demand from India and proposed new taxes are likely to also weigh on prices.

The iShares Silver Trust (SLV) has bounced from the support around $30, but still faces strong resistance in the $32 to $33 area.

Fund Transfers in the Week Ahead

Because of the S&P 500's big move this quarter, some strategists expect to see some funds shift out of equities -- given the fact that stocks have had a big move and bonds have sold off, portfolio managers in asset-allocation mode may trim a little bit of equity holdings and move them into fixed-income holdings to rebalance target weights.

According to Thomson Reuters' Lipper service, investors in U.S.-domiciled equity funds have splurged so far in the first quarter of the year, pumping a net $32.7 billion in fresh capital into the sector.

Thomson Reuters' Lipper service is a rating system that ranks a mutual fund's success based on whether the fund has met certain goals. Mutual funds are ranked based on total return, consistent return, preservation, tax efficiency or expenses. The top 20% of funds receive the highest ratings and are named Lipper Leaders, based on the Thomson Reuters mutual fund company of the same name (Lipper). Asset managers, fund companies and financial intermediaries recognize Lipper's benchmarking and classifications as an industry standard.

A fund that has received a Lipper rating for total return has proven to return income from dividends, interest and capital appreciation. A rating for expense identifies low cost funds. Consistent return ratings are funds that provide constant returns that are risk-adjusted. A Lipper rating for preservation is for funds that demonstrate a high ability to preserve capital as compared with other funds within the same asset class.

This follows net outflows for the previous nine-month period, which saw a high of $66 billion in net redemptions occur in the second quarter of 2011. For all of last year, equity funds experienced net outflows of $50.4 billion, only the second full year of redemptions since Lipper started tracking fund flow data in 1992.

The S&P 500 ended 2011 virtually unchanged, but is up 23 percent since the end of September.

Even as money has moved back into equities, taxable bond funds are also enjoying a banner start to the year.

Lipper data shows $85 billion in net inflows so far in 2012, on pace to be the best since the $98 billion of net inflows recorded in the first quarter of 2010.

Taxable bond funds have not had a negative quarter since the fourth quarter of 2008. The record inflow year for this category was 2009 when investors bought an additional $384 billion of taxable bond funds. The last full year of net outflows was the $54 billion in 2000.

Stocks have benefited not just from the upbeat economic data, but from speculation that the Federal Reserve could add further stimulus to the economy.

The Major ETFs in the Week Ahead

The entire major index ETFs remain in uptrends, but there are differences between them. iShares Russell 2000 Index (ARCA: IWM) is the weakest while QQQ remains the strongest. With a few of the ETFs close to trendlines IWM presents the most danger of breaking to the downside. All the other ETFs remain in strong uptrends and that should not be fought in the week ahead. Use trendline breaks as profit taking opportunities and pullbacks that hold above support as buying opportunities.

Market Sentiment in the Week Ahead

Market sentiment did not change much last week. While financial newsletter writers turned a bit more positive on the market, the AAII sentiment numbers showed a 3% decline in the number of bulls. Neither reading is giving particularly strong signals at this time for trading in the week ahead.

Earnings in the Week Ahead

This is a light week for earnings, but attention paid to those that are presented is important as they will help answer if there's a housing recovery, if retailers still have some fight in them, and if some one-time darlings can offer hope!

Health care stocks could also be a focus as the Supreme Court hears a challenge to the health care reform legislation, championed by President Obama. The court will hear three days of arguments and a decision comes later.

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.

Monday

Earnings: Lions Gate Entertainment (LGF) will know if "The Hunger Games" was a monster at the box office. The stock is up 74% this year. So investors are bullish. Jim Cramer thinks a box office take of $120 million or less is a sell signal.

Economy:

• 7:00 a.m. Philadelphia Fed President Charles Plosser

• 8:00 a.m. Fed Chairman Ben Bernanke on the economy at NABE economic conference

• 10:00 a.m. Pending home sales index

• 10:30 a.m. Dallas Fed survey

Tuesday

Earnings: Homebuilder Lennar, McCormick (MKC) and drug-store chain Walgreen. Lennar's report took a lot more importance Friday after KB Home (KBH) reported an 8% order decline and new-home sales came in lower than expected. The question KB Home raised is if all the builder talk about weekend traffic in subdivisions and renewed buyer interest is just talk.

Economy:

• 9:00 a.m. S&P/Case-Shiller HPI

• 10:00 a.m. Consumer confidence

• 10:00 a.m. Richmond Fed Survey

• 12:45 p.m. Bernanke lectures at George Washington University

• 1:00 p.m. $35 billion 2-year note auction

• 3:45 p.m. Fed Gov. Elizabeth Duke on building sustainable communities

• 9:00 p.m. St. Louis Fed President James Bullard on monetary policy, in Beijing

Wednesday

Earnings: Fertilizer maker Mosaic and payroll processor Paychex (PAYX). Mosaic is about the health of agriculture. Corn has been holding steady. Paychex is about employment growth.

Economy:

• 8:30 a.m. Durable goods

• 1:00 p.m. $35 billion 5-year note auction

Thursday

Earnings: Best Buy and Research In Motion (RIMM). Electronics retailer Best Buy has been trying to reposition itself, and investors seem to be buying its efforts. Shares are up 17% this year. RIM is a basket case. It sells lots of BlackBerry devices and falls further and further behind Apple's iPhone and phones built on Google's (GOOG) Android system.

Economy:

• 8:30 a.m. Weekly jobless claims

• 8:30 a.m. Real GDP Q4 final

• 10:30 a.m. Richmond Fed President Jeffrey Lacker at Richmond Fed credit market symposium

• 11:00 a.m. Kansas City Fed survey

• 12:45 p.m. Bernanke at George Washington University

• 1:00 p.m. $29 billion 7-year note auction • 1:00 p.m. Fed’s Plosser on economic outlook

Friday

Earnings: Athletic footwear retailer Finish Line (FINL). If results from Shoe Carnival (SCVL) are any indicator, Finish Line should have decent results. Shoe Carnival's results were so good the stock jumped 25%.

Economy:

European finance ministers meet

• 8:30 a.m. Personal income

• 9:45 a.m. Chicago PMI

• 9:55 a.m. Consumer sentiment

Conclusion for the Week Ahead

There are some reasons to be a bit wary in the week ahead.

April is nearly here, and the old saying is “sell in May and come back in October”. The market is off to its best start since 1998, and no one thought the S&P 500 would be up 11% or so this soon. Moreover, the market hit a 2011 peak on April 29 and didn't return to that level until February this year.

But -- and this is important -- the indexes themselves don't look like they're ready to implode. They're trading within defined channels. So, barring a major external event, maybe war between Israel and Iran, a pause seems the most plausible scenario – or did we have that last week?

If there is going to be further correction of the market it should be like a “run of the mill constructive correction” ... it could be within the same 2 to 5 percent pullback we’ve seen since the rally ignited back in December -- money keeps rotating and leadership keeps changing -- it’s been a follow the money, stock pickers rally.

It is unlikely that the second quarter will be like the first quarter – trader’s need to watch the market’s moves over the next several days to see how the second quarter is setting up. Traditionally cyclical sectors that trade defensively are looking good – however, energy sectors might be a consideration to avoid since they have a too high beta and influenced more by the global economy.

The major averages closed the week mixed, but did bounce on Friday, also re-enforcing the statement that the slight correction maybe already over. The Powershares QQQ Trust (Nasdaq: QQQ) was able to close the week higher, and technical readings of the major averages remain positive.

The chart of the NYSE Composite (INDEXNYSEGIS:NYA) shows Friday’s strong close, suggesting that last Monday’s highs are ready to be tested. The action Monday, which may depend on the overseas markets, will tell us more.

Look for prices to move higher this week despite the economic reports, as the technical action continues to look positive. It does not look explosive like it did at the start of the year.

It is recommend that investors continue to lock in profits on existing long positions, and have stops in place for all positions. The market becomes more vulnerable as it moves higher without a significant correction.

Also look for yields to come back down in the next few weeks, and those who are worried about having too heavy a position in the bond market should look to reduce their exposure. There are signs that yields are bottoming and a move in the 30 Year T-Bond yields above 3.45% could cause a rush for the exits.

The economy is improving and while inflation is trending higher, there is no threat of corporate profits disintegrating -- the rally should continue!