The Week Ahead: March Jobs Report To Keep The Bull Market Running!
The Game Plan: ConAgra, Monsanto, Non-Farm Payrolls, Auto Sales!
Stock Market: Global Central Banks in Focus!
Wall Street: Spring Sales – Pullback -- Markets To Bounce Back!
by Ian Harvey
April 01, 2013
The stock market starts the first week ahead for April, with both the S&P 500 and Dow at record highs.
As the second quarter kicks off, many analysts believe it's a given that neither the stock market nor the economy will do as well as they did in the first quarter.
After flirting with an all-time high for three weeks, the S&P 500 posted its best closing level in history. But some strategists say Thursday's record could be a harbinger that the stock market rally is running out of steam.
The S&P traded within 10 points of the all-time closing high for 13 sessions before breaking through, showing that investors need new catalysts to push firmly above resistance levels.
As the market has gone higher ... upward moves have generally gotten smaller, which suggests that the move is getting old and that we need a pullback.
The week ahead will give the bulls a lot to think about, with the March jobs report, auto sales and manufacturing data set to be released. Also, central-bank meetings in Japan and Europe will be closely watched.
Also, MF Global Holdings Ltd.'s (MFGLQ) bankruptcy proceedings are on tap.
• ‘The Past Week’
• ‘The Upcoming Week’
• ‘The Economy’
• ‘Overseas Influence on the Stock Market’
• ‘Earnings and Company News’
• ‘A List of Key Events’
• ‘The Spotlight on Certain Companies’
• ‘Sentiment Effect on Stocks’
• ‘The NYSE Composite’
• "Buy or Sell in April"
• ”Market Rally Continues – Keep on Buying”
• ”Sectors Affected by an Extended Rally”
• "Pullback of Stock Market - Sell-Off Imminent!"
• ”Bull Market To Continue Through 2013”
• "Stock Market Correction Ahead - Providing Buying Opportunities!"
• "Stock Market Expectations in 2013"
It's inevitable when you're hanging out in record territory to start wondering when the party will end.
There's still a sense that this rally and uptrend is getting a little long in the tooth and the signal that the easy gains are probably made.
Still, many strategists remain bullish on stocks longer-term, with many upping their S&P forecasts in recent weeks to 1600 or better amid expectations that the economy and stocks will improve in the second half.
Stocks finished the holiday-shortened week on a firm note, as the S&P 500 reached an all-time closing high on both a daily and weekly basis.
Although the intraday high from October 11, 2007 at 1,576.09 has not yet been exceeded, it was a good week for investors. The market internals were also strong Thursday, which supports another push to the upside in the week ahead.
The benchmark index has risen almost 10 percent so far this year, fueled by strong profit growth and accommodative monetary policy from the Federal Reserve. But those gains have slowed as investors fret over Cyprus's bailout and mixed signs about the economy.
There were still several bouts of selling over the Cyprus situation, but the market was very resilient. The very weak early trading on Wednesday was used as buying opportunity for many, because the Spyder Trust (SPY) closed unchanged. Investors stepped in on declines to buy and finally pushed the S&P above the previous record set on Oct. 9, 2007.
The tech sector is still lagging, but there was some technical improvement in the outlook for Apple (AAPL). April is a typically a strong month for some technology industry groups. If this sector starts to catch up, it would give the major averages a big boost.
The biggest gains were logged in January, but March has been a solid month for stocks as well, with all three indexes rising more than 3%. Stocks continued to rally in the holiday-shortened week despite Cyprus concerns.
• The Dow Jones Industrial Average (DJI) had a very good quarter, ending at a record 14,578 and up 11.2 percent, its best first quarter since 1998.
For the month, the Dow finished up 3.7%, and rose 0.5% on the week.
Interestingly, the blue-chip index has never finished a year in negative territory when the first quarter is up at least 8 percent.
Hewlett-Packard was the biggest gainer on the Dow for the quarter, skyrocketing more than 67 percent. Caterpillar and Alcoa were the only two blue-chip stocks to finish in the red.
• After threatening for several sessions, the Standard & Poor's 500 Index (SPX) finally hit its high on the last trading day of the quarter, closing out at 1569. The index was up 0.8 percent for the week, and is up 10 percent for the first quarter.
The S&P has risen for 11 of the past 13 weeks, up 0.4 percent over the past two weeks.
All 10 S&P sectors finished higher for the quarter, led by health care and consumer staples, up more than 15 percent and 13 percent, respectively.
• And the Nasdaq Composite Index (COMP) gained 8.2 percent in the first quarter to 3267.
The COMP set a new 12-year intraday high of 3,270.30. The COMP gained 3.4% in March and tacked on 0.7% in the past week.
It's still about 35% below its March 2000 closing high of 5,048.62, which came at the cusp of the dot-com bubble.
CBOE Market Volatility Index (VIX) ), widely considered the best gauge of fear in the market, finished Thursday session down 0.5 points, or 3.4%, to close at 12.70.
For the quarter, the VIX dropped 29.5%, losing 18.1% in the month and dropping 6.4% for the week.
The market was rattled by the Eurozone crisis last week. Despite the temporary fix in Cyprus, more disquieting news is likely in the future.
Cypriot banks re-opened after an almost two-week closure to relative calm. Strict capital control measures were imposed and could remain in place for weeks. Cypriots will not be allowed to withdraw more than 300 euros a day, cash checks, or take more than 3,000 euros when traveling abroad.
Italy is having trouble putting together a coalition to govern the country, while Belgium was hoping to finalize a budget that would meet the new EU guidelines.
Meanwhile, rumors swirled that Fitch Ratings will follow fellow ratings agency Moody's lead to cut Italy's sovereign debt rating. Moody's rates Italy two notches above "junk" grade. However, Italian Economy Minister Vittorio Grilli said he was unaware of any upcoming downgrade.
Even Germany, which has the strongest economy, saw an uptick in unemployment that surprised many.
At least in Germany, retail sales came in strong, which helped a bit. Still, the German Dax had a rough week, falling 1.4%.
The Dax has been leading the S&P 500 since last June, and is now up 30%, versus just a 22% gain for the S&P 500. It is getting close to stronger support, and a decisive break below the 7,530 level would be a negative sign.
The iShares Dow Jones Transportation (IYT) put in a strong performance on Friday, suggesting that its recent correction may be over. It had a strong month, gaining 4.3%, and is now up 18% for the year.
The weekly technical studies like the On-balance volume (OBV) and relative performance are positive, and show no signs yet of topping. The weekly Starc band sits at $115.66. There is initial support now in the $108 area, with more important levels around $103.
Two sectors stood out last week. The Select Sector SPDR Health Care (XLV) and Select Sector SPDR Utilities (XLU) were both up 2.4% for the week. This was much stronger than the 0.7% gain in the SPY.
The weekly chart of the Select Sector SPDR Utilities (XLU) shows that it closed the week above the August high at $38.54 (line a), which is quite bullish.
The weekly relative performance has moved above WMA and the recent highs, suggesting that it have bottomed out. The RS line has more important resistance at its downtrend (line b). The weekly OBV looks very strong, having surged through its long-term resistance (line c).
There is monthly support now at $37.70 to $38.20.
The monthly chart of the Select Sector SPDR Health Care (XLV) shows that it closed a few cents below its monthly Starc+ band at $46.26. This is the first time since 2000 that this has occurred. There is monthly pivot resistance for April at $47.91.
The monthly relative performance has been above its WMA since April 2012, and is still acting strong. The monthly OBV moved above its WMA at the end of 2011.
Looking at the weekly and daily OBV, since it is important to examine multiple time frames, they are also positive with no signs of topping. The first good support is in the $44 to $45 area.
The Select Sector SPDR Materials (XLB), the Select Sector SPDR Financials (XLF), Select Sector SPDR Technology (XLK), and the Select Sector SPDR Industrials (XLI) were the weakest last week, all gaining around 0.3%.
The May crude oil contract closed up $3.43 per barrel last week, and the weekly chart of crude oil looks very positive.
The outlook for the SPDR Gold Trust (GLD) improved last week, as it has again tested the lower boundaries of its flag formation.
Economic Reports in the Past Week
There were some very good and some disappointing economic numbers last week. On the plus side, the Dallas Fed Manufacturing Survey was strong, as were durable goods, which were up 5.7%. Also, the S&P Case Shiller Home Price Index was up 8.1% on a year-to-year basis, and GDP was revised slightly higher.
Not all of the housing data was good, however. New home sales declined 4.6%, and pending home sales also fell. The Chicago Purchasing Managers' Index was also weaker than expected, but it had been strong for the last two months. The biggest surprise was the eight-point drop in consumer sentiment last Tuesday.
Interest rates have also moved lower over the past few weeks, which may be a sign that some investors are getting nervous.
The weekly chart of the ten-year Treasury Note closed below its 20-week ’Exponential Moving Average’ (EMA) for the first time since the middle of December. The yield hit a high of 2.083% on March 11, but closed Thursday at 1.852%. There is next important support at 1.7% and the uptrend (line c).
There is long-term resistance in the 2.36% to 2.4% area that must be overcome to signal a turn in interest rates. Yields will need to be watched closely over the coming weeks; if they continue to decline, it will likely be a negative sign for the stock market.
• The March payroll report will be the prime economic report on tap in the week ahead. Investors and economy watchers will want to see whether hiring maintained February's momentum.
Last month’s report was a surprise to the upside with the economy adding 236,000 jobs, far exceeding analysts’ expectations. The headline unemployment rate fell to 7.7% from 7.9%, hitting its lowest level in four years.
Forecasters expect only a small deceleration in nonfarm payrolls. The median forecast in a survey compiled by Dow Jones Newswires is for 200,000 jobs to have been created this month, on top of 236,000 new hires in February.
Analysts believe the unemployment rate will hold steady at 7.7% when the numbers are released on Friday.
Economists say that for the unemployment rate to continue to decline, the economy will need to add at least as many jobs as were created in February, and those strong figures will have to be maintained for many months to make a significant impression.
The Federal Reserve has said it won’t start raising interest rates until the unemployment rate falls to 6.5%. Most economists agree that threshold is a long way off.
Otherwise, a slew of economic data are also due in the week ahead.
Overseas Influence on the Stock Market for the Week Ahead
• Payroll firm ADP’s employment report is out on Wednesday and that can offer a fairly accurate snapshot of the government report that will follow in two days.
• Also on Monday is the release of the ISM Manufacturing index and investors will be looking for continued strength in that sector.
• Monday will also see the release of a report on construction spending, always an important measure of economic activity.
• Wednesday will see the release of the ISM Service index, and
• On Friday international trade data will measure U.S. levels of imports and exports.
• A report on consumer credit is also due on Friday.
• Also, U.S. Auto Sales Expected to Rise - New U.S. car sales in March, set to be reported Tuesday, are expected to have risen 5.3% from a year earlier and to have jumped sharply from February, according to Edmunds.com.
The online automotive-information provider estimated 1.48 million new vehicles will have been sold in March, a 24% jump from last month.
Among U.S. auto makers, Edmunds said it expects General Motors Co.'s (GM, GMM.U.T) sales to be up 8.8% and estimated Ford Motor Co.'s (F) sales increase at 3.8%. Chrysler Group LLC's sales are expected to have climbed 5.9%.
Earnings and Company News in the Week Ahead
In the week ahead, earnings from agricultural giant Monsanto (NYSE: MON) are expected as well as earnings from food conglomerate Conagra Foods (NYSE: CAG) and from healthcare provider Accretive Health (NYSE: AH).
McCormick & Co. (MKC), G-III Apparel Group Ltd. (GIII), WD-40 Co.(WDFC) and Cal-Maine Foods Inc. (CALM) are among the other notable names reporting in the week ahead.
• Monsanto is expected to report fiscal second quarter EPS on Wednesday, April 3 of $2.561 compared to $2.28 a year ago.
Analysts at Bank of America have turned more positive on the stock since its recent deal with Dupont (NYSE: DD). "We are increasing our FY14 EPS estimate to reflect the incremental royalties and our target price to reflect diminished risks that may have otherwise dragged on MON's multiple. We continue to use any volatility into/through March 28th (when the USDA crop planting intentions report is released) as an opportunity to buy MON."
Sales are expected to grow to $5.236 billion from $4.748 billion in the same period a year ago. Gross margins are expected to expand to 56.483 percent from 46.543 percent in the previous quarter. The options market is expecting a 3.27 percent move in the stock price on the earnings announcement.
• Conagra Foods is also expected to report second quarter results on Wednesday before the bell.
Analysts at Deutsche Bank have a hold rating on the stock. "Conagra should continue to benefit from M&A-driven EPS accretion as well as Long-Term potential synergies from the Ralcorp deal and less volatility by partly divesting grain milling. However, we view core fundamentals as challenging, leverage is high (3.9x net debt/EBITDA) and are worried over slower private label consumption."
Conagra is expected to report fiscal third quarter EPS of $0.562 vs. $0.51 a year ago with sales expanding to $3.848 billion from $3.373 billion a year ago. Gross margins are expected to improve 23.66 percent from 23.44 percent in the previous quarter and the options market is expecting a 2.9 percent move in the stock price.
• Lastly, Accretive Health is expected to report fourth quarter operations on Thursday.
Analysts at Oppenheimer have an outperform rating on the stock with a $15.00 price target. "We continue to believe AH's current valuation assumes a zero growth scenario. Because new business contributes essentially zero margin in year one, we apply a mature EBITDA margin to the company's existing revenue base, which yields an EV/EBITDA multiple slightly below 6x. Our $15 PT equates to ~9x mature EBITDA on the existing business."
The company is expected to report EPS of $0.09 compared to $0.17 a year ago with sales expected to be reported at $236.889 million vs. $260.08 million a year ago. Gross margins are expected to improve to 21.937 percent from 20.486 percent from the previous quarter.
• Bankruptcy Court to Focus on MF Global - MF Global will present its creditor-payment plan to a Manhattan bankruptcy court, a key step in the financial firm's liquidation.
Under the plan, slated for a Friday hearing, MF Global's creditors could expect repayment within a year, while it would boost its brokerage customers' recoveries to 100% within months.
• Separately, a Wilmington, Del., judge Wednesday will consider granting final approval to Geokinetics Inc.'s (GEOKQ) $25 million bankruptcy loan.
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: GenCorp (NYSE: GY), Harvest Natural Resources (NYSE: HNR) and GMX Resources (NYSE: GMXR).
Economy in the Week Ahead:
• 8:58 am Manufacturing PMI
• 10:00 am ISM manufacturing
• 10:00 am Construction spending
• Earnings in the Week Ahead: Maxwell Technologies Inc (NASDAQ: MXWL) and Magnum Holder Resources (NYSE: MHR).
Economy in the Week Ahead:
• Monthly auto sales
• 10:00 am Factory orders
• Earnings in the Week Ahead: Monsanto and Conagra Foods.
Economy in the Week Ahead:
• First day of Bank of Japan meeting
• 8:15 am ADP employment report
• 10:00 am ISM nonmanufacturing
• 10:30 am Oil inventories
• Earnings in the Week Ahead: Accretive Health
Economy in the Week Ahead:
• Second day of Bank of Japan meeting
• 07:00 am Bank of England announcement
• 07:30 am Challenger job cut data
• 07:45 am European Central Bank announcement
• 08:30 am Jobless claims
• 10:30 am Natural gas inventories
• 10:30 am Fed Chairman Ben Bernake at University of Dayton Arena, brief comments on financial and economic education
• 05:00 pm Fed Vice Chair Janet Yellen speaks on monetary policy to Society of American Business Editors and Writers
• Earnings: No major earnings to report
Economy in the Week Ahead:
• 8:30 am Employment report
• 8:30 am International trade
• 3:00 pm Consumer credit
International Economic Reports in the Week Ahead
• Monday - Reserve Bank of Australia Interest Rate Decision and FDIC Rules on Loan Purchases.
• Tuesday - the Eurozone Unemployment Rate, ECB Board Member Benoit Coeure and the final HSBC China Services PMI are to be released.
• Wednesday - Eurozone CPI
• Thursday - Eurozone composite and services PMI's, Bank of England Interest Rate decision, the European Central Bank Interest Rate decision, Eurogroup Finance Minister Jeroen Dijsselbloem is expected to speak, ECB President Draghi is to hold his press conference following the interest rate decision and the Bank of Japan Interest Rate decision.
The Usual Discussion on a Pull-back
Many investors and analysts within the last few months did not expect to see an all-time high on the S&P 500. They believed that the economy didn’t support it, and just a few months ago, we were 40% below today’s levels.
But, the market is always surprising, and this rise caught more than a few investors off-guard.
However, in the last three years, strong market run-ups in the first quarter have led to pullbacks of between 10 to 20 percent during the first few weeks of the second quarter. And ahead of the second quarter this year, the debate continues over whether equities will see a consolidation.
The rally is looking tired and we're due for a pullback for stocks, according to many analysts. They view this pullback not like in the past years, but a smaller decline of about 5 to 10 percent. A bounce is very likely to occur after that, so individual investors can use this market to their advantage and look to buy on the dips.
Some analysts point to slow earnings growth as a possible catalyst for the pullback.
Earnings growth expectations for the first quarter are at a modest 1.5 percent, according to the latest data from Thomson Reuters. So far, a little over 100 companies on the S&P 500 have provided negative earnings guidance compared to 23 positive pre-announcements for the first-quarter. Still, earnings growth is forecast at 9.2 percent for the year.
Just last week, industry heavyweights including Oracle (ORCL), FedEx (FDX) and Caterpillar (CAT) handed in cautious outlooks.
Also keeping investors nervous are negative headlines from Europe. In addition to the jitters over the Cyprus bailout, investors added Italy's economic and political concerns to their list of worries as the nation faced ongoing political deadlock.
However, these catalysts are not viewed as a big enough threat to say the bull market's over and global recession's starting because there's another financial crisis.
The big picture still points to a major secular bull market being underway, with at least another four years left, led by durable goods.
For further information read...."Buy or Sell in April"
The SPX Revealing Corrections
As the weekly chart of the S&P 500 reveals, spring corrections have occurred for the past three years.
But what about this year?
In 2010, the S&P 500 peaked at the end of April, and then dropped 17.1% over the next nine weeks to hit a low in July. By September, it had started a new rally. The S&P 500 was able to make new highs for the year in November.
The decline in the spring of 2011 was much worse. The S&P peaked the week of May 6, and the correction lasted twenty-three weeks, with the S&P 500 losing 21.6%. The market finally made its low in early October, but the S&P 500 was not able to exceed the 2011 high until March 2012.
Last year's correction started the week of April 6, and the S&P lost 11% in just eight weeks. Still, the decline was severe enough, coincident with the fear of the Euro debt crisis, to turn the sentiment quite negative. This helped the market bottom out in early June.
If you look at these three corrections, they all had a sharply lower weekly close near the highs (blue candle), which was an early warning sign. It is not expected that a correction will be seen before June, but at this point it appears it will be briefer and shallower, more like 2012 than 2011.
Sentiment Effect in the Week Ahead
There was little change last week in individual investor sentiment. The bullish percentage was unchanged, while the number of bearish investors dropped from 33.3% to 28.6%. Financial newsletter writers were a bit more bullish, at 49.5% versus 47.4% the previous week; on the other hand, the bearish percentage also rose slightly.
The long-term monthly chart of the NYSE Composite goes back to 2004. It shows that the 2011 high (line a) was overcome in January. Despite the market's strength, the NYSE is still 6.8% below the May 2008 high, and 14.3% below the all-time high of 10,413.
The monthly chart continues to look quite bullish, with the monthly Starc band at 9,541, which is the next real upside target. There is monthly support now at 8,571, and the monthly uptrend (line b) is far below that, at 7,538.
The weekly chart of the NYSE shows that the breakout level (line d) was tested on the late February pullback. Though last week's close was strong, it was still slightly below the close three weeks ago. The weekly Starc+ band is now at 9,350.
The weekly NYSE Advance/Decline (A/D) line is rising strongly after breaking out to the upside early in the year. It is well above its strongly rising WMA and the uptrend (line f). There is minor support now at 8,968, with the rising 20-week EMA at 8,758.
The number of stocks making new highs on the NYSE jumped to 373, but is still below the 2013 highs of 430 to 440.
Conclusion for the Week Ahead
It will be a very tricky week in the week ahead - in the past week, buying in Treasurys drove yields lower, in a flight-to-safety play but also due to quarter-end buying. The 10-year was yielding 1.85 percent late Thursday.
The jobs number could create volatility, in that we're in the lower end of the yield range again. There could be some give-back in yields, as we head into the jobs number, and into the Japan story, and into the European Central Bank outcome. If things were to stabilize in Europe, and the jobs numbers are decent, we could get back to the lower 1.90s," on the 10-year.
Defensives look good -- health care, staples and utilities. Health care and staples are the two best sectors in the market -- investors are getting increasingly defensive.
Both the S&P health care and consumer staples sectors were the market leaders in the first quarter, up 15 percent and 13 percent, respectively.
Despite the big run-up this year, experts argue that valuations remain attractive for U.S. stocks. The S&P 500 is trading at just 16 times 2012 earnings. At its all-time high in October 2007, the S&P 500's valuation was just above 17 times profits for the past 12 months.
And looking at earnings projections, stocks still appear reasonably valued. The S&P 500 is trading at just 14 times 2013 estimates.
However, investors should concentrate on managing their existing positions—and be sure you have hard stops in place on all of them.
Continue to take profits and raise stops. If you are feeling really good about your investments this year, it is a clear sign that you should be taking some more profits.