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The Week Ahead in the Stock Market
April 02, 2012



A Big Week Ahead After a Great 1st Quarter!

As Market Heads Into April, “Where Is the Pullback?”

Wall Street: After stocks' first-quarter run, focus turns to data!



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week ahead

After the best first quarter in 14 years, the market may be poised for the long-awaited pullback, as investors look to a slew of economic data for insight on the strength of the domestic economy.

Friday's jobs report will be the week's big event, along with auto sales reports on Tuesday. Bed Bath & Beyond, Carmax and Monsanto report results. Apple had the biggest impact on the market in the quarter, but Sears was the top S&P 500 stock.

The Past Week

Wall Street's March Madness Pushes Dow to Best Monthly Close in Four Years!

Dow, S&P Post Best Quarter Since 1998!



Stocks finished the week a bit lower, but once again, the heavier selling last Thursday was well supported. This past week started off in grand fashion, as comments from Fed chairman Ben Bernanke suggested that he was ready to help in order to increase job growth. This sparked impressive one-day gains and led the Nasdaq Composite to reach its highest closing level since November 2000.

Stocks then declined for the next three days, and many on Wall Street expected a further correction still.

The Dow Jones Industrial Average (DJIA) finished the past week at 13,211.96, up 1 percent for the week and closing the first quarter with an 8.14 percent gain, its best first quarter since 1998. The Dow logged its sixth-consecutive month of gains in addition to a stellar first quarter.

Among the Dow components, BofA (BAC) skyrocketed nearly 72 percent for the quarter, while H-P (HPQ) slumped more than 7 percent.

The Standard & Poor's 500 Index (SPX) was at 1,408.45, for the week and up 12 percent for the quarter.

Financials were the best S&P sector performers for the quarter, shortly followed by Techs. Utilities were in the red.

The Nasdaq Composite Index (COMP) had its best first-quarter gain -- 18.7% -- since 1991.

The market went up this past week in spite of disappointing housing numbers over the last two weeks. Sales don't appear to be rising as quickly as thought, and home prices may not have bottomed -- yet.

Also, the gains came despite a 6.7% gain in the price of gold, a 16% gain in the price of silver and a 4.3% gain in the price of light sweet crude, the benchmark U.S. oil.

The sharp rise in the stock market since October has had analysts predicting a pullback -- or as many say now -- “a pause” -- as stock indices hit each new level, and they are still expecting to see that as the second quarter begins.

The Markets Ending March 30, 2012

033012-week ending



The CBOE Market Volatility Index (VIX), widely considered the best gauge of fear in the market, ended above 15.

On the economic front, consumer spending increased to its biggest gain in seven months, according to the Commerce Department. In addition, consumer sentiment rebounded to its highest level in more than a year, according to Thomson Reuters/University of Michigan's latest survey.

Meanwhile, business activity in the Midwest slipped slightly in February, according to the Institute for Supply Management-Chicago, but still indicated a slow expansion in the regional economy.

Some Asian markets delivered their best quarter in 20 years but the region stayed on the sidelines ahead of the Chinese PMI report over the weekend.

European shares rallied after the euro zone raised the combined lending ceiling for their two bailout funds to 700 billion euros from 500 billion, according to the region's finance ministers.

Spain said it will try to save more than 27 billion euros in its budget this year through corporate taxes, halting civil servant wages and ministerial spending cuts, according to government officials.

The Week Ahead

The bulls have definitely been delighted with the market's amazing first-quarter performance, but, the week ahead offers a major obstacle -- the March jobs report.

The biggest economic report of any month, it should show that the economic recovery, while not booming, is steady. It should explain why auto sales reports from manufacturers, due Tuesday in the week ahead, continue to run near a 15-million annual rate.

But the jobs report will also come as gasoline prices have risen nearly 19% this year, and the big unknown is if -- or how much -- they're forcing consumers to change their spending habits.

While the jobs report is the week's major report, there are other important reports in the week ahead on manufacturing, factory orders and construction spending.

In a week of few earnings reports, several will be scrutinized closely: home-furnishings retailer Bed Bath & Beyond (BBBY), seed producer Monsanto (MON), used-car dealer Carmax (KMX) and Constellation Brands (STZ), the owner of a host of premium wine brands and the distributor of Corona beer.

However, April has been called the “cruelest month,” but in the past two years, it’s when the stock market made its highs for the year.

So investors start the second quarter with that on their minds, and head into a holiday shortened week ahead, where the most important piece of data will be released when the stock market is closed. The March jobs report is released Good Friday, when just the bond market and some electronic futures markets are open for trading in the U.S.

The Sell-Off – The Pullback – The Correction – April Expectations!!!

Over the last 40 years, the month of April has been one of the better months, averaging a gain of 1.56%. Typically, the period from November to May is the best time for the stock market.

Some analysts say the market could follow its seasonal history, and investors could “sell in May,” as they did last year. They also are watching gasoline to see if the steep price rise stings consumers and starts to become a setback for the economy.

There is still an expectation of a sell-off in “the next few months but there has been no definite time-frame – however, the market decline should not be like the 22 percent the S&P lost last year from late April through early October.

“Where is the pullback?” strategists keep asking. The week ahead should start out positive. Usually the first day (of the quarter) does have inflows. Seasonally speaking, markets usually have a positive bias through May – the markets have a pretty good tone -- the concerns about China, quarterly earnings and interest rates -- should not really occur until the summer.

But even if equities do pull back -- and with more than 80 percent of the benchmark S&P 500 above the 200-day moving average -- the market would appear primed for one, analysts cautioned it was more likely to be a healthy decline.

Analysts expect to see investors buy the dips, as many are still under-invested in U.S. equities and have lost out on recent gains.

The Bullish Aspect of the Market in the Week Ahead

Many strategists were not very bullish for stocks early in 2012.

The most bullish of these strategists was looking for the S&P to reach 1500. As the Wall Street Journal chart below indicates, the median forecast was for the S&P 500 to end the year at 1362, which is more than 3% below Friday's close.

Therefore, some of these strategists are now looking for a 3%-5% correction before the market can resume its uptrend. Such a correction could give some the opportunity to raise their forecasts, maybe in the week ahead.

040212-SPX-strategists



Europe’s Effect on the Market in the Week Ahead

Along with dealing with a short week and a glut of economic data, investors will have to grapple with Tuesday's release of the minutes from the most recent Federal Open Market Committee meeting and an interest-rate decision on Wednesday by the European Central Bank after its meeting.

There will continue to be some flare-ups in Europe that will rattle markets here in the U.S. as the underlying issue in Europe - the sovereigns themselves being solvent - has not been resolved!

Also, in the overseas markets, another drop in the German bunds could make it more difficult for European banks to recover, as it would adversely impact their balance sheets.

The Eurozone problems have been on the back burner for the past few weeks, but that may not last much longer. The rescue fund was boosted to EUR 700 million late last week, but many still think it needs to reach EUR one trillion.

The inflation rate is still too high, and riots in Spain over further austerity measures are keeping many on edge. Though the charts of major European stock markets like the German Dax and the French CAC-40 look much stronger than we might expect, they are badly lagging the US market.

In the week ahead the ECB is expected to keep interest rates unchanged with no major announcements on other policy decisions while the Fed minutes will not be followed up with a press briefing by U.S. Federal Reserve Chairman Ben Bernanke.

The Fed and the Week Ahead

The Fed minutes, released Tuesday afternoon, could give some clues as to further Fed easing. The Fed’s ”Operation Twist”, which involves selling short-dated Treasury securities and buying longer dated, expires in June.

The market seems to be convinced that there’s going to be some additional or extension to twist, and the minutes will address that in some capacity.

The Major ETFs in the Week Ahead

The major ETF Indexes rose last week as the market continued to push higher. All the ETFs respected their trendlines over the week, showing stable price for the time being and no immediate warning signals. That said, the markets have been on a relatively steep rise this year with very few, and short-lived, pullbacks. The pleasant coast higher may be in for some jolts in the near future though, as first quarter earnings season kicks off this month. Therefore, some vigilance will be required as volatility, something which has been largely absent in equities throughout 2012 may start cropping up come April.

The IPATH S&P 500 VIX Short-term (ARCA: VXX) ETF recently put in the lowest lows seen since inception and indicates there may be a bit too much confidence in this smooth ride higher that equities have been on.

040212-VXX



The trend remains up for the major index ETFs in the week ahead and as long as (respective) support levels hold, this is a market to be long in.

As we enter April though, things could get more volatile as earnings season kicks off. Therefore, as always, risk should be managed and the downside calculated. The bearish divergence of the MACD is a signal that there may be some underlying weakness in the market. Use trendlines and support to warn of price declines, as these levels have kept traders long in the strongly rallying ETFs, and can also provide a way out.

Precious Metals in the Week Ahead

The SPDR Gold Trust (GLD) is trying to hold the short-term 61.8% support at $158, which was tested on March 22. A close back above $165—especially on volume over 20 million shares—would improve the outlook.

040212-GLD



The weekly analysis still suggests that one more drop is needed for a sustainable low to be formed.

The chart of the iShares Silver Trust (SLV) actually looks a bit better, and a daily close above the $32 level could complete a short-term bottom. There is first strong resistance in the $33.50-$34.50 area.

040212-SLV



Market Sentiment in the Week Ahead

Some of the important market sectors seem to have already had their corrections and could easily spur another rally to significant new highs. If the major averages do break out of their recent trading ranges, we could then see another 2%-3% on the upside. This might be enough to swing the other sentiment measures to more extreme levels.

Currently, the sentiment measures have become a bit more positive, as the number of bullish financial newsletter writers rose to 50.5%, up from 43.4% just three weeks ago.

The number of bearish individual investors dropped 2.3%, to 25.5% last week, while the number of bulls was 42.5%. This is well below what is seen at significant market tops, although the newsletter writers are getting closer. It should be noted that these sentiment measures only give very good signals one or two times a year and always need to be supported by the technical action.

The Key Events in the Week Ahead

Equity markets will be closed at the end of the week for the Good Friday holiday, which could create lighter volume and increase volatility. The holiday also conflicts with the release of the March payrolls report, which could leave investors reticent to make big bets in front of the data.

The Jobs Reports in the Week Ahead

There are two important market-moving reports in the week ahead:

• The unemployment rate, and

• Nonfarm payrolls.

The unemployment rate should hold at 8.3%, its rate in February. Some economists see the rate slipping to 8.2%. A jump would be a shock.

Nonfarm payrolls are seen rising by 210,000, perhaps 225,000, with private-sector jobs growing by 235,000.

The following Monday after Good Friday will likely be dictated by the jobs data, which will ultimately depend on how the numbers come in relative to expectations - it's all about beating or missing expectations!

The Auto Sales in the Week Ahead

Auto sales should also be watched closely as there were over 15 million units sold in February – great for the economy – but expect a little bit of a pullback which will be important in terms of peoples’ thinking about consumer spending more broadly.

Earnings in the Week Ahead

Earnings Reports May Show Increasing Consumer Confidence

The first-quarter earnings season won't start for a week or so with Alcoa (AA) starting the season after the close on April 10, and the heaviest percentage of reports will come in the latter half of April.

But this week has a few reports of interest.

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: There are no major earnings reports scheduled for release.

Economy:

• 10.00 am ISM manufacturing

• 10.00 am Construction spending

• 10.00 am St. Louis Fed Pres. Bullard speaks

• 12.35 pm Cleveland Fed Pres. Pianalto speaks

Tuesday

Earnings: International Speedway (ISCA). The company, which runs 13 auto-racing tracks, is expected to report up to a 20% decline in revenue and a 10% earnings decline. NASCAR may have peaked.

Economy:

• Monthly auto sales

• 10.00 am Factory orders

• 2.00 pm FOMC minutes

• 16.05 pm San Francisco Fed Pres. Williams speaks

Wednesday

Earnings: Bed Bath & Beyond (BBBY) and Monsanto (MON). BBY's shares have risen nicely over the last year, and the company has said it expects results to meet analyst estimates: $1.33 in earnings and $2.66 billion in revenue. Watch what the company says about housing.

Monsanto is expected to report $2.12 a share in earnings, up from $1.87 a year ago, on revenue of $4.53 billion. The stock may get more activity with Friday's report of tight U.S. grain supplies.

Economy:

• 8.15 am ADP employment

• 10.00 am ISM nonmanufacturing

• 11.00 am San Francisco Fed Pres. Williams speaks

Thursday

Earnings: Carmax (KMX) and Constellation Brands (STZ). If Tuesday's auto sales report is strong, look for good results from this operator of used-car dealerships across the country. Revenue is expected to grow 6.7% to $2.4 billion. Shares have risen 431% since the 2008 financial crash.

Constellation owns the Robert Mondavi, Clos du Bois and Simi brands. It is a pure play on consumer willingness to pay up for fun. Shares have risen 113% since April 2009.

Economy:

• Monthly chain store sales

• 8.30 am Initial claims

• 9.10 am St. Louis Fed Pres. Bullard speaks

Friday

Earnings: The market is closed in observance of Good Friday.

Economy:

Stock market closed—Bond and some futures market shortened session

• 8.30 am Employment report (March)

• 3.00 pm Consumer credit

Conclusion for the Week Ahead

Sharp gains last Monday clearly resolved the prior week's indecision. The early drop last Thursday took some of the major averages back to their first key levels of support, which now appear to have held. Friday's higher close supports the positive outlook.

Though the Advance/Decline (A/D) line on the NYSE Composite still shows a short-term negative divergence, this is not the case for the A/D lines on the S&P 500, Dow Industrials, and Nasdaq 100 (NDX). This supports a test, if not a breakout above, the March highs this week.

However, the technical action should be watched closely. If there is an upside breakout, caution needs to be applied to becoming too enthusiastic. If you start to think that your positions can easily go another 10% higher, it is probably time to think about taking profits.

Given the holiday-shortened week and the monthly jobs report coming out on Friday when the markets are closed, risk remains quite high.

The benchmark S&P 500 index could be vulnerable to a retreat if the data shows a softening of the economy, a possibility many investors have been cautiously eyeing with the index up nearly 30 percent from its October low.

It appears that yields are bottoming, and those with heavy positions in the bond market should consider hedging their position by buying one of the short bond ETFs. If the 30-year Treasury bond yield moves above 3.45%, it will be a strong indication that rates have indeed bottomed.

The speed of the recovery from the 2008-09 recession has been painfully tentative and frustrating. That's one reason Federal Reserve Chairman Ben Bernanke warned several times this past week that an economic recovery is not yet assured.

Higher gas prices and a break in the auto recovery could derail things. So could a deep recession in Europe. Gasoline will probably hit $4.30 a gallon as the national average before peaking in late spring or early summer -- Iran and Israel could upset this further!

The first quarter has been quite remarkable with little in the way of major economic data disappointing the market -- "a no drama, no surprise quarter” -- and this makes the market vulnerable in its expectations of a 2nd Quarter continuing in the same direction – however, a further rally would be great – let’s hope!

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