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The Week Ahead in the Stock Market
April 16, 2012



The Week Ahead May see Markets feel Pain from Spain!

More Bumps Ahead as Earnings Season Gets Underway!

Wall Street: Stocks to Track Earnings with an Eye On Europe



by Ian Harvey

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week ahead

After suffering their worst two weeks of the year, stocks will look to quarterly earnings to determine whether the recent pullback has been exhausted or more losses are justified.

Concern that Spain could default on its debt may negate what should be a decent week ahead for earnings. Companies reporting include Coca-Cola, Citigroup, IBM, Intel, Kimberly-Clark, Microsoft and GE.

Sooner or later, Europe was going to emerge again as a problem for markets around the world – and this past week was the week.

Therefore, the week ahead market’s performance may well depend on how investors view the conditions in Spain and Italy. The big day will be Thursday, when Spain is to auction 2- and 10-year bonds. A bad auction -- producing a high yield or too little demand to sell the entire issue -- could slam markets around the world.

The auction will come as 11 components of the Dow Jones Industrial Average (DJIA) and such heavyweights as Goldman Sachs (GS), Morgan Stanley (MS) Qualcomm (QCOM) and Union Pacific (UNP) will report earnings.

In addition, important reports are due on retail sales and housing in the week ahead. And Thursday's weekly report on initial jobless claims will get close scrutiny after the claims rate bumped up in the latest week.

The Past Week

Last week was a roller-coaster ride in the markets, as stocks opened Monday under pressure from the previous Friday’s weaker than expected jobs numbers. This selling was exacerbated Tuesday when some of the European markets reopened and also started to sell off.

By the close on Tuesday, it seemed as though the remarkably positive first quarter was just a nice dream. Pessimism over the economy and stocks increased. Spiking yields in both Spanish and Italian bonds renewed fears of a Euro zone contagion. China bears were out in force.

But then the US market opened Wednesday as if it had been fully medicated, and closed sharply higher. Alcoa’s (AA) earnings after the close Tuesday helped, as did a positive response to the Spanish bond auction. The party continued Thursday, as rumors of a much better GDP number from China helped fuel further gains.

After the two-day binge, the hangover began on Friday. Stocks closed lower, and the weaker than expected GDP numbers from China did not help.

GDP - Gross Domestic Product – is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

GDP = C + G + I + NX

where:

"C" is equal to all private consumption, or consumer spending, in a nation's economy

"G" is the sum of government spending

"I" is the sum of all the country's businesses spending on capital

"NX" is the nation's total net exports, calculated as total exports minus total imports. (NX = Exports - Imports)

GDP is commonly used as an indicator of the economic health of a country, as well as to gauge a country's standard of living. Critics of using GDP as an economic measure say the statistic does not take into account the underground economy - transactions that, for whatever reason, are not reported to the government. Others say that GDP is not intended to gauge material well-being, but serves as a measure of a nation's productivity, which is unrelated.

Alcoa Inc opened the earnings season with a bang, reporting a first-quarter profit on Tuesday instead of the expected loss. That positive surprise foretold a trend. Of the 32 companies in the S&P 500 that have reported earnings so far, Thomson Reuters data showed that 75 percent - or two dozen - have beaten Wall Street's expectations.

Stocks fell for a second week, in the most volatile week of the year, punctuated by big swings in both directions. The Dow Jones Industrial Average (DJIA) fell 1.6 percent to 12,849, and the Standard & Poor's 500 Index (SPX) fell nearly 2 percent to 1370, a key technical area. At its low of the past week, the S&P 500 was off 4.6 percent, from its recent high, and down for two weeks in a row, for the first time since November. The Nasdaq Composite Index (COMP) fell 2.3%.

It was a week that saw declines for Apple (AAPL), down 4.5%; Whirlpool (WHR), down 4.8%, General Electric (GE), off 3.3%, and Ford Motor (F) and General Motors (GM), down more than 4% each.

Heathcare stocks were crucified. The Morgan Stanley Healthcare Payors Index (HMO) fell 7.6% on the week. The normally defensive Select Sector SPDR Health Care (XLV) has been weaker than expected, falling 2.6%.

The sectors that have held up the best over the past two weeks are the Select Sector SPDR Consumer Staples (XLP), down 1%, and the Select Sector SPDR Consumer Discretionary (XLY), down 1.5%.

And the European markets had a bad week. German stocks fell 2.8%. French stocks dropped 3.9%. Spanish stocks fell 4.2% -- and are off some 20% since early February.

However, it must be remembered that the U.S. stock market rally for 2012 is still intact. The Dow is up 5.2% for the year, with the S&P up 9% and the Nasdaq up 15.6%. The Nasdaq-100 Index (NDX) is up 18.5%. Apple, the heaviest influence on the index and up 12 out of the last 13 weeks, is still up 49% for the year.

The Markets Ending April 13, 2012

week ending 041312



The 10-year Treasury yield fell back below 2 percent for the first time since early March in the past week, as investors became more concerned about global growth with Europe a concern, and unevenness in U.S. data. Weekly jobless claims were a surprising negative, coming in at 380,000, about 30,000 higher than expected.

Crude oil, basis the June contract, has dropped down to test the uptrend from the December low.

A drop below the support at $100 would definitely get the market’s attention, and if it occurs it will be interesting to see how the transportation stocks respond.

Precious Metals

The SPDR Gold Trust (GLD) also closed weak on Friday after rebounding to resistance in the $163 area. The pattern of lower highs and lower lows is still intact.

The iShares Silver Trust (SLV) is looking more negative once again. A break of the $30 support could trigger some serious selling, and drop SLV back to the $26 to $27 area.

The Week Ahead

The week ahead will be busy – so say goodbye to the smooth sailing of the first quarter.

It has the potential to be stomach-churning roller-coaster ride -- and it will come after stocks suffered their worst weekly performance of the year and their second weekly loss in a row.

So claims data, industrial production and Monday’s retail sales are the important numbers to watch in the week ahead. The unseasonable warm winter months have helped pulled sales forward and are expected to rise 0.4 percent, compared to February’s 1.1 percent.

Analysts expect to see Treasurys stay in a range in the week ahead with about 2.20 percent the top for the 10-year yield, for now.

Overseas Influence on the Markets in the Week Ahead

This is the first time since October, where the reality is that stocks are typically volatile, despite zero volatility in the first quarter – it appears possible that a decline could double what has already been done. The crucial factors are:-

• the stock market runs the risks of weaker U.S. data;

• a slowdown in China, and

• the European debt saga becoming more threatening.

Economists had expected China to have a GDP of 8.4 percent, but the import export and GDP numbers came and went, with the GDP at 8.1 percent -- easing has already started, due to the fact that knowledge of the slowdown was coming prior to the report.

However, the biggest concern is the euro zone -- where Europe in the past week moved back onto the list of market worries in a big way, when yields in Italy and Spain shot higher, amid fiscal concerns and low prospects for economic growth.

Debt by Country as % GDP in 2012

eurozone debt



Europe will stay in the headlines in the week ahead, as Spain issues bills Tuesday and longer-dated securities Thursday, and investors will watch to see if the auctions go better than Spain’s weak auction of several weeks ago. Also, European Central Bank President Mario Draghi speaks at the ECB statistics conference on Tuesday morning.

A period of gradual under-performance for the year is apparent, clearly displayed with the deterioration based on Spain. Therefore the auctions are going to be quite important – this could be a catalyst for some weakness in some equities markets around Europe.

The Spanish Inquisition

Spain is a Major Concern!

Spanish bonds sold off in a big way last week, with their yield ending the week at about 6%. That's a big number for government debt, and it comes because Spain's economy is a mess, beaten up by a housing bubble-and-bust that may be worse than the U.S. housing bubble.

The euro-zone's fourth-largest economy is in a major recession, with unemployment above 20%, and the government is struggling to meet demands that it cut spending. How the economy will grow again is another question entirely.

So, its debt is now in the cross-hairs of speculators who believe it’s worth much less than its face value and is busy making profits with heavy shorting.

The big debt auction on Thursday, in the week ahead, will tell markets if Spain can survive the immediate crisis or if the euro-zone will need to employ some of the $1 trillion bailout fund to keep Spain afloat.

Volatility – “sell in May, and go away”

Higher volatility is raising its ugly head again – this may be an expectation for the months ahead.

The so-called “sell in May” phenomena was true for the market last year, when stocks made their highs for the year in April and then ended flat after a choppy summer and early fall. Therefore, it’s unrealistic to think that investors are not going to be looking at that.....presenting a big possibility that this year is going to be true to that historical pattern.

The Major ETFs in the Week Ahead

The outlooks of the individual ETFs varies…..while PowerShares QQQ ETF (Nasdaq: QQQ) and the S&P 500 SPDRS (ARCA: SPY) ETF remain in uptrends, the trend in the Dow Jones Industrial Average SPDR (ARCA: DIA) has been drawn into question and the Russell 2000 iShares Index (ARCA: IWM) ETF has been weak for months relative to the other indexes.

This non-confirmation of the ETFs is not a timing signal -- but it is a legitimate cause for caution. With two of the major indexes breaking support (even if temporarily), it shows a weakening of the overall market and could pull the stronger indexes down with it. However, if SPY and QQQ can hold above the March 6 low and push higher, this may present another opportunity as, taken individually, the uptrend is still intact for these ETFs.

The Key Events in the Week Ahead

Earnings in the Week Ahead

Earnings Season Switches Into High Gear in the Week Ahead

Some 86 components of the S&P 500 are set to report earnings in the coming week.

Of these, 11 are Dow components, including Bank of America (BAC), American Express (AXP), Coca-Cola (KO), General Electric (GE), Microsoft (MSFT) and McDonald's (MCD).

Nearly a fifth of the S&P 500 report in the week ahead, including big blue chips — IBM, Microsoft, Coca-Cola, and McDonald’s — as well as banks, like Citigroup and Bank of America.

A major concern with the onset of the earnings season, as the reporting calendar is heavy for the next few weeks, is the lowering of earnings estimates. Late last week, Google (GOOG), J.P. Morgan (JPM), and Wells Fargo (WFC) all reported better than expected earnings, and all declined Friday. Google fell over 4%.

S&P500



In case investors did not have enough to worry about in the week ahead, this chart from The Wall Street Journal shows that analysts have been steadily lowering their earnings estimates for the quarter and the year.

Standard and Poor’s reports that only industrials, technology, and consumer staples are expected to show an increase in earnings for the first quarter. On the other hand, financial stocks are expected to show the best earnings growth in 2012. This correlates with the technical outlook that suggests a decent correction in the banks should be a good buying opportunity.

However, on the plus side, valuations are still being nicely supportive for this market, and first-quarter earnings could surprise to the upside where 3 to 5 percent for first quarter operating earnings growth could be expected.

Here is a brief list of some of the key events in the week ahead.

All earnings dates listed below for the week ahead are tentative and subject to change. Please check with each company's respective website for official reporting dates.

Monday

Earnings: Citigroup (C), Charles Schwab (SCHW), newspaper publisher Gannett (GCI) and toymaker Mattel (MAT). Citigroup is probably the biggest report. The goal will be to convince investors that its finances are in order and that a dividend increase will really happen. An embarrassing result of the Federal Reserve's stress tests was that the banking giant was forced to shelve plans for a dividend increase.

Economy:

• 8.30 am Retail sales

• 8.30 am Empire State survey

• 9.00 am Treasury international capital flows

• 10.00 am NAHB survey

• 10.00 am Business inventories

Tuesday

Tax Day

Earnings: Coca-Cola, IBM (IBM), Intel (INTC), Johnson & Johnson (JNJ) and Yahoo (YHOO). Coca-Cola and IBM should be the stars of the day. Both have been reporting consistent earnings gains in recent quarters, with IBM's stock price hitting a record high of $210.69 on April 3. Semiconductor maker Intel also has become a darling of Wall Street, also hitting a 52-week high this past week. Johnson & Johnson has been struggling for months with quality control and other problems.

Economy:

• 8.30 am Housing starts

• 9.15 am Industrial production

Wednesday

Earnings: American Express, asset-manager Black Rock (BLK), wireless network developer F5 Networks (FFIV), telecommunications chip maker Qualcomm and tool maker Stanley Black & Decker (SWK). American Express will help gauge consumer confidence by how well people are using its cards. Qualcomm is a supplier to Apple. Stanley Black & Decker will shed some light on the housing and home-renovation markets.

Economy:

• 7.00 am Mortgage Applications

• 10.30 am EIA Oil inventories

Thursday

Earnings: Bank of America, Blackstone Group (BX), DuPont (DD), Microsoft, SanDisk (SNDK), Union Pacific (UNP) and Verizon Communications (VZ). What investors want to know about Bank of America is how much progress it's made in getting its mortgage business back into shape. Watch SanDisk to see if its client base can survive the iPhone. And Union Pacific's guidance is a way to look at where the economy overall is headed. Microsoft, will want to address how the personal computer business is faring against the onslaught of tablets and its expectations of a slew of new products, including Windows 8.

Economy:

• 8.30 am Initial claims

• 10.00 am Existing home sales

• 10.00 am Philadelphia Fed survey

• 10.00 am Leading indicators

• 10.30 am EIA natural gas inventories

• 16.30 pm Fed balance sheet

Friday

Earnings: General Electric, Honeywell (HON), athletic-apparel-maker Under Armor (UA), Kimberly Clark (KMB), McDonald's (MCD) and oil services giant Schlumberger (SLB).

Economy:

• There are no major economic reports scheduled for Friday.

Conclusion for the Week Ahead

Equities snapped a two-day advance last Friday, pulled lower as the rising cost of insuring Spanish debt against default increased concerns about Europe's financial health.

The benchmark S&P 500 rose for two consecutive days during the past week after a drop of more than 4 percent in the previous five sessions - opening the possibility that equities had seen the pullback many analysts were expecting after the S&P 500 climbed 12 percent in the first quarter.

The S&P 500 remained near its 50-day moving average, a key technical level that could help indicate the next direction for stocks in the week ahead.

On Friday, the S&P 500 closed at 1,370.26.

The March nonfarm payrolls report, which was released on Good Friday when the U.S. stock market was closed, showed just 120,000 jobs added last month. That figure fell far short of the forecast for 203,000 new jobs and raised questions about whether the recovery in the U.S. labor market was stalling.

Employment has been on everybody's watch list since that Friday. There continues to be improvement which may bring about the belief that it was a hiccup, but in aggregate, as the economic recovery is still continuing to improve.

But even if earnings are solid and data shows improvement, markets could be susceptible to further losses if more signs of fiscal distress in the euro-zone emerges.

You have to put Europe, Spain and Italy, on any 'watch list' at this point – which may even be more important than earnings.

Unfortunately, last week saw a fairly deep correction, more than many were expecting. This leads us to the market direction in the week ahead -- the action early in the week ahead will likely set the tone for the next week or two.

It is important that investors have stops in place. While there may only be another 2% to 3% decline, there is a chance that there could be a loss of another 5%. That is why it is important to determine stops on positions when the markets are closed, so investors do not get caught up in the emotion of a declining market.

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