The Week Ahead in the Stock Market April 22, 2013

The Week Ahead: Earnings, Earnings and More Earnings!

The Game Plan: Apple's Earnings and Housing Data!

Stock Market: A Pullback Is Healthy?

Wall Street: Bears Trying To Upset The Bulls!

by Ian Harvey

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April 22, 2013

Introduction

Last week saw a slight correction in the stock market – will the pullback continue in the week ahead? Also, it's make-or-break time for the first-quarter earnings season, and it comes just as the stock market is showing signs of strain.

About 170 S&P 500 and 10 Dow companies report earnings in the week ahead, and they include everything from tech icon Apple (AAPL) to industrial names like Caterpillar (CAT) and energy companies like giant Exxon (XOM).

The week ahead also has a light but important economic calendar, including home sales data Monday and Tuesday, durable goods Wednesday, and the first look at first-quarter GDP Friday. Even though it is a reading of past activity, first-quarter GDP is important since, at estimated 3 percent growth, the rate is about double what is expected for the current quarter.

Traders have also been fixated on events surrounding the Boston Marathon bombers, though it was not seen as a market factor.

Quick Reference:

‘The Past Week’
‘The Upcoming Week’
‘The Economy’
‘Earnings and Company News’
‘A List of Key Events’
‘The Spotlight on Certain Companies’
‘Expectations for the Stock Market’
‘Sentiment Effect on Stocks’
‘The NYSE Composite’
‘Conclusion’

Other Articles:

Buy or Sell in April
Pullback of Stock Market - Sell-Off Imminent!
Market Rally Continues – Keep on Buying!
Sectors Affected by an Extended Rally
A List of Companies Reporting
Bull Market To Continue Through 2013”
Stock Market Correction Ahead - Providing Buying Opportunities!
Stock Market Expectations in 2013

Year to date, the S&P is up 9 percent and has not had a significant pullback, even though the past week saw a slight correction with a spate of disappointing economic data and geopolitical happenings.

Many believe that by any sort of measure, the market is kind of overdue for some sort of a pullback and maybe we're finally going to get it in the week ahead.

With a market that has moved up like this one has, expectations are really a concern. Expectations are not being met… then you throw in earnings season. Even though earnings are coming in better than expected -- they're struggling on the top line, the revenue side – which is indicative of a global economy growing below trend.

The commodities sell-off is also signaling a global weakening, and it accelerated when China released disappointing GDP data Monday.

Every April, as it has for the last four years, the market is trending exactly the same! There is a confluence of factors :-

• The fundamental case—everyone was excited about the economy improving, but that story broke down.

• The earnings are not improving.

• The commodities complex looks just like last year.

Even though economists expect a weaker economy, they do not expect it to be as soft as last year, and stock strategists also expect the market to rebound later in the year, after any sell-off.

However, seasonally, April can actually be a good month for stocks so they may hold on, but in the week ahead and also the next few weeks, there could be a downdraft as there was in the past three years. May is when investors get a little worried – there is a sideways trend in place which means that it's also possible there could be a sideways correction. That means stocks would grind in within a range, instead of selling off.

This makes the earnings season particularly key, as traders look for clues about the extent of the soft spot and its impact on corporate profits.

The next two weeks are really important. That's when the bulk of the market cap reports. They will be extremely important. There's a limited amount of economic data to consume. The huge reports come at the beginning of the month, when April employment data is released.

Industrials and technology are the areas where the market is expecting the greatest weakness. If there are areas where there could be a surprise and guide higher, those could be the areas. They should be the areas where the turnaround story could occur, should it show up!


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The Past Week


THE WEEK AHEAD

Introduction to the Week Ahead

Wall Street would normally be set for a technical rebound in the week ahead after a drop of more than 2 percent, the worst weekly decline so far this year. But that could easily change by the time Apple; the iPhone maker reports its earnings, which are due on Tuesday after the closing bell.

It's not the $700 stock anymore, but Apple still has huge weighting on indexes, and it's still the window into the state of consumers, a sort of reality check.

Wall Street has been recently pressured by a slew of disappointing economic data and weaker-than-expected earnings reports from blue-chip companies like IBM (IBM).

The Economy in the Week Ahead

On Monday, we get new existing home sales data and the new home sales report follows on Tuesday. Also on Tuesday the PMI Manufacturing Index Flash is released, and that is likely to give us a reading on the economy's health.

The durable goods report is out on Wednesday, followed Thursday by jobless claims, which have risen four out of the five past weeks. Then on Friday, we get the advance reading on GDP for the first quarter and the final reading for April on consumer sentiment from the University of Michigan.

Economic Predictions for the Week Ahead

• In the housing sector, March figures for existing home sales are due on Monday and new home sales on Tuesday. Economists polled by Reuters have forecast slight gains in both March existing and new home sales over February figures.

With existing home sales data for March from the U.S. Economists are looking for a reading of 5.01 million sales in the month, higher than the previous reading of 4.98 million.

• U.S. durable goods orders for March will be released on Wednesday, with the forecast calling for a drop in March following February's gain. Durable goods are manufactured goods, such as washing machines and refrigerators, meant to last three years or more.

• Thursday's data on weekly U.S. initial claims for jobless benefits are projected to dip to 351,000 for the latest week.

• On Friday, Wall Street will get a snapshot of the broad economy, measured by gross domestic product, or the output of all goods and services inside U.S. borders. First-quarter GDP is forecast to have grown at an annual rate of 3 percent, compared with growth at an annual pace of just 0.4 percent for the fourth quarter. Many analysts see downside to this number due to recent data including employment indicators, PMI's, and inflation data.

• A final reading for April on U.S. consumer sentiment will come out on Friday from the Thomson Reuters/University of Michigan Surveys of Consumers. The forecast calls for a blip higher to a reading of 73.0 from a previous reading of 72.3.

Earnings and Company News in the Week Ahead

The reality is that Q1 results aren’t materially weaker than what we saw in the 2012 Q4 earnings season. The market seemed satisfied, if not exactly thrilled, with Q4 results, as its strong momentum in January and February this year shows.

What this means is that the excessive worry may not solely be due to Q1 results, but rather what these results tell us about the coming quarters. Consensus expectations for the first half of 2013 appear quite reasonable, with total earnings for companies in the S&P 500 expected to increase by only +1.2% from the same period in 2012. But estimates for the back half of the year represent a significant growth ramp up -- +10.8% over the 2012 period.

Consensus estimates then extrapolate the expected second-half 2013 growth recovery into 2014, resulting in further gains of +11.7%. Recent economic data from home and abroad is likely prompting a reassessment of these earnings growth expectations. The earnings miss from IBM and GE’s reference to Europe bring home this issue.

We will get a deluge of earnings reports in the week ahead, with a total of 665 companies coming out with Q1 results, including 162 S&P 500 members. This includes a host of industry leaders from Apple (AAPL) and Amazon (AMZN) to DuPont (DD), Caterpillar (CAT) and Ford (F).

The aggregate earnings picture for the 396 S&P 500 reports still to come is for earnings decline of -4.3%, which compares to +2.1% earnings growth for the same group of companies in the preceding quarter. The composite growth rate for Q1, where we combine the results of the 102 companies that are out with the 398 still to come, is for a drop of -0.8% in total earnings on flat revenues.

The Spotlight on Certain Companies in the Week Ahead

In looking at the week ahead earnings reports, the market will be watching techs and blue chips, including Netflix, Apple, AT&T, Boeing, Proctor & Gamble, Exxon-Mobil and Zynga, among others.

Investors will be particularly eyeing key earnings from technology behemoths Apple (NASDAQ: AAPL) and chip maker Texas Instruments (NASDAQ: TXN). Texas Instruments' earnings and guidance is considered a key indicator for the semiconductor, and the broader technology industry by many analysts.

Apple, which releases its quarterly results after the bell on Tuesday in the week ahead, has seen its shares tumble from an all-time high of $700 last September to under $400. With its stock down over 25 percent since the beginning of the year, the tech giant faces major questions about whether it can keep on innovating and selling more electronics.

Analysts are projecting revenue to grow 8 percent to $42.49 billion, while earnings per share are expected to drop 18 percent, according to Thomson Reuters.

Analysts such as J.P. Morgan are not as bearish on the company as many traders and analysts on the street are currently. "Our research indicates that a new lower-priced iPhone and upgraded iPhone 5S, along with a refreshed iPad mini with Retina Display, could restore the “what's next?” to 2H [calendar] 2013. In our view, the “what's next?” does not have to be a new product category."

"Instead, it is more a function of Apple being able to stage new product launches of existing categories to smooth out the product cyclicality of consumer electronics. We also think that Apple's gross margin profile could be upward biased owing to supply chain dynamics."

"With Apple, we reiterate our Overweight rating and Dec-13 price target of $725. Apple is on the J.P. Morgan Analyst Focus List. In our view, a compelling part of the stock's risk-reward profile is that upside potential can return to the model. We think that timing issues related to the supply chain and LTE network capacity rollouts kept a lid on upside potential in recent quarters, but these cross currents should fade moving through the rest of [calendar] 2013."

The analysts at J.P. Morgan are expecting earnings per share of $10.58 on revenue of $43.637 billion. They expect gross margins to come in at 39.2 percent.

Analysts at Jeffries are much less bullish on the stock. The analysts have a hold rating on the stock with a price target of $420.00 per share.

• A number of other big players in the Internet and technology space are expected to release earnings in the week ahead, including Netflix (NFLX), which reports after the bell Monday. After a quarter in which its stock nearly doubled and it rolled out its first original content, "House of Cards," investors will be interested in seeing the latest subscriber numbers.

Analysts are expecting revenue to grow 17 percent to $1.017 billion, while earnings per share are projected to swing from an 8 cent loss a year ago to an 18 percent gain, according to Thomson Reuters' analyst consensus numbers.

Sterne Agee is cautious on the stock ahead of the earnings release, with a hold rating but without a price target. "We expect NFLX to handily beat consensus 1Q estimates but believe expectations are already high and mostly reflected in the stock. We believe the "bogey" for net domestic streaming adds in 1Q is close to 2M subs. In addition, we believe 2Q domestic streaming guidance will need to be healthy (above 500K net domestic streaming adds). In the absence of either of these, we could see profit taking."

"Management had guided conservatively for 1Q and not fully factored in the potential success of House of Cards. The series was very successful and likely boosted subs in 1Q. We believe the Street is expecting net domestic streaming adds to be at the upper end of guidance of 1.4M to 2.1M net adds."

"We are looking for a net increase of 1.84M domestic streaming subscribers and 900K international subscribers in 1Q. On other hand, we expect a 400K decline in the number of domestic DVD subscribers. In total, we expect the company to add 2.3M net new subscribers during 1Q versus guidance of 1.2M to 3.1M."

"Our revenue/EPS estimate of $1B/$0.26 compares to consensus of $1.01B/$0.17 and guidance of $1.004-$1.031B/$0.00 to $0.23, respectively. For 2Q, management guided for 500K net domestic streaming subscriber additions but we believe the Street expects guidance to be stronger than that."

"We remind investors that NFLX shares have been extremely volatile post earnings. In the past six quarters, shares have been down double digits four times the day after earnings and up twice double digits."

Analysts at National Alliance are much more optimistic on the stock here, with an accumulate rating and $186.64 price target on the stock.

• On Tuesday in the week ahead, Dow component AT&T (T) reports.

We're sure to hear plenty about its mobile subscriber numbers, many of whom are locked into iPhone contracts. Revenue is expected to be pretty much flat with the year ago quarter—down just a fraction of a percent at $31.74 billion. Earnings per share are expected to grow 7 percent to 64 cents, according to Thomson Reuters.

Caterpillar noted Friday that retail sales of its equipment world-wide were down 11% in March from a year ago. That includes an 11% decline in North America, 8% in Europe -- and 24% in the Asia-Pacific region dominated by China.

Caterpillar is expected to earn $1.49 a share for the first quarter, down from $2.37 a year ago. Revenue may fall 14.1% to $13.7 billion. That's why the shares are down 10.2% for the year and down 31% since peaking on Feb. 23, 2012.

Texas Instruments is also expected to report earnings in the week ahead on Monday after the close. Texas Instruments is expected to report first quarter EPS of $0.30 vs. $0.32 a year ago on revenue of $2.85 billion, lower than the $3.12 billion reported in the same period a year ago.

Analysts at Deutsche Bank are mildly cautious ahead of the report with a hold rating and $31 price target. "Our 1Q rev/EPS ests stand at $2.85b (-4% q/q)/$0.31, in line with Street and mid-pt of mid-qtr guidance for revs of $2.8-$3.91b (-3-6% q/q) and EPS of $0.28-$0.32, net of one-time charges and benefits. By segments, we model Analog revs to decline 1% q/q and Embedded revs to be flat q/q, roughly in line with typical seasonality for these segments."

"While we believe TXN will effectively manage through the current challenging macro environment and emerge as a share gainer in its core businesses over the long run, we maintain our Hold rating as valuation already reflects a 1H cyclical recovery and these long-term improvements."

Analysts at Wedbush are much more optimistic on the stock currently, with an outperform rating and a $39 price target. "We expect TI to print a modest beat driven by order trends continuing to improve post Chinese New Year and, despite a choppy earnings season, look for largely in-line Q2 revenue guide."

"TI raised and narrowed Q1 guidance to the upper half of its prior range with GAAP EPS to a range of $0.28 to $0.32 and revenue to a range of $2.80B to $2.91B (-6% to -2% Q/Q) at its mid- quarter update on March 7. We expect a modest beat as checks indicate order trends have continued to improve post the Chinese New Year holiday. We are increasing our Q1 pro forma EPS estimate to $0.32 on revenue of $2.87B above the Street ($0.30/$2.85B) and our prior estimates ($0.31/$2.85B)."

"We continue to view TI as our best big-cap stock for investors to play the overall recovery of the semi industry given TI's (1) recent quarterly dividend increase to $0.28 or $1.12 annualized implying a 3.4% dividend yield, (2) addition of $5B to current share repurchase plan, (3) position to benefit from higher utilization rates pushing GM higher, and (4) market share gains driving steady Q/Q earnings and revenue growth."

• And coffee giant Starbucks will tell us just how much premium coffee we're drinking and how global expansion is going when it releases its quarterly results Thursday afternoon. According to Thomson Reuters, revenue is projected to grow 12 percent to $3.59 billion while earnings per share are expected to move 21 percent higher to 48 cents.


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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.

Monday

Earnings for the Week Ahead: Caterpillar, Halliburton, Hasbro, Six Flags, Netflix, Texas Instruments, Crane, ACE Ltd., B/E Aerospace, Hexcel, Zions Bancorp, Checkpoint Systems, Philips Electronics

Economy:

• 10:00 am: Existing-home sales

Tuesday

Earnings for the Week Ahead: Apple, Dupont, Travelers, Amgen, AT&T, Yum! Brands, United Technologies, Coach, CIT Group, Delta Air Lines, Air Products, Cree, Discover Financial, Forest Labs, Gannett, Illinois Tool Works, Xerox, Lockheed Martin, Juniper Networks, VMWare, Western Digital, Angie's List, Graco, US Airways, Norfolk Southern, Owens-Illinois, Hanesbrands, Panera Bread, AK Steel, Ryder System, Ingersoll-Rand

Economy:

• 8:58 am: Markit PMI
• 9:00 am: FHFA home prices
• 10:00 am: New home sales
• 10:00 am: Richmond Fed survey
• 1:00 pm: $35 billion 2-year note auction

Wednesday

Earnings for the Week Ahead: Boeing, Procter & Gamble, Ford, Eli Lilly, Qualcomm, Western Digital, Nasdaq OMX, Corning, Dr. Pepper Snapple, Barrick Gold, General Dynamics, Sprint Nextel, Southern Co, Barclays, F5 Networks, Thermo Fisher Scientific, Motorola Solutions, Lorillard, Aflac, Owens Corning, W.R. Grace, Ashland, WellPoint, Whirlpool, Hess, Angie's List, Morningstar, Tupperware, Zynga, Stryker, Cheesecake Factory, Crown Castle, Cliffs Natural, Cabot Oil and Gas, Akamai

Economy:

• 7:00 am: Mortgage applications
• 8:30 am: Durable goods
• 1:00 pm: $35 billion 5-year note auction

Thursday

Earnings for the Week Ahead: Exxon Mobil, 3M, ConocoPhillips, Unilever, UPS, Starbucks, Altria, AstraZeneca, Hershey, Boston Scientific, AmerisourceBergen, Colgate-Palmolive, Diamond Offshore, Dow Chemical, Entergy, Celgene, Harley-Davidson, Bristol-Myers, Iron Mountain, Alaska Air, Southwest Air, JetBlue, Cabela's, KKR, New York Times, Coinstar, Cerner, Chubb, Eastman Chemical, Expedia, Leggett & Platt, Level 3, Potash, Time Warner Cable, Raytheon, Safeway, Stanley Black & Decker, Bunge, Biogen Idec, Baidu

Economy:

• 8:30 am: Weekly jobless claims
• 11:00 am: Kansas City Fed survey
• 1:00 pm: $29 billion 7-year note auction

Friday

Earnings for the Week Ahead: Chevron, Honda, D.R. Horton, Lazard, DTE Energy, Total SA, Aon, Brookfield Office Properties, Weyerhaeuser, VF Corp, Goodyear Tire

Economy:

• 8:30 am: Real GDP (Q1)
• 9:55 am: Consumer sentiment

International Economic Reports in the Week Ahead

Monday - Monday night, the Flash China HSBC Manufacturing PMI for April is also expected to be released; the previous reading for the index was 51.6.

Tuesday - Tuesday morning will be PMI day in Europe as both the flash manufacturing and services PMI's for the Eurozone and for France and Germany individually are expected to be released. For the Eurozone, the manufacturing PMI is expected to have been flat at 46.8 from the previous month while the services PMI is expected to have increased slightly to 46.6 from 46.4.

For Germany, the manufacturing PMI is expected to have been flat at 49.0 from the previous month while the services PMI is expected to have ticked up slightly to 51 from 50.9. Lastly, the French manufacturing PMI is expected to have risen to 44.3 from 44 in the previous month while the services PMI is expected to gain to 42.0 from 41.3.

Later Tuesday, the retail sales report from Canada will be watched, especially by currency traders. Also due is the RBNZ rate decision.

Wednesday - Wednesday, markets will focus on the German IFO Business Climate Index, due out at 4:00 am eastern. The index is expected to have slipped slightly in the latest reading to 106.2 from 106.7 at the last report.

Thursday - Thursday brings more data from the EU as the Spanish unemployment rate for March is due out and is expected to have risen to 26.5 percent from 26.02 percent previously.


CLICK HERE for a complete list of companies reporting in the week ahead.

.....or go to.....

CLICK HERE for a complete list of companies reporting in the week ahead.


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Expectations for the Stock Market – 50-Day Moving Average!

The market was around breakeven early Thursday, in the past week, after an inline Jobless Claims report and mixed earnings announcements. Unfortunately, at 10am ET we received soft readings from both the Philly Fed and Leading Indicators. Quickly the market broke through 1550 and plummeted to the next area of support at 1541 (50 day moving average).

The market wrestled over the 50 day for most of the session ending the day right at the mark. So this is the new battleground to fight over.

At this stage there is enough information to grade earnings season. Given a combination of the lack of negative pre-announcements + early reports=Grade of B.

Generally that's good news for stocks. However, when the market is sitting at all-time highs, then B isn't going to be good enough -- especially not good enough in conjunction with a recent slate of softer than expected economic reports in the air.

This same atmosphere was all investors needed the past 3 April's to embark on a correction. Likely that is the case here again. Look for spots to buy back in around 1500.

The critical level in the week ahead would be 1,540 on the S&P 500, which is near the 50-day moving average.

On Friday, the benchmark S&P 500 index closed at 1,555.25.

The past few weeks have been very bullish, but this bullishness has declined somewhat. However, it’s not dire yet – we probably need another week like this past week – but any further drop below that uptrend line and the bears will be in control.

Sentiment Effect in the Week Ahead

This past week, bullish sentiment according to the AAII rebounded to 26.8%, partially because the prior week's reading had a low sample size. If the stock market declines for another three to five weeks, this number should drop back to the 20% level or lower.

The number of bullish financial newsletter writers dropped slightly to 47.4%, but you will recall they never turned very negative, even at the lows in 2012.

The NYSE Composite in the Week Ahead

As discussed above a correction is expected, however, it is possible that a smaller correction is likely viewing studies on the S&P 500 and NYSE Composite – they have not formed any significant negative divergences, like they did prior to the 21% slide in 2011. There have been some divergences in the daily studies, as the number of NYSE stocks making new highs has been deteriorating since early in the year.

The H-L indicator did turn negative this week. This is consistent with a correction, but the fact that the daily and weekly NYSE The weekly NYSE Advance/Decline (A/D) line have continued to make new highs with price is positive for the intermediate-term trend.

The weekly chart of the NYSE Composite shows that it reached its lowest level in the past six weeks, but did close above its lows. The close was also above the quarterly pivot at 8,938. The 20-week ’Exponential Moving Average’ (EMA) is at 8,834, and the NYSE is not too far above its weekly Starc band at 8,729.

The 38.2% 'Fibonacci support’ from the June lows sits at 8,478, which coincides with the weekly uptrend (line b). This is just over 5% below Friday's close.

The top that formed in 2012, section highlighted, when it took almost three months before the selling became quite heavy. This suggests that we could bounce around between last week's lows and the recent highs for a few more weeks before we drop to stronger support.

The weekly A/D line is holding up pretty well, and is still above its rising WMA. There is further support at line c. The major support for the A/D line goes back to the 2011 lows (line d).

There is resistance now for the NYSE between 9,131 and the high at 9,256.

Conclusion for the Week Ahead

I expected last week to be a difficult one for the stock market, and the gyrations are likely to continue for the next several weeks. I was surprised a bit by Friday's strength. Another sharply lower close could have changed the technical outlook.

The S&P 500 and Dow Industrials, which are the strongest averages, need several consecutive higher closes to turn the focus back on the upside. However, the damage in both the energy and technology sectors is concerning. By the middle of the week ahead, the short-term technical picture should be clearer.

One stock that’s always a good tell is IBM (IBM). The stock was crucified when its earnings came out and the situation is now critical. Look out below if it drops much further because then it could see the mid $100s.

However, on the bright side of the market, “Mom & Pop” stocks that pay a nice dividend, are usually a good hiding place. Johnson & Johnson (JNJ) is one of these marvels, and it continues to perform well.

The past week was to be the big kick-off to earnings season, an ambitious one considering the markets had already posted double digit gains in 2013.

“Too Much Too Far?” seems to be the message being sent in regard to last week’s stock market results!

Bleak fundamentals did not help the situation with poor economic data from China, Europe and the U.S., not to mention the scariness of the bombing at the Boston Marathon.

Your strategy for the week ahead -- as we embark on week two of earnings season, the heaviest we will see – requires infinite patience.

Normally, the charts set up nicely for a potential move but the last seven to ten days have really wreaked havoc on the technical picture.

Generally it is possible to look at individual names and their technicals to get a good read on direction, time and volatility. However, when the market is making the moves that have been experienced - no rhyme or reason just plain selling - well, it's time to step a bit more cautiously.

Times like these require patience, in addition to pulling out new tools from the trader toolbox. Bi-directional and/or limit risk plays will definitely be needed to overcome the present market movements.


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