The Week Ahead Will See Jobs Report Threatening the Rally!
Bulls Will Battle Europe and the Economy!
Wall Street: Can Bulls Maintain the Edge in the Battle of the S&P 500?
by Ian Harvey
Armed with better-than-expected corporate profits, Wall Street’s bulls will do battle with potentially bearish economic and European news in the week ahead as investors await Friday’s April jobs report.
First-quarter earnings have been a happy surprise. But recent data suggest this year's economic euphoria may have been overdone, a risk for stocks. Friday's jobs report, in the week ahead, should clarify matters. Pfizer, AIG, GM and Cummins report earnings.
The monthly jobs report is always a big deal. The report coming on Friday, in the week ahead, will offer a clearer picture of the economic recovery's strength -- and its capacity to withstand some big stresses that lay ahead. The report is expected to show the U.S. unemployment rate at 8.3%, up from February's 8.2%, and payroll growth of about 165,000. If the numbers miss, the market could react badly.
The jobs report climaxes a big week for economic reports. There will be data on the health of U.S. manufacturing and the services economy, an important report on auto sales, and a number of different slices on the jobs picture in the week ahead.
Plus, it's another big week for corporate earnings. Reports due in the week ahead include Dow component Pfizer (PFE), engine-maker Cummins (CMI), oil giant BP (BP), insurance giants American International Group (AIG) and Allstate (ALL), MasterCard (MA), Visa (V) and General Motors (GM).
A string of disappointing economic data, starting with the March jobs report, have been a speed bump for stocks in the past several weeks, while investors also fret about new sovereign debt troubles in Europe. Now, the April jobs report looms large, and economists are paring back their expectations to reflect a slower rate of job growth of about 159,000 nonfarm payrolls.
First-quarter GDP Friday showed growth of just 2.2 percent, below the 2.6 percent expected by economists.
Central Bank also meets Thursday, in the week ahead, and holds a press briefing afterwards. Spain auctions bonds that day, its first since S&P’s downgraded its debt by two notches to BBB-plus last week.
The Past Week
The drama that will unfold in the week ahead comes after a week that ended reasonably well. The market was up four days out of five and had its best week since mid-March, with the Dow Jones Industrial Average (DJIA) up 1.5%, temporarily rising above its 2012 closing high of 13,264 on Friday -- up 0.1 percent for the month of April.
The Standard & Poor's 500 Index (SPX) was up 1.8%, regaining the key 1400 level, ending the week at 1403. The 1400 level is near or at a level that a number of strategists have set as a forecast target for year-end 2012. Many of those strategists saw their 2011 targets met by April last year, when the S&P hit 1370. It then traded lower to finish the year dead flat, at 1263.
The Nasdaq Composite Index (COMP) was up 2.29% to finish at 3,069. The only down day was Monday. The Nasdaq was helped by Apple (AAPL) and Amazon (AMZN).
Apple (AAPL) relieved a lot of anxiety and destroyed all the talk that its iPhone business was stumbling with blowout earnings, in large part because of huge iPhone sales in China. After trading as low as $555 on Tuesday afternoon, it surged as high as $618 early Wednesday in response to the reported 35 million iPhones sold.
Apple looks ready to close April above its monthly Starc+ band for the third month in a row. For those who are not familiar with Starc band analysis, these bands identify extreme price levels in any market. When prices are at or above the Starc+ bands, it is a high-risk time to buy.
Starc bands stand out among other overbought/oversold indicators for their ability to generate highly reliable signals for traders in all markets and time frames.
'STARC Bands’ are a type of technical indicator that is created by plotting two bands around a short-term simple moving average (SMA) of an underlying asset's price. The upper band is created by adding a value of the average true range (ATR) - a popular indicator used by technical traders - to the moving average. The lower band is created by subtracting a value of the ATR from the SMA.
Upper STARC band = SMA + ATR*
Lower STARC band = SMA - ATR*
* The average true range (ATR) is generally multiplied by a user-specific multiplier factor before being added/subtracted from the SMA.
Most traders use a move toward the upper band to signal an increased probability that the price will pull back toward the moving average, and a move toward the lower band as a signal that the price may head back higher. Other traders believe a move beyond the bands signals an increase in momentum. STARC bands generally use a six-period moving average, and the average true range factor is usually multiplied by two before being added/subtracted from the SMA.
This indicator is similar in calculation and interpretation to Bollinger Bands.
STARC is an acronym for Stoller Average Range Channels. The indicator is named after its creator, Manning Stoller who developed in the mid-1980’s.
And Amazon.com (AMZN) cheered everyone by showing a quarterly profit, small as it was, as sales grew 34% in the first quarter.
Expedia (EXPE) shares jumped after results beat expectations wildly. But Procter & Gamble (PG) earnings disappointed.
The Markets Ending April 27, 2012
The strong earnings last week helped push the stock market higher, with the S&P 500 SPDRS (ARCA: SPY) ETF showing a nice gain of 2.6%, while the PowerShares QQQ ETF (Nasdaq: QQQ) was up 3.2%.
The stock market also did a good job of ignoring the worrisome events in the Eurozone. The weekend elections in France will now have to be resolved with a runoff election on May 6. In the Netherlands, the prime minister was forced to resign, as support for the German-led austerity plan throughout Europe is diminishing.
German state elections will also be held May 6, in the week ahead, as will parliamentary elections in Greece. There seems to be a rising tide of public opinion that the forced austerity is just making matters worse. Italian Prime Minister Mario Monti, who is trained as an economist, has been pointing out the pitfalls of the current course.
Also, the markets ignored S&P’s downgrade of Spain’s debt, which dropped it below the ratings of Fitch and Moody’s. Stocks and the British pound seemed to shrug off news that the UK’s economy had dropped back into a recession in the first quarter.
As this graphic from The Wall Street Journal illustrates, continued deterioration in the Eurozone economies will eventually take its toll on the rest of the world. Private lending will dry up, there will be less demand for exports from the emerging markets, and emerging currencies will continue to weaken.
Last fall, the potential impact of European problems on the US stock market or economy was not as big a concern as it is now.
Seven months ago, sentiment was very negative on both the US economy and the stock market. Stock prices are also at much more attractive levels.
Last week’s sharp drop in durable goods orders and the disappointing preliminary reading on first-quarter US GDP may also be a sign that the U.S. economy is slowing down.
Technically, the effect on the stock market for the intermediate-term trend is still positive, but despite last week’s strength, it is not clear yet that the market’s correction is indeed over. In any case, stock selection will be even more critical in the coming months.
The July crude oil contract finished last week up slightly, trying to hold the uptrend from the late 2011 lows.
A close above $106.50 would improve the short-term outlook, although the major resistance above $109 needs to be overcome to signal higher prices.
The SPDR Gold Trust (GLD) closed up $2, turning higher late in the week. The weekly chart shows fairly narrow ranges over the past month, suggesting that the market may be sold out.
The criterion for a bottom in GLD has not been fulfilled -- however, the seeming lack of interest in gold and disappearance of the gold bulls suggests that a bottom is close. There may be new buy signals in the week ahead, but one more drop may occur in the week ahead before this happens.
'On-Balance Volume - OBV' is a method used in technical analysis to detect momentum, the calculation of which relates volume to price change. OBV provides a running total of volume and shows whether this volume is flowing in or out of a given security. This indicator was developed by Joe Granville.
OBV attempts to detect when a financial instrument (stock, bond, etc.) is being accumulated by a large number of buyers or sold by many sellers. Traders will use an upward sloping OBV to confirm an uptrend, while a downward sloping OBV is used to confirm a downtrend. Finding a downward sloping OBV while the price of an asset is trending upward can be used to suggest that the "smart" traders are starting to exit their positions and that a shift in trend may be coming.
The iShares Silver Trust (SLV) finally broke the support at $30, but there was little follow-through selling, as SLV quickly rebounded. This is a positive sign, and may be signaling a sold-out market.
The Week Ahead
Volatility – “sell in May, and go away” – Does this still Apply?
The week ahead includes May Day. The markets are highly sensitive to the historic pattern of “sell in May” and “go away,” particularly since it has held true in the past two years when stocks reached their highs of the year in April.
This year, the market hit highs early in the month of April and subsequently sold off about 4.5 percent. Yet, those losses were nearly recovered by Friday’s close.
'May Day' refers to May 1, 1975, when brokerages changed from a fixed commission for securities transactions to a negotiated one. Previous to this, commissions were standard from broker to broker.
At the time, the majority of Wall Street felt that these changes would have little effect on their commissions. However, shortly after the switch, Charles Schwab pioneered what are now known as discount brokerages, which charged much lower fees, and in some cases none at all - known as no-advice accounts. As a result, the number of individual investors expanded greatly. This was the first step in the creation of the discount brokerage houses that we know today.
The Jobs Report in the Week Ahead
The Jobs Report Will Control The Market Direction in the Week Ahead
The jobs report became a big issue for investors last Friday when the government reported that first-quarter gross domestic product, the basic measure of economic performance, grew at an annualized 2.2% rate. Most economists had expected a rate closer to 2.5%, and some thought 3% was possible.
The report was one more piece of evidence that the economy seemed to be stalling out. The first indications came with the March jobs report that said payrolls grew by 120,000 after several months of job gains topping 200,000. However, many think that the March result overstated the slowdown.
Still, new jobless claims started to move higher in March. Housing reports have not confirmed anecdotal evidence of a real housing recovery. Retail sales have been spotty, as have reports on manufacturing from the 12 Federal Reserve banks.
So, the jobs report becomes a bigger-than-usual deal.
On top of the headline numbers of 8.3% unemployment and 165,000 payroll jobs added, the critical numbers to watch in the week ahead are: wage gains, hours worked and private payroll growth. It's likely that federal, state and local government payrolls will either be lower or stagnant.
Overseas Influence on the Markets in the Week Ahead
All this matters because the U.S. economy is still tied in tightly to global economic forces. Europe could well be in a recession before long. The United Kingdom is. So are Greece and Spain, which reported a 24.4% unemployment rate in the first quarter, up from 22.9% in the fourth quarter.
Markit.com, a European consulting firm, reported that its index of retail sales in Germany, France and Italy fell from 49.1 to 41.3 in April. French retailers posted a survey-record drop as they reported disruption due to the presidential elections.
China's economy has been slowing, although not falling apart yet.
A recession in Europe could hit U.S. exports, and that could affect jobs.
Besides Spain, investors will be watching the buildup to the French and Greek elections, which take place Sunday, May 6. French President Nicolas Sarkozy is expected to lose the runoff election against Francois Hollande, who opposes aspects of the fiscal compact and supports raising taxes and spending. And Greece could very well end up with a very fractured, fragmented government.
The briefing Thursday, in the week ahead, by ECB President Mario Draghi will also be important because Draghi may give more color to his comment about Europe needing a growth pact. If there are very few changes then after the ECB meeting, short the euro into the weekend elections.
The Economy, QE3 and the Influence on the Week Ahead
Friday’s jobs number could also send the dollar lower, if investors think it is weak enough to prod the Fed into easing.
Fed Chairman Ben Bernanke this past week made it clear the Fed has no plans for a third round of Quantitative Easing (QE3) or another bond purchase program; the Fed also raised its economic forecast.
Yet, stock market investors clung to Bernanke's comments that the Fed could do more if it needed to, leaving the door slightly ajar for another easing round. The dollar also weakened on the idea of more easing, with the dollar index closing at a two-month low Friday. The euro edged up 0.2 percent against the dollar, ending the week at 1.32. Bonds also saw buying and the 10-year yield slipped to end the week at 1.931 percent.
The first-quarter GDP number Friday reflected a decrease in government spending, but importantly, consumption picked up – due to more jobs.
Expect the jobs report, in the week ahead, to be more supportive than negative for the market – the economy is making progress -- it’s more likely the economy will surprise on the upside than the downside when you look at the year as a whole.
The Battle for the S&P 500 Index in the Week Ahead!
It will be another battleground for S&P 500 index in the week ahead. Will the bears finally give up and let the bulls have their way?
After Monday’s drop, stocks had a great week last week. Many of the major averages rebounded, and the S&P 500 closed above the psychologically key resistance of 1,400. The market internals were strong late in the week, and the Advance/Decline (A/D) lines are at or above key resistance.
But the index is still down 0.4 percent for the month so far even after gaining 1.8 percent for the week, with only one trading day left in April.
A close above 1,400 is positive, but the recent high, near 1,422, is a more important technical level -- confirms that there's room to move higher, particularly in the week ahead.
A close above that would open the window to testing highs back to early 2008. The next natural area you'd see is a run to at least 1,440, the May 2008 high.
The S&P 500, up 11.6 percent for the year, jumped 4.4 percent in January, 4.1 percent in February and 3.1 percent in March, but is down 0.4 percent so far this month.
The sideways action present in the past few weeks has been enough to alleviate any overbought conditions that existed in the market a month ago. Therefore, the market has the potential for another leg higher in this longer term uptrend, which began early October 2011.
The Major ETFs in the Week Ahead
The outlooks of the individual ETFs still continues to vary.....The S&P 500 SPDRS (ARCA: SPY) and PowerShares QQQ ETF (Nasdaq: QQQ) have maintained strong uptrends since October; the Dow Jones Industrial Average SPDR (ARCA: DIA) put in a lower low recently drawing the uptrend into question but is still showing signs of potential upside, and the Russell 2000 iShares Index (ARCA: IWM) ETF continues to flat-line. With recent breaks above short-term resistance in SPY and QQQ it appears likely a further advance will develop, with DIA likely to be brought along for the ride. IWM remains the weakest of the group, but if the other ETFs advance, it is likely to challenge resistance within the expanding range it has been trading in. In the week ahead manage risk and be aware of significant support levels that may foreshadow larger declines.
The Key Events in the Week Ahead
Earnings in the Week Ahead - GM, Whole Foods, Cummins, Sirius XM Radio, AIG – Another Big Week
287 S&P 500 companies have already reported results.
Thomson Reuters says 72.8% of these have been beaten -- admittedly trimmed Street estimates -- but that's still impressive. Since 1994, about 62% of companies have beaten Street estimates.
Earnings are up overall about 7.1%, Thomson Reuters says, but that number is distorted by Apple's huge profit gain. Take Apple out, and the number drops to 4.7%. Industrial and tech companies are showing the largest earnings growth.
Thomson Reuters says 121 S&P 500 companies are expected to report quarterly results in the week ahead.
The Fed in the Week Ahead
Besides data in the week ahead, there are also a few Fed speakers, mostly appearing on panels. CNBC’s Steve Liesman Tuesday will be interviewing both Atlanta Fed President Dennis Lockhart and Chicago Fed President Charles Evans at 10:30 a.m. ET Tuesday. They will both be appearing at the Milken Institute conference, as is Dallas Fed President Richard Fisher.
Fed Gov. Daniel Tarullo speaks Wednesday morning, in the week ahead, in New York, at the Council on Foreign Relations. He also meets in New York with bankers to discuss the recent bank stress tests.
Investors will also be watching the meetings Thursday and Friday between Treasury Secretary Timothy Geithner and Secretary of State Hillary Clinton with Chinese Vice Premier Wang Qishan and State Councilor Dai Bingguo. Ahead of those meetings, Geithner said China hasn’t done enough to open its economy or allow its currency to appreciate. On Friday, the yuan set a new high for a second straight day.
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.
Earnings:Anadarko Petroleum (APC), Anheuser-Busch/Inbev (BUD), Jacobs Engineering (JEC), PMC-Sierra (PMCS). Anadarko is a big natural-gas producer. Futures jumped 8.5% to $2.186 per million British thermal units. The question is if the market has bottomed.
• 8:30 a.m. Personal income
• 9:45 a.m. Chicago PMI
• 10:00 a.m. Housing vacancies
• 10:30 a.m. Dallas Fed survey
• 2:00 p.m. Senior loan officer survey
• 5:30 p.m. Dallas Fed President Richard Fisher on panel on jobs at Milken Institute conference .
Earnings:Cummins, BP, CBS (CBS), Domino's Pizza (DPZ), Emerson Electric (EMR), Sirius XM Radio (SIRI) and Chesapeake Energy (CHK). Sirius gets much of its business by putting players in new cars. So, its growth story will be closely watched. Chesapeake is highly controversial because of its finances are deeply intertwined with those of CEO Aubrey McClendon.
• April auto sales
• 10:00 a.m. ISM manufacturing data
• 10:00 a.m. Construction spending
• 10:30 a.m. Chicago Fed President Charles Evans, Atlanta Fed Dennis Lockhart CNBC interview
• 11:00 a.m. San Francisco Fed President John Williams on panel on recovery at Milken Institute conference
• 12:30 p.m. Fed’s Evans and Lockhart on panel on monetary policy at Milken Institute conference
• 3:00 p.m. Philadelphia Fed President Charles Plosser on economic outlook CFA Society, San Diego
Earnings:Allstate (ALL), Allergan (AGN), Green Mountain Coffee Roasters (GMCR), MasterCard (MA), MetLife (MET), Clorox (CLX), Martha Stewart Living Omnimedia (MSO), Time Warner (TWX) and Whole Foods Market (WFM). MasterCard offers a unique picture of consumer spending practices both in the United States and abroad. Whole Foods presents a picture of the relatively affluent shopper.
• 7:30 a.m. Challenger job cuts report
• 8:00 a.m. Fed Gov. Daniel Tarullo speaks on regulatory reform at Council on Foreign Relations, NY
• 8:15 a.m. ADP employment report
• 10:00 a.m. Factory orders
• 12:30 p.m. Richmond Fed President Jeffrey Lacker on economic outlook in Norfolk, Va.
• 1:30 p.m. Philadelphia Fed’s Plosser on economic outlook at University of California, Santa Barbara
• 6:30 p.m. Chicago Fed’s Evans on restoring growth
Earnings:General Motors, AIG, cell-phone tower company American Tower (AMT), hospital operator HCA Holdings (HCA), Hyatt Hotels (H), homebuilder MDC Holdings (MDC). GM's earnings picture will be clearer after Tuesday. Through March, light vehicle sales, including pickups, were up 2.6% from a year ago. But high gas prices clearly crimped pickups. Listen also to the discussion about GM's money-losing European business. AIG's business is doing very nicely, and the stock is up 48.9% this year, a touch better than Apple's 48.89% gain. MDC shares are up 10% for the month and 61% for the year as a number of investors are betting on a housing recovery starting by next year at the latest. January orders were up 30% from a year ago.
• April chain store sales
• 7:45 a.m. European Central Bank rate announcement
• 8:30 a.m. Initial claims
• 8:30 a.m. Productivity and costs
• 10:00 a.m. ISM nonmanufacturing
Earnings:BNP Paribas (BNP), Estee Lauder (EL) and outdoor-advertising company Clear Channel Outdoor Holdings (CCO). BNP Paribas is one of France's biggest banks. Its American Depositary Units are up slightly for the year. But they're off 26% since it became apparent that French President Nicolas Sarkozy might not win re-election. A runoff is in a week.
• 8:30 a.m. Employment report (April)
• 11:30 a.m. Chicago Fed’s Evans moderates panel at Chicago Fed on restoring growth and stability
Earnings to Watch in the Week Ahead
Conclusion for the Week Ahead
There were some encouraging signs in two key sectors last week, homebuilders and energy stocks. The surge in volume in the homebuilding stocks indicates that their correction is over.
Also, after a disappointing first quarter, energy stocks may have finally bottomed out, and they may be enough to push the market above the recent highs.
Even though individual investor sentiment is negative enough to help fuel another leg to the upside, the financial newsletter writers are still bullish. If the A/D lines can move to convincing new highs, it will be a sign that the early April highs in the major averages can be exceeded by a wide margin.
The action early in the week ahead should tell us more. If there are clear signals that the market correction is over, we are still likely to see a one- or two-day setback that will present a better entry point on the long side. There are still quite a few stocks with attractive patterns that are close enough to monthly support to give good risk-reward entry points.
Many strategists have set their year-end S&P 500 targets – an average of 1450 being a common figure. They expect the market to face a lot of bumps on the way there, including worries about slower growth, European debt concerns and the fallout from the U.S. presidential election.
Therefore, it would be prudent, as the 1450 mark draws closer, to set up risk reduction strategies – maybe the prospect of lower risk equities – this keeps a flow in the equity market and, relative to bonds, is still cheap.
Despite political uncertainty, despite all the negatives within the market place, earnings growth has been quite substantial. The notion that the bull rally is about to stall as a result of bad earnings is unlikely – Europe, however, poses another question!
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