Week Ahead: Continued Turbulence Expected in the Stock Market!
Stocks face Uncertainty Due to Bank Woes!
JPMorgan's Trading Debacle -- $2 Billion is Just the Start!
Wall Street: Facebook IPO
by Ian Harvey
Facebook’s giant IPO is tentatively scheduled to price May 17, pending SEC approval. But Europe may continue to drive the action as markets navigate the politics of Greece and Italian and French debt auctions in the week ahead.
There is also a heavy calendar of U.S. data, including retail sales, industrial production, weekly claims and the minutes of the Fed’s last meeting.
More volatility could be in store for stocks in the week ahead as investors grapple with less certainty about the economic outlook and a new blow to the financial sector after JPMorgan Chase's (JPM) trading loss.
Europe is expected to keep investors jumpy as well, with inconclusive results from the recent Greek election and the country's future appearing more worrisome.
The economic picture appears cloudy these days, with some data showing a more positive trend and other reports showing the opposite. An index of consumer sentiment rose to its highest in a more than four years, but last week's jobs report showed another monthly decline in hiring.
The week ahead brings minutes from the last Federal Reserve meeting, which investors will look to for more guidance on whether the central bank plans to give additional help to the economy.
The Past Week
Stocks closed lower for a second straight week on Friday after a week of choppy trading. Strategists say that's likely to be the case again in days to come.
For the year, the Dow is up 4.9%, with the S&P 500 up 7.6% and the Nasdaq up 12.6%.
The dollar gained for a second week, with the dollar index up nearly a percent.
The Markets Ending May 11, 2012
The 10-year Treasury yield fell in the past week to 1.84 percent, as investors bought bonds in a flight to safety trade.
The Major ETFs
After the week before last, last week’s prices managed to stabilize in the major index ETFs. The prior correction threw up warning flags as several support levels were broken, but as the week closed out, the price had managed to climb back above those support levels, indicating this rally may not be over yet.
The S&P 500 SPDRS (ARCA: SPY) put in a swing low at $134.49 on May 9, which was a drop below prior support at $136. Late week trading saw a pick up though, with Friday's action trading much of the session back above $136.
The Dow Jones Industrial Average SPDR (ARCA: DIA) did not create a new low last week and managed to hold above the April 10 low at $126.92. The $127 area has been support going back to mid-February, with resistance kicking in near $133 since mid-March.
PowerShares QQQ ETF (Nasdaq: QQQ), representing the Nasdaq 100 index, remains in an uptrend that began back in October.
Russell 2000 iShares Index (ARCA: IWM) ETF, representing the Russell 2000 index, continues to hold within the range it has been trading in. Support, which has been in place since late January, continues to hold at $77.97.
The Week Ahead
Markets to Bounce - Unlikely!
Many strategists see a further decline ahead for the stock market and expect choppiness to continue.
Short-term investing seems to be the recommended strategy -- with Europe’s continuing dramas Asian countries having problems, along with a mix of U.S. data – makes wanting to play the market from the long side a surefire risk!
Important data in the week ahead includes the Philadelphia Fed and Empire State manufacturing surveys which are a good barometer for current activity. Retail sales data Tuesday will be an important look at the consumer.
Technical Issues in the Week Ahead – Bearish Patterns
Technical charts indicate bearishness ahead -- The outlook stays bearish unless you get above 1,415!
The 'bigger picture' view is that in the near or intermediate term, further downside is favored – with S&P 500 charts showing a ”head and shoulders top” -- particularly with demand earlier this month not strong enough to push the benchmark index above its April high.
Support can be found just below 1,300, while resistance could come at 1,415 for the S&P 500.
Last Week’s Problems Continue into the Week Ahead
Many strategists don’t see much reason for the market to bounce in the week ahead due to the following concerns:-
• Deteriorating U.S. economic data;
• the political clash against austerity in Europe, and
• Weaker global growth, clear in China’s economic reports this past week.
Investors will also pay close attention to JPMorgan Chase (JPM), which revealed a shocker $2 billion derivatives trading loss Thursday. JPMorgan CEO Jamie Dimon will no doubt again be apologizing, and explaining the trading blunder to shareholders at its annual shareholder meeting in New York Tuesday.
Already on Friday, there were calls for Congressional hearings into the losses. Fitch also downgraded J.P. Morgan’s long term issuer default rating to A+ from AA- and put the parent company and subsidiary long-term ratings on negative watch. Dimon will be interviewed on “Meet the Press” Sunday.
Consolidation Not Likely in the Week Ahead
Down 5% and Consolidation Period not Over!
The market is only down five (percent) – but many analysts believe there’s more coming! They think that the consolidation period is far-from-over; however, many see the market trying to go higher again!
Investors have been looking for a market correction, and many were looking for a dip where they could put new money to work – therefore, expect the market to find a bottom in the current pullback somewhere between 1,300 and 1,350, before the market starts moving back up.
There is also a feeling that the second half of the year, ahead of the presidential election, will become “sloppy”. The market may also run into trouble as it focuses on the “fiscal cliff,” or the budget cuts and tax hikes expected next year.
Overseas Influence on the Markets in the Week Ahead
Expect Europe to hold the market’s attention in the week ahead. This week, newly elected French President Francois Hollande meets German Prime Minister Angela Merkel for the first time Tuesday, the day he is sworn in. The meeting is important because the relationship between Germany and France is seen as vital to the future of the euro zone.
There will be Italian auctions and French auctions, Monday and Wednesday. Greece is also scheduled to make a debt payment Tuesday.
Meetings, the Fed and the Influence on the Week Ahead
G-8 leaders meet in Camp David late in the week ahead, and they will also be watched for what they say about the Euro zone debt crisis.
The Fed’s minutes from its last meeting will be watched, when they are released Wednesday, but they are not expected to reveal much new on possible easing. Even though the Fed has indicated there is no further easing planned, the market continues to speculate that the Fed will ultimately carry out more quantitative easing, or bond purchases.
The Major ETFs in the Week Ahead
When price action occurs like what we have seen over the last two weeks, there are reasons to be both bullish and bearish; therefore, risk management becomes crucial. In each of these ETFs, there are important levels to watch, which can help establish entry points and control losses.
• It is important to note that the S&P 500 SPDRS (ARCA: SPY) March 6 low at $134.36 was not breached on the decline. This is a significant level and if breached, it would warn of a larger correction into primary support near $130. On the other hand if a rise above the 52-week high at $142.21 occurs it clearly means this rally still has legs-to-run. Therefore, in the week ahead, price action can be used as a gauge; if a rise back above $138, there is a slight bullish bias and a drop below $134 is bearish.
• The Dow Jones Industrial Average SPDR (ARCA: DIA) ETF is in a short-term range within a longer-term uptrend. A break below the low of the range at $126.92 is likely to result in further declines, targeting the $122 to $121 region which is primary support. A rise above $130 is short-term bullish likely triggering buying into the upper portion of the range - $132 to $133. A rise above the 52-week high at $133.14 indicates a breakout and a continuation of the uptrend.
• PowerShares QQQ ETF (Nasdaq: QQQ), trendline does not intersect until just below $63, which means that even though the ETF has been declining since early April, the bull market remains in effect. $63 is significant, though, and if penetrated, it could lead to further declines into a $59 target price. However, if the trendline is broken -- which requires a move back above $66.75 -- it would be a signal of a potential retest of the 52-week high and the possibility of an even higher price.
• Russell 2000 iShares Index (ARCA: IWM) ETF, continues to hold at $77.97 -- a drop below that level is bearish with a target of $72. However, a rise above the high of the range at $84.66 indicates an upside breakout. False breakouts have been prevalent in this ETF throughout the year though, and therefore the other index ETFs likely present high probability opportunities. If the other ETFs continue to decline the Russell 2000 could be hit hard as it has been relatively weak for much of 2012. For that same reason (relative weakness) rallies could be muted in the ETF even if the other indexes begin to rally once again.
Earnings in the Week Ahead -
Ninety Percent of S&P 500 Companies have already Reported Results.
Facebook’s Initial Public Offering!
Major retailers set to report earnings in the week ahead include Home Depot (HD), a Dow component, JC Penney Co. (JCP), Limited Brands (LTD), parent of Victoria's Secret, discount chain Target Corp (TGT), and Wal-Mart Stores, Inc (WMT), the world's largest retailer and also a Dow component.
It's been a decent string of earnings but not spectacular. Some 66% of S&P 500 companies that have reported results so far have beaten Wall Street estimates. That's better than the long-term average of 62% but lower than the average of the last four quarters of 68%.
The best quarter was the third quarter of 2009 when 79% of companies beat estimates, according to Thomson Reuters.
Facebook’s IPO in the Week Ahead
Facebook’s initial public offering, however, is an event that has been awaited for months. Despite mixed reviews for its roadshow, Facebook’s offering is many times oversubscribed.
Bloomberg has said institutional investors are worried about the possibility Facebook's growth is slowing. Plus, traffic from its mobile site is growing much faster than the traditional computer site. But there's little ad revenue coming in from mobile.
Facebook will get lots of television coverage because of the likelihood it will be the largest Internet IPO. The offering, designed to raise $10.6 billion for Facebook and selling shareholders, is supposed to price after Thursday's close in a range of $28 to $35 a share. That would imply a market value of as much as $96 billion for the stock. Shares would start trading on Friday under the ticker FB.
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: Deal site Groupon (GRPN), whose IPO has been problematic. There have been management and accounting problems. The shares closed at $26 on their first day of trading. They're now at $9.90.
• There are no major economic reports scheduled for Monday.
Earnings: Dick's Sporting Goods (DKS), Home Depot, Saks (SKS) and J.C. Penney. Home Depot will help flesh out the picture of the housing market. J.C. Penney has to prove its turnaround plan is working.
• 8.30 am Retail sales
• 8.30 am CPI
• 8.30 am Empire State survey
• 9.00 am TIC data
• 10.00 am NAHB survey
• 10.00 am Business inventories
Earnings: Abercrombie & Fitch (ANF), Deere(DE), Staples (SPLS) and Target. Deere's results in the last year or so have disappointed. The stock has struggled. Target has lately won Wall Street fans. Shares are up 9.4%.
• 8.30 am Housing starts
• 9.15 am Industrial production
• 2.00 pm FOMC minutes
Earnings: Facebook IPO prices
Wal-Mart, Ross Stores (ROST), Dollar Tree (DLTR) and Safesforce.com (CRM). Wal-Mart's image has been tarnished since The New York Times alleged bribery was a big factor in its rapid growth in Mexico. Salesforce.com shares have come off their highs in April, suggesting its rapid growth may be at risk.
• 8.30 am Initial claims
• 10.00 am Philadelphia Fed survey
• 10.00 am Leading indicators
Earnings: Facebook stock trades
• 8.30 am PPI
• 9.55 am Consumer sentiment
Economic Reports to Watch in the Week Ahead
The U.S. Trade Deficit report for March -- due Thursday -- should show a big gain because the Chinese New Year celebration cut February's deficit substantially.
The weekly jobless claims report from the government -- due Thursday -- watch to see if it falls and how big the revisions from the past week were.
The April Producer Price Index Report -- due Friday -- the index is expected to fall because gasoline prices moved lower in April.
Consumer Price Index for April -- due Tuesday -- look for a small decline because of falling gasoline prices.
Retail sales for April -- due Tuesday -- Wall Street pays a lot of attention to this report. Watch the sales growth excluding autos. It's likely to show some shrinkage after the warm winter weather helped business.
Housing starts and building permits -- due Wednesday -- Starts should grow because of strong permit growth in March. Permits may decline.
Industrial production and capacity utilization -- due Wednesday -- Both should rise modestly.
Empire State manufacturing survey for May and Philadelphia Federal Reserve Bank manufacturing survey for May -- due Tuesday and Thursday, respectively -- these may frustrate by declining as rapid growth early in the year tails off.
Initial jobless claims -- due Thursday -- look for claims of between 370,000 and 380,000 in the latest weekly report. That's a sign of modest but steady job growth.
Index of leading economic indicators for April -- due Thursday -- Nomura Securities sees the index increasing by 0.1% in April following a rise of 0.3% in March. A contributing factor: expansion of the manufacturing workweek.
Conclusion for the Week Ahead
While markets stabilized this past week, the prior week’s decline resulted in some mixed signals. Major support levels are within proximity, which means, if penetrated, there is a reason to sell or get short. But if those levels hold in the week ahead and prices begin to move above last week's highs it could spark buying interest once again. Support and resistance should be watched closely as they present both entry signals and risk controls. The outlook for the markets is not definitive but by using risk management and being nimble there are still opportunities in this market environment.
”Success is simple. Do what's right, the right way, at the right time.”
”Success is simple. Do what's right, the right way, at the right time.”
Option Tip for your Success!
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Options traders win because they are successful.