The Week Ahead in the Stock Market
May 27, 2013

The Week Ahead: Rally Strength or Signs of Weakness?

Stock Market: Key Economic Data -- Housing and Sentiment Data!

The Game Plan: Tiffany, Avago Technologies and The Fresh Market Report Earnings!

Wall Street: Signs of a Strong Economy Still!

by Ian Harvey


May 27, 2013


Many believe that stocks will continue to grind higher in the week ahead, as investors who missed the rally look for opportunities to buy on dips. However, with the major U.S. gauges up about 15% for the year, some investors have speculated the market is on the verge of a long-awaited pullback.

Particularly since the stock market's break in its recent rally this past week left many investors wondering if they're seeing a turning point or just a blip in the upward path.

The three major U.S. stock indexes posted a decline for the past week on Friday, their first weekly loss since mid-April, raising some fresh worries that this year's rally may be weakening.

The week ahead could make it harder to figure out if there will be a market correction or not, considering that the long Memorial Day weekend typically signals the start of the summer.

Markets will be especially hyper-focused on the economy in the week ahead and whether there's any sign it is getting strong enough to encourage the Federal Reserve to start pulling back the security blanket of quantitative easing.

In the holiday-shortened week ahead, none of the data will make a huge difference in the Fed's decision-making, but it will add to the picture on the economy. There is consumer confidence, pending home sales, personal income, and revised first-quarter gross domestic product. But weekly jobless claims Thursday could be the most anticipated because of what it might say about the job market, a week before the June 7 release of the crucial May employment report, which is important for the Fed.

The May jobs report is the next mile marker for the Fed, since restoring job growth is part of its mandate and it has targeted a 6.5 percent unemployment rate as a point where it may start to roll back its zero-rate policy.

If there is improvement significantly beyond the 165,000 jobs created in April, the Fed is expected to look for confirmation in the next several monthly reports.

Quick Reference for the Week Ahead:

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

The Fed in the Week Ahead

James Bullard, president and CEO of St. Louis Federal Reserve Bank, explains that the scale of the Fed's tapering, when it comes, will depend on data and might start very slowly to allow for a possible "reverse".

Financial markets have been locked in debate about how and when the Fed will back away from its $85 billion monthly bond-purchase program, or "Quantitative Easing (QE3)". The debate took shape as Fed officials this month voiced their varied views on when it should happen, with the most hawkish pushing for June. But Fed Chairman Ben Bernanke woke the market to the possibility the Fed could be ready to start "tapering," or cutting back on its purchases in the next couple of months, depending on the economy's progress.

Even though that same view was expressed earlier by New York Fed President William Dudley, the comment from the Fed chairman before a congressional committee sent markets on a rollercoaster Wednesday.

By Thursday, reports of the contraction in China PMI for the first time in seven month sent markets tumbling in Asia and Europe.

That report also hit oil and industrial metals, like copper, hard, but they recovered losses along with U.S. stocks as the trading day progressed.

Stocks are up more than 16 percent for the year and are at an important crossroad where the market can act spooked by what not too long ago was construed as good news. However, the current state of the economy is just right for stocks and should keep them moving higher until the economy looks too good, or robust.

Many investors need to realize that the economy is improving fast enough for stocks to be satisfied but slow enough that the Fed stays dovish -- let's not try to make something too complicated.

Even if the Fed tapers its bond purchases, that doesn't mean it ends the program or that it will start selling the $3.339 trillion in mortgages and Treasurys it holds on its ballooning balance sheet.





Check out the ”Options Results”

The Past Week


Introduction to the Week Ahead

”…..The bull market hit a speed bump this past week with the S&P 500 declining for a third day on Friday -- with the three major stock indexes posting their first negative week since mid-April on lingering concern that the central bank may scale back its stimulus measures to support the economy…..Still, the indexes closed well off their lows in light volume for the past week ahead of the three-day Memorial Day holiday weekend…..It is important to note that Thursday's trading session may have been the most glaring example of just how powerful the bull market in U.S. stocks is right now. Even though all of the major averages closed slightly lower on the day, the U.S. market was able to shrug off a global rout in stock prices that began with a 7.3 percent crash in the Nikkei.….”
- The Past Week in the Stock Market – May 27, 2013

Even with just four work days in the week ahead, there are some important economic reports. The biggest will be the second estimate of first-quarter gross domestic product. The consensus estimate is it will come in at an annualized 2.5%. What everyone wants to see is a number north of 3%.

Pay attention to two reports of consumer confidence in the week ahead. The first comes Tuesday from the Conference Board. The second comes Friday from the University of Michigan. And the market will parse reports on personal income and spending on Friday as well as the monthly Chicago Purchasing Managers Index.

Lastly, the two big earnings reports in the week ahead are upscale jeweler Tiffany (TIF) before Tuesday's open and Costco Wholesale (COST) on Thursday. Tiffany has a big exposure to the global economy. Costco is more domestically focused. Tiffany shares are up 32.9% this year; Costco shares are up nearly 16%.

The Economy in the Week Ahead

A number of important economic reports are due in the week ahead related to housing, consumer sentiment and economic growth following Monday’s Memorial Day holiday. All U.S. securities markets are closed Monday.

On the economic front, consumer confidence numbers for the month of May will be out on Tuesday. Other domestic reports that will be of interest to the market include jobless claims and the second GDP estimate, both of which are due out on Thursday. Pending home sales data will also be due out on Thursday. On Friday, key economic reports include Chicago PMI and the final reading of the University of Michigan Consumer Sentiment index.

Economic Predictions for the Week Ahead

• The S&P/Case-Shiller housing pricing index is out Tuesday, gauging home prices in 20 of the largest U.S. cities. Home prices have been rising in many regions of the county and economists believe the trend continued in May.

• Also due Tuesday is the Conference Board’s survey of consumer confidence, an important measure because consumer spending makes up 70% of the U.S. economy. With the housing market improving and the jobs market slowly healing, consumer confidence is expected to rise to 72.5 for May versus 68.1 in April.

• Tuesday will also see the release of regional manufacturing reports from the Dallas and Richmond Federal Reserves.

• The initial jobless claims data is forecast to stay flat at 340,000 for the week ending May 25. Continuing claims are expected to rise to 3 million for the week ending May 18, a rise from the 2.912 million continuing jobless claims reported in the prior week.

• The Commerce Department on Thursday will release its updated report on first-quarter gross domestic product. Economists believe the new data will cause real GDP growth to be revised downward to an annual rate of 2.4% from 2.5% reported a month ago.

• Also due Thursday is a report on pending home sales, a significant gauge of home selling activity.

• The Reuters/University of Michigan consumer sentiment index will be released on Friday. Economists believe the index will be slightly higher than a month ago. Also on Friday a report is due on consumer income and spending for April.

Overseas Influence on the Stock Market for the Week Ahead

Global recovery greatly depends on the emerging world, and the Chinese economy is certainly an issue. The recovery does not depend on Europe, Japan or even the United States, but with China in the process of adjusting to a slower growth rate, it becomes quite a concern, even though there's growth in other parts of the world.




Earnings and Company News in the Week Ahead

The final week of May will be critical for the markets as volatility hit a number of regional stock indices this past week, although the United States was largely spared.

For the past week, the S&P 500 lost a little better than 1 percent, but this paled in comparison to losses in Japan, where the Nikkei fell more than 7 percent on Thursday.

Traders will be watching earnings announcements from the likes of Tiffany (NYSE: TIF), Michael Kors (NASDAQ: KORS), Dollar General (NYSE: DG), The Fresh Market (NASDAQ: TFM), Avago Technologies (NASDAQ: AVGO), Costco (NASDAQ: COST), and Guess? (NYSE: GES) in the week ahead.

Looking Ahead

The predominantly negative tone of company guidance has prompted downward adjustments to estimates for the second quarter 2013, though estimates for the second half of the year have held up quite well. Total earnings in the second quarter are now expected to be up +1%, which is down from +4.8% in mid-March. As a result, the expected total earnings growth for this year has come down to +6% from 6.7% at the start of the Q1 earnings season. Consensus expectations reflect total earnings to increase an additional +11.5% in 2014.

Recent economic data from home and abroad will likely prompt a reassessment of these consensus expectations. But the big question is with respect to how the market would react to this expected downward adjustment to earnings expectations. It has essentially shrugged such revisions thus far, banking instead on the continued Fed support to keep the rally in place. With recent developments on the Fed front indicating that the central bank could be moving towards a ‘tapering’ decision in the not-too-distant future, the underwhelming earnings picture may finally start getting more attention.

The Spotlight on Certain Companies in the Week Ahead

• On Tuesday, May 28, luxury retailer Tiffany is expected to release its quarterly earnings results prior to the opening bell. Heading into the report, Wall Street analysts have consensus EPS estimates of $0.52, representing a year over year decline of almost 19 percent compared to the $0.64 the company reported in last year's corresponding period. Sales are expected to be up 4.40 percent to $855.14 million.

Shares closed Friday's trading session essentially flat at $76.21. Year-to-date, Tiffany has risen nearly 33 percent on the back of a strong market.

In a client note from Thursday, analysts at Deutsche Bank noted that the company previously guided for net earnings from operations to fall around 15 to 20 percent due to gross margin pressure and higher marketing-related costs. The company said that it sees earnings growth in all subsequent quarters. The stock is currently trading above Deutsche Bank's price target of $68.50.

• On Wednesday, May 29, The Fresh Market is scheduled to release its quarterly results before the opening bell. Analysts expect the company to report a 10 percent rise in earnings per share to $0.44 from $0.40 last year. Sales are expected to rise 13.80 percent to $369.69 million.

The stock climbed a little less than 1 percent on Friday to close at $46.10. Year-to-date, TFM has lost more than 4 percent, significantly underperforming the broader market.

In a client note from Thursday, Deutsche Bank analysts wrote that "recent strength at WFM gives us some confidence that trends at TFM may be improving, at least modestly." The firm is looking for EPS above current Street consensus, but noted that the company has missed estimates in its last two quarters. Deutsche Bank reiterated its Hold rating on the stock and $40.00 price target.

Avago Technologies is expected to release its quarterly results after the market close on Wednesday. Heading into the report, analysts are modeling a decline of almost 15 percent in EPS to $0.52 from $0.61 in the year ago period. Sales are expected to be down 3.30 percent to $558.24 million.

The stock closed up 0.38 percent on Friday to $34.10. In 2013, AVGO has risen a little less than 8 percent, underperforming the broader market.

Analysts at Deutsche Bank wrote that "AVGO shares have underperformed peers in recent weeks as we believe investors fear the co's upcoming F2Q results/guide will yield estimate cuts." They added that while Deutsche Bank estimates are slightly below current consensus, the firm's detailed end-market analysis "leaves us comfortable with our ests, which we believe are better than buy-side fears." The firm reiterated its Buy rating and $40.00 price target on the stock ahead of Wednesday's report.

Companies in the News

Cisco Systems' (CSCO), the nation's largest provider of the routers and switches that direct data, voice and video traffic on the Internet, fiscal-third-quarter earnings suggest that corporate customers are changing their penny-pinching ways, at least when it comes to technology upgrades.

Cisco posted better-than-expected financial results last week and sounded an upbeat note about the current quarter, saying it expects growth in revenue and profits as the economy continues to slowly mend.

Cisco's position as the largest provider of networking gear has insulated it from some of the price erosion that has hobbled the consumer-hardware side of the tech sector.

Cisco does most of its business with enterprises, though it also has government customers, some of which are dealing with across-the-board federal budget cuts mandated by sequestration.

The company has long supplied most of the routers and switches used by communications companies and others to exchange data on the Internet. Cisco in recent years has been diversifying with the aim of establishing itself as the nation's dominant information-technology company. It is aggressively courting customers that it can help in building up cloud-computing services to deliver more of their products and services online. Cisco has also begun selling server systems and has offerings to help customers beef up network security.

Cisco is well-positioned to benefit as companies step up investments in data-traffic networks to accommodate users who increasingly use smartphones and tablets to consume media and surf the Internet.

"I am extremely confident with the hand Cisco has to play," John Chambers, Cisco's chief executive, told analysts and investors during a May 16 conference call following the company's quarterly earnings release.

Profit rose 14% year over year in the three months through April 27. Revenue from sales of routing and switching devices was roughly flat. Cisco's revenue growth came from sales of data-center equipment, wireless equipment and gear to help customers deliver video. Overall, revenue was up 5.4% to $12.2 billion.

Chambers said the global business climate appears to be improving, especially in the United States. Cisco sells its networking gear to enterprises and governments around the world, with about 60% of sales coming from the Americas.

Chambers' optimism was welcomed on Wall Street, but no one in the market is looking for Cisco to return to its highflying days in the 1990s, when investor exuberance for all things digital briefly made the company the worlds largest by market value.

Today, the stock is viewed more like a solid blue-chip, luring investors less with its prospects for outsize growth than with a respectable dividend yield of 2.9%.

Of 30 analysts who cover the company, 20 have "strong buy" ratings on the stock, two have "buy" recommendations, seven rates it a "hold" and one has a "strong sell" rating.

Cisco Systems is expected to significantly outperform the market over the next six months with less than average risk.

Treasury Auctions in the Week Ahead

Stock traders will be watching bonds in the week ahead, as the Treasury auctions $99 billion in two-year, five-year and seven-year notes Tuesday through Thursday.

With the sharp rise in yields, it is expected that they will be well-subscribed. May is a unique month and usually produces a bid for index buying.

Rates can go higher but not much without more proof that the economy is improving and they won't go higher just because the Fed stops -- if the Fed stops too early, rates will go lower.

Rising rates could slow stocks as they adjust, but will not stop the market from going higher. Based on history, it would take a level above 4 percent to stop stocks from rising.

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.


• Memorial Day; U.S. Markets Closed


Earnings: Canadian Solar (NASDAQ: CSIQ), Seadrill (NASDAQ: SDRL), Tiffany (NYSE: TIF), and Wet Seal (NASDAQ: WTSL)


• 9:00 am: S&P/Case-Shiller home price data
• 10:00 am: Consumer confidence
• 10:00 am: Richmond Fed
• 10:30 am: Dallas Fed
• 1:00 pm: $35 billion two-year note auction


Earnings: Dollar General (NYSE: DG), Michael Kors (NASDAQ: KORS), The Fresh Market (NYSE: TFM) and Avago Technologies (NASDAQ: AVGO)


• 1:00 pm: $35 billion five-year note auction


Earnings: Big Lots (NYSE: BIG), Costco (NASDAQ: COST), Express (NASDAQ: EXPR), Joy Global (NYSE: JOY), Sanderson Farms (NASDAQ: SAFM), Guess? (NYSE: GES), and Lions Gate Entertainment (NYSE: LGF)


• 8:30 am: Weekly jobless claims
• 8:30 am: Real first-quarter GDP (second)
• 1:00 pm: $29 billion seven-year note auction


Earnings: Frontline (NYSE: FRO), Genesco (NYSE: GCO), and Graham (NYSE: GHM)


• 8:30 am: Personal income
• 9:45 am: Chicago PMI
• 9:55 am: Consumer sentiment

International Economic Reports in the Week Ahead

International economic reports that the market will be watching in the week ahead include Canada's interest rate decision on Wednesday and Chinese Manufacturing PMI data on Friday. Canada's central bank is expected to hold interest rates steady at 1 percent while there is no forecast for Chinese PMI. In the prior period, the index came in at 50.60, showing very modest expansion.

Tuesday - Swiss Employment level and Japanese retail sales

Wednesday - German Unemployment, Brazilian GDP, German CPI and Canadian interest rate decision

Thursday - Swiss GDP

Friday - Indian GDP, French consumer spending, EU unemployment rate, Canadian GDP and Chinese Manufacturing PMI

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




A Positive Outlook Still!

The duration and the scope of the rally have surprised even veteran market watchers, many of whom have been expecting a reversal in the trend for several weeks.

The market has managed to avoid any significant pullback since November, and dips have been used as buying opportunities. Even with the past week's 1.1 percent loss, the S&P 500 remains up 15.7 percent for the year.

Here are some positives to be recognized for the market rally to continue in the week ahead:-

• The U.S. growth is improving and that should help stocks.

Many investors, analysts, etc., are underestimating economic growth and sustainability -- it's going to be hard for the stock market to fall if we're going to grow closer to 3 than 2 percent for the second half of the year.

Many analysts had expected a "Sell in May" market this year, since that had been the pattern of the last several years, and they had expected the economy to be pressured by sequestration and other federal budget cuts. While manufacturing data is running soft, the impact so far has not been as bad as some expected. Housing has been a bright spot, with existing home sales continuing to improve in April to the highest level in 3 1/2 years.

The improving economy is definitely lifting the stocks, but with help from the Fed. There is modest improvement, modest earnings growth, and not from a robust economy which is the good news for the stock market. An acceptable economy is best for the stock market – with a strong economy, the Fed will disappear and inflation will rise.

• Also, the pickup in volume suggested to some a shift in sentiment, though activity has been below-average throughout the rally, which has taken the Dow and the S&P 500 to record highs.

• Some of the recent rally has reflected a push out of bonds and into stocks.

Equity valuations tend to be lower when real 10-year U.S. Treasury note yields are above 4 percent or below 2 percent, Goldman Sachs analysts wrote in a recent research note.

The benchmark 10-year U.S. Treasury note's yield rose on Friday above the key 2 percent level - the highest in two months. Treasury yields rose this past week after the Fed added to bond investors' fears that the U.S. central bank might slow its bond purchases later this year if the economy improves further.

Investors are trying to determine if yields are likely to climb on stronger growth and a more hawkish stance by the Fed.

• Volatility has also not been a problem. That's why Wednesday's reversal - where the Dow and the S&P 500 both rose more than 1 percent during the morning, but fell more than 1 percent in the afternoon - caused many investors to take notice.

This is a change, because historically, when you get that kind of a reversal day, it kind of stalls things out for a while -- but the market's up trend has mostly been orderly, with little divergent action.

Negative Thoughts in Regard to a Continued Rally

It appears that buyers’ fatigue is starting to set in -- buyers can only take stocks so far -- and with the market being as extended as it is, it's certainly not unrealistic to think sellers will start to come in and take advantage of the strength that has been seen so far.

• Some analysts see some of the market's strong momentum finally waning. This past week's decline caused the S&P 500 to trade below its 14-day moving average, but the index managed to close above the level.

• In another possible sign of weakening sentiment: Two massive blocks of puts were bought on Friday on the iShares MSCI Emerging Markets Fund (EEM.P) and the Vanguard FTSE Emerging Markets Fund (VWO.P), according to options strategists.

The move suggests investors are hedging against a possible decline in emerging markets in the weeks and months ahead.

Economic data has remained mixed, adding further uncertainty to market projections.

However, this is not to say that the uptrend is over!

Expectations in the Week Ahead!

The current environment is making many investors a little cautious. An improving economy could keep rates moving higher, and that could pressure stocks. The 10-year note broke above 2 percent this past week for the first time since March.

Claims data certainly needs watching, particularly after the past week's claims fell by 23,000 to 340,000, and the continuing claims declined by 112,000 to 2.9 million during the week ending May 11, in the largest decline in more than a year and the lowest level since before the financial crisis. The claims are for the week ending May 18, which is the survey week for the May employment report. Economists were watching them closely, and said while they expect payroll growth to be slower in the second quarter than first quarter because of fiscal tightening; the claims are indicating the weakness in labor might not be that severe.

If claims keep falling toward 300,000, QE will end -- if we get a (monthly jobs) number closing in on 200,000 again, it is possible that the Fed will definitely go toward tapering.

China is a more frightening situation for the stock market and needs to regain their footing. It is not a sure fact that the market is really that worried about the Fed going away from QE as there has been more discussion this year about the Fed tapering QE than at any other point.

However, expect the market to move a bit higher, even in the week ahead, but it should be more of a sideways move for much of the second half of the year, consolidating before moving higher later.

Sentiment Effect in the Week Ahead

The market's outlook is still bullish, despite last week's losses, and we still do not have firm sell signals from either the daily or weekly technical studies. On May 15, a total of 517 stocks made new highs on the NYSE, which is consistent with a positive major trend.

At Thursday's low of 1,636, the S&P 500 was already 3% below Wednesday's highs. Expect to see prices get back toward these highs in the week ahead, but given the nature of Wednesday's reversal, they may not be exceeded.

Bullish sentiment of individual investors jumped again last week, according to AAII, as 49% are now bullish, up from 38.5% the previous week. Only 21% are bearish now, which is the lowest reading so far in 2013. This number will likely jump in the week ahead.

Financial newsletter writers have continued to become more bullish, from a low of 44.3% on April 24, to 55.2% currently. Only 18.8% are bearish, which was a level last seen a few weeks ago.

The NYSE Composite in the Week Ahead

The weekly chart of the NYSE Composite shows that the weekly Starc band and upper channel (line a) were both tested last week. The NYSE came close to closing below the prior week's low at 9,397 but it did not.

There is next good support at 9,256, and then the rising 20-week ’Exponential Moving Average’ (EMA) at 9,060. This is approximately 3.8% below Friday's close.

The 38.2% 'Fibonacci Retracement’ support from the 2011 lows is at 8,441, which is more than 10% below current levels, and also corresponds to the uptrend (line b).

The weekly NYSE The weekly NYSE Advance/Decline (A/D) line did make new highs two weeks ago, but turned lower this past week. The WMA is still rising strongly, but could be tested on a further correction.

Conclusion for the Week Ahead

There is still a lot of support for the market rally in the week ahead!

And the fact that there was some solid U.S. economic news this past week -- existing- and new-home sales both showed gains in April, to levels last seen in 2008.

Jobless claims fell to a seasonally adjusted 340,000 in the last week; part of an admittedly slow recovery but a recovery nonetheless.

So far, there are still buyers.

Every time this past week, when the market looked like it would slump badly, buyers would step in. The Dow was down 95 points early on Friday and ended the day with a small gain. On Wednesday, the blue chips fell about 276 points during Federal Reserve Chairman Ben Bernanke's testimony, but a 122-point loss was trimmed 80 points at the close.

Unless something we don't see falls -- truly falls apart -- there's support... until there's not support!

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