The Week Ahead in the Stock Market
June 10, 2013

The Week Ahead: More Volatility – Bulls Take A Stand!

Stock Market: 'Just Right' Jobs Data Could Help Equities!

The Game Plan: Retail Sales, Lululemon Earnings To Drive Markets!

Wall Street: Reasons For A Continued High!

by Ian Harvey

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June 10, 2013

Introduction

The week ahead has few catalysts due to the lull between May's employment report and the next Fed meeting June 19. The stock market bulls will grapple with the prospect of keeping control, particularly after a past week of wild swings!

U.S. data in the week ahead includes Thursday's retail sales and weekly jobless claims, and PPI inflation data and consumer sentiment on Friday. But traders will perhaps be more focused on Tokyo early in the week when the Bank of Japan holds a two-day meeting that could make a difference to world markets still reeling from the past week's volatility.

The U.S. Treasury is also auctioning $66 billion in 3- and 10-year notes and 30-year bonds, of interest, in the week ahead, after another week of sharp moves in fixed income markets.

The Treasury market is now cheap enough that there is unlikely to be any upset to the outcome of the auctions -- there is really no economic data that could really change things.

However, the BOJ is really important – the discussions are likely to be concentrated about how they're proceeding with their policies -- it will be of some importance as to how they will address the issue of volatility that has occurred with the Nikkei and the yen.

Quick Reference for the Week Ahead:

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

Opportunities With Pullbacks in the Week Ahead!

It would be suggestive for investors to become more cyclical as the summer progresses due to the fact that the economy is actually starting to get a little bit better -- the economy although still weak, and according to past data, seems to be on the up-and-up! The time to buy into the stocks market is when things are bad and progressing to good.

Stock gyration, such as witnessed in rocky trading Thursday as the U.S. dollar tumbled against the yen and amid ongoing questions over the murky future of the central bank's stimulus program is the time of entry. Major averages eventually finished at session highs and the Dow regained its footing above the psychologically-important 15,000 level.

The overall situation in Japan is a minefield, which may come back to haunt us, but buying the dip when it has occurred has provided an opportunity for a big rebound.


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The Past Week


THE WEEK AHEAD

Introduction to the Week Ahead

”…... All of the major indexes picked up ground this past week, erasing earlier losses. Stocks rebounded late in the week, but only after the averages broke a few levels of support that many thought would hold.

The Dow Jones industrial average and Standard & Poor’s 500-stock index surged more than 1 percent Friday, and it appears that the bull market in stocks is still intact heading into the week ahead....”

- The Past Week in the Stock Market – June 10, 2013

The week ahead brings a relatively light week on the data front, with few earnings and scarce data economic data marking the calendar.

The May retail sales report on Thursday and earnings from key companies including Lululemon Atletica (NASDAQ: LULU), Navistar (NYSE: NAV), and PVH Corp. (NYSE: PVH) highlight the vacant calendar.

The important economic data comes at the end of the week ahead, with jobless claims and retail sales on Thursday, along with business inventories. Then on Friday we get the latest reading on inflation with the producer price index, as well as industrial production figures.

The Economy in the Week Ahead

A smattering of economic data is due in the week ahead that will help shed light on such important economic subjects as the state of U.S. consumers and small businesses.

The National Federation of Independent Businesses, a small business advocacy group, will release its small business optimism index on Tuesday. The data are compiled each month from a survey conducted with NFIB members.

It is expected to reflect the uncertainty felt by small business owners as higher payroll taxes and government budget cuts are felt throughout the economy. On the bright side, consumer sentiment is at its highest level in five years, which likely bodes well for small business owners.

The closely-eyed consumer sentiment survey from Thomson Reuters and the University of Michigan will be released on Friday, providing a fresh look at consumer confidence. Rising home prices and a gradually strengthening labor market have helped boost consumer sentiment in recent months. That’s important because an optimistic consumer will generally spend more and consumer spending accounts for 70% of the U.S. economy.

A report from the Commerce Department Thursday will give Wall Street a look at how retailers fared in the month of May. While consumer sentiment has been on an upswing, individuals have had to tighten their belts as a result of an across-the-board payroll tax hike and still-tight credit conditions.

Also on tap in the week ahead are several inflation gauges, including import and export prices on Thursday and the Producer Price Index on Friday. Some economists fear the Federal Reserve’s easy-money policies will lead to runaway inflation, but recently the opposite has been true. Inflation is running well below the target rate set by the central bank, which poses its own set of problems.

Overseas Influence on the Stock Market for the Week Ahead

The big media focus this past weekend will be the historic two-day summit between U.S. President Barack Obama and China President Xi Jinping.

But a handful of key Chinese economic indicators out this weekend could have a big impact on U.S. markets come Monday’s opening bell. Investors will pay close attention to producer prices and consumer prices for any signs of inflation.

Also watch out for reports on trade, industrial output, and retail sales, in the week ahead, which are expected to surge almost 13% in May from a year ago.

Continued Volatility for the Week Ahead

”…... But stocks have been volatile recently, as investors grapple with concerns about when the Federal Reserve might start to cut back on its stimulus efforts….The market's recent volatility suggests investors are starting to price in the eventual end of Fed stimulus, analysts said, raising concerns about how well stocks will fare without it…..”
- The Past Week in the Stock Market – June 10, 2013

Analysts expect the volatility to continue in the week ahead but are divided on the trajectory for stocks. The S&P was about four percent off its highs on an intraday basis Thursday before it turned higher.

Two weeks ago, the market was overheated. The last week and a half provided a restacking of the stock market, and an opportunity to buy a dip. If the market can consolidate before moving back to the 1655 level, it could be heading into record territory again by July 4.

Analysts say that volatility has to do with a change in the way the bond market is viewed. Bond yields have been moving higher in anticipation of the Fed tapering off its purchases. In the week ending Wednesday, $9.1 billion in outflows hit bond funds, the second highest level since Lipper began compiling data in 1992.

Bond market volatility has now been introduced which is making for a more volatile market overall. This has taken the stock market rally since the beginning of the year, and put it in perspective – this will probably provide a mirror for the second half of the year. This is probably heralding the end of the 30-year bull market in bonds.

Bond yield implied volatility, which has risen periodically through the financial crisis, is elevated once more.

However, it is possible that yields could still move lower in the week ahead, if the economy weakens or stocks sell off sharply. The bond market appears to have overreacted to the situation. There's a very low appetite for bonds and no one really with strong appetite to buy, which is a sign of getting close to a top of a range. Yields have been around 2.20 for the past couple of weeks, and if the BOJ doesn't disrupt the Japanese bond market and volatility calms down, Treasurys could rally a little bit after the auction in the week ahead, and then it matters how the market goes into the Fed meeting and how they communicate things.

Many feel that Fed tapering comes later -- the fundamentals support the market where they are now, and they don't think they're mispriced. They believe that the Fed is doing a good job, and would be more concerned about Fed policy if the dollar were weakening and business and consumer confidence were going down – which is not occurring!

One of the hurdles for stocks is we're moving into the summer season where there could be less liquidity and a little more volatility – this could provide a challenge. The first part of the year is when you have people investing for the year and flows are coming in. Over the summer time, significant pullbacks are unlikely but we could see more volatility.

The Reality of QE Tapering

The "Quantitative Easing (QE3)" program by the Fed is very straightforward.

This is the most transparent Fed in history and they have been very clear that QE cannot stay around forever. They have also been abundantly clear that there are two things that will bring about the end of QE:

1. First, QE creates too much negative side effects like speculative bubbles or painful inflation. Neither is the case now.

2. Second, they will unwind it when the economy no longer needs all the extra help.

This last part is the most important. When they start removing QE, it is likely a sign that the Fed strongly believes that economic growth is self-sustaining. Investors should see that as a “Seal of Approval” and not a badge of dishonor: because in general, solid economic growth fuels earnings growth, which begets higher share prices.


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Earnings and Company News in the Week Ahead

Markets will focus eyes on retailers Lululemon Atletica and PVH Corp in the week ahead. Lululemon is expected to report earnings on Monday after the bell while its fellow retailer PVH will report Wednesday after the close. Truck maker Navistar will also report earnings Monday.

As already stated, the week ahead, however, doesn't really have the potential for a big trigger.

The biggest may be Monday, when Apple's (AAPL) annual developer conference starts. If Apple doesn't make some major product announcements, the stock could be pressured.

Right now, the biggest announcements are expected to be new operating systems for its Macintosh and mobile product lines.

The shares are up 14.7% since bottoming on April 19 at $385.10, but they are still off 37% from its peak in September.

The Spotlight on Certain Companies in the Week Ahead

Lululemon Atletica

The maker of women's athletic clothes is expected to report earnings Monday after the close. Wall Street is looking for first quarter earnings per share of $0.30 on revenue of $341.00 million. In the same period a year ago, the company reported earnings per share of $0.32 on revenue of $285.7 million. Analysts at Morgan Stanley weighed in on the stock Friday ahead of the earnings release next week. Morgan Stanley has an equal-weight rating on the stock and does not have a price target for the stock.

“We think 1Q13 expectations are in-line with the event's most likely outcome. The market is looking for raised FY13 guidance and probably gets it. We anticipate the pant recall impact debate ends and old debates re-emerge, changing stock dynamics.”

“LULU said on 3/21 its black luon pant recall would cost 2013 EPS $0.25-$0.27 and this led to a -13% Street FY13 earnings revision. Since then however, the stock is up 26%. We believe the market has assumed a less severe impact and we agree. Our store checks suggested customers substituted luon pants with other products and revealed recalled items back in stores earlier than expected.”

“We model $2.03 FY13 EPS vs. the Street's $1.99. We think LULU has to raise its $1.95-$1.99 FY13 EPS guidance to $2.00-$2.05 to meet market expectations. This is the most probable scenario in our view and likely causes a muted stock reaction. We don't see much guidance upside since LULU usually forecasts conservatively. If LULU misses 1Q EPS or guidance falls short, the stock likely drops, but the converse is also true. We doubt either happens, although the risk/reward seems slightly skewed down. The options market is pricing in a +/- 7% jump, 270 bps below the avg. move.”

Canacord Genuity analysts are more bullish on the stock heading into earnings. Already with a buy rating on the stock, they boosted their price target to $92 from $87 Monday ahead of earnings.

“Weekend store checks confirm LULU has begun restocking stores with the Astro and Groove yoga pants – two of the three styles that were recalled in mid-March (the Wonder Under crops have yet to be restocked). This timing is consistent with our note from April 22 in which our supply chain checks indicated LULU would be restocking the recalled Luon pants in early June. As such, we continue to believe Q2 comps will benefit from pent-up demand.”

“Not only is the impact to the brand from the recall expected to be negligible, we believe LULU benefited from increased traffic and substitute purchases. As such, we expect to see upside to our Q1 estimates when the company reports Q1 results on June 10. We reiterate our BUY and are raising our target to $92 from $87 based on a 35x P/E multiple that is more consistent with its growth rate.”

Canaccord Genuity expects Lululemon to report first quarter EPS of $0.30 on revenue of $335.8 million, roughly in line with Wall Street forecasts.

PVH Corp.

The maker of brands such as Calvin Klein and Izod is expected to report earnings Wednesday after the close. Analysts forecast earnings per share of $1.35, higher than the $1.30 reported in the same period last year. Revenue is expected to rise to 1.91 billion from 1.43 billion a year ago.

Bank of America re-assumed coverage of the company in April with a neutral rating and a $115 price target. They forecast earnings per share of $1.33, slightly below the street as they fear the recent Warnaco acquisition will negatively weigh on earnings.

“Given near-term revenue & expense headwinds following the Warnaco acquisition (completed 2/13/13) we see limited 2013 EPS upside. Our $115 PO is based on 14x our F15 (Jan.) operating EPS estimate of $8.20 and is supported by our DCF analysis (assumes a 7-8% expected return and 7.5x terminal EBITDA multiple).”

“Cost synergies are still expected to reach $100MM over 4 years now (instead of 3) as PVH makes incremental investments in WRC's infrastructure, Calvin Klein Jeanswear product & design quality, in-store marketing, and talent (new heads of Europe & Asia being recruited). Expected WRC EPS dilution of ($0.25) in F14 (reduced from previous +$0.35 accretion) also reflects mark-downs associated with global CK inventory rationalization (particularly the CK Jeanswear business).”

“PVH sales thru 2013 should be pressured by: (1) the impact of global CK inventory clearance on sell-thru of current CK goods; (2) plans to reduce CK off-price distribution by $40-50MM over the next 2 years; (3) continued weakness in Heritage (particularly Bass outlets); and (4) the loss of the “Chaps” license ($250MM sales).”

J.P. Morgan has PVH at a neutral rating and has a slightly higher price target at $120. “We are setting our quarterly 2013E EPS estimates for PVH following 4Q12 Earnings. We estimate 1Q13E EPS of $1.33, 2Q13E EPS of $1.36, 3Q13E EPS of $2.53, and 4Q13E EPS of $1.82. For 2013E, we adjust our estimate from $7.45 to $7.05. We are lowering out FY14 estimate from $8.60 to $8.25.”

“We believe the WRC acquisition is a game-changer longer-term with a united “House of Calvin Klein” and ability to expand Tommy to underpenetrated, higher growth Asia and South American markets attractive, in our view. Incorporating 6-8% revenue growth and mid-to-high teens EPS growth, we see potential for $10-$11 in EPS in FY15. That said, we see FY13 as a "transition" year with SG&A investments (systems, distribution, marketing) potentially offsetting transaction synergies with a number of top-line headwinds.”

Navistar

Heavy vehicle manufacturer Navistar is also expected to release earnings Monday. The company is expected to report a loss of $1.20 per share in the quarter on revenue of $2.88 billion. In the second quarter last year, Navistar earned $0.67 per share on revenue of $3.3 billion.

J.P. Morgan analysts commented on the stock Friday ahead of earnings. They reiterated their overweight rating on the stock ahead of the earnings.

“Navistar will report earnings Monday afternoon after the close (~4PM), with a conference call at 4:30PM ET. NAV's FQ2'13 is expected to be messy, with improvement expected in FH2'13 as the new 13-L engine was launched at the end of April. EBITDA is expected to be flattish, and cash burn is expected to be ~$100MM- $200MM on the back of restructuring expenses and pension contributions.”

“Key risks to FQ2 results include ongoing costs related to the Garland plant closure and field campaigns to repair existing issues on older engines. NAV's Class 8 production was slightly higher than JPMe, though market share was slightly below as engine offerings remained in transition. We continue to expect market share to be bumpy as new offerings roll-out.”

J.P. Morgan forecasts a loss per share of $1.09 and revenue of $3.0 billion, both higher than Wall Street estimates. The analysts note three key questions that need to be answered:

• 1. How are customers responding to the new 13-L offering?

• 2. How far along is the cost reduction program?

• 3. Have any new cash needs arisen that might affect near-term cash burn?

Jefferies reiterated its buy rating and $45 price target on Navistar earlier this week. They forecast a wider loss per share than the street of $1.16 per share on revenue of $2.9 billion.

“Last quarter, NAV realized EBITDA of $57 mln, versus the guidance of $(50)- $50 mln and ended the quarter with $1,189 mln in cash versus guidance of $950-$1,050 mln. Our EBITDA forecast for F2Q is $39 mln, but we don't include a possible warranty campaign of $25 mln or so as timing remains uncertain. We believe management will provide guidance for F3Q, which should show a slight sequential improvement in EBITDA.”

“Our $45 PT applies an average historical multiple to our FY13 sales – 32% EV/Sales. However, we continue to see significant upside when uncertainty fades. Risks: another downturn in the North American truck market, as well as potential lack of adoption of NAV's enhanced EGR engine technology.”

Cyclical Stocks and Performance!

Equity markets are in a period of adjustment, as can be easily seen if there's an unannounced change in policy, which provides a shock to the downside – which as was discussed in pullbacks providing a buying opportunity!

That adjustment is likely to keep trading in a narrow range. On Thursday, in the past week, the S&P 500 briefly fell under its 50-day moving average of 1,604, as well as below the psychologically important level of 1,600, before rebounding. However, the benchmark index remains below its 14-day moving average of 1,645.08.

This year's gains have been broad, with all 10 S&P 500 sectors sharply higher, so it is difficult to determine which sectors may be the most vulnerable to a market pullback. The best-performing sector of the year - health care, up 20 percent - is a defensive group, as is telecom, one of the year's weaker performers, with a gain of 8.6 percent for the year to date.

Cyclical sectors, which are tied to the pace of economic growth and have been especially sensitive to any indication that Fed policy may be changing, have outperformed the broad market this year. However, despite those gains and the Fed uncertainty, they may not be vulnerable going forward. The shakier sectors have been the big dividend payers, because higher yields on safe government debt would make those shares less attractive.

Investors haven't simply been 'selling the winners, but have also been selling the high dividend payers, which is not usual when pullbacks oocur. In fact, the opposite usually occurs, as investors flock to 'safer' plays.

Sector Rotation in the Week Ahead

No “Great Rotation”, but still outflows are apparent: according to Lipper, with bond funds reported having outflows of $9.08 billion, with $4.63 billion of that in outflows from high yield funds. Stock funds, meanwhile, reported modest inflows.

Last week saw several speakers at the Sandler O'Neill Global Exchange Conference — including TD Ameritrade CEO Fred Tomczyk — make comments that there was no sign of the “Great Rotation” -- at least not yet and not likely in the week ahead.

IPO’s in the Week Ahead

• The big IPO in the week ahead is Coty, well known cosmetics and fragrance manufacturer, whose brands include Calvin Klein, Chloe, Adidas, Marc Jacobs, and Sally Hansen.

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: Amira Nature Foods (NYSE: ANFI), Camelot Information Systems (NYSE: CIS), KMG Chemicals (NYSE: KMG), Navistar, Lululemon, Annie's (NYSE: BNNY), Diamond Foods (NASDAQ: DMND), North American Energy Partners (NYSE: NOA), and ModusLink Global Solutions (NASDAQ: MLNK).

Economy:

• Two-day Bank of Japan meeting starts

Tuesday

Earnings: LDK Solar (NYSE: LDK), Medical Action Industries (NASDAQ: MDCI), Oxford Industries (NYSE: OXM), Ulta Salon (NASDAQ: ULTA), and Rand Logistics (NASDAQ: RLOG).

Economy:

• 7:30 am: NFIB survey
• 10:00 am: Wholesale trade
• 10:00 am: JOLTS
• 1:00 pm: $32 billion 3-year note auction

Wednesday

Earnings: Agilysys (NASDAQ: AGYS), PVH Corp., and Men's Warehouse (NYSE: MW).

Economy:

• 1:00 pm: $21 billion 10-year note auction
• 0200 pm: Federal budget

Thursday

Earnings: Rentrak Corp. (NASDAQ: RENT), Oculus Innovative Solutions (NASDAQ: OCLS), and ALCO Stores (NASDAQ: ALCS).

Economy:

• 8:30 am: Initial claims
• 8:30 am: Retail sales
• 8:30 am: Import prices
• 10:00 am: Business inventories
• 1:00 pm: $13 billion 30-year bond auction

Friday

Earnings: No major earnings to report

Economy:

• 8:30 am: PPI
• 8:30 am: Current account
• 9:15 am: Industrial production
• 9:55 am: Consumer sentiment

International Economic Reports in the Week Ahead

Monday - Swiss unemployment rate, Italian industrial production, and the Bank of Japan interest rate decision.

Tuesday - British industrial production.

Wednesday - British claimant count, eurozone industrial production and the Australian employment change.

Friday - eurozone employment change

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


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A Positive Outlook Still!

Many investors fear this rally is overheated, whilst others are berating themselves for having missed the rally -- however, both groups have nothing to fear.

It is true that the rally is certainly overheated … and a pullback is long overdue, but don’t expect such a pullback to last too long, especially if it’s deep (which is not expected!). Too many dollars are chasing too few equities. The result has been – and will likely continue to be – higher prices.

So investors should not fear a forthcoming massive decline – as has occurred in the previous two summer swoons. Moreover, investors will have yet another chance to buy that dip, as can be seen with the following:-

1. Safe Environment -- Even though the U.S.’s economy isn’t growing at a fast rate, but is growing -- compared to the global economy which is fairly stagnant, as well as the fact that the EU could dip back into recession -- it certainly provides the investor with a sound environment due to its size offering investors stability, and they’re also willing to pay a premium for that safety net.

2. GDP is acceptable -- The economy continues to show growth averaging +2%, which is a shade light versus the historic average of +2.7% for the US economy, but it also is at a pace that is not creating excesses that often lead to the next contraction.

So whereas the average economic expansion lasts just about 5 years, this one could be longer than normal because it is proving to be a case of “slow and steady wins the race”.

3. Record Corporate Earnings -- Earnings continue to grow -- the S&P 500 is on pace to produce record earnings of $109 this year. And next year's estimates point to a new record at $121. This is quite high due to the revenue growth being down – but $115 would be a reasonable outcome – which is very good news for investors.

4. Stocks Are Cheap -- There are many ways to access value. But one of best time tested methods is reviewing the earnings yield of stocks versus Treasury bonds.

Traditionally there is a 3% spread between the 10 year Treasury and the earnings yield of the stock market. Right now the 10 year is only at 2.1%. However, as QE melts away the rate will probably float up to more like 3%.

So that would mean that stocks should have a 6% earnings yield, which translates into PE of 16.7 as fair value. Now multiply that by the $115 per share estimate for next year = 1920 fair value for the S&P 500.

This is a reasonable target for next year given the likely inputs on earnings and bond rates. Even modestly higher rates or lower earnings would still produce a fair value above current levels.

5. P/B Ratio -- Also, the depreciation schedule for U.S. companies is aggressive. This lowers the value of assets quicker than normal resale values. Lowering the asset value elevates the P/B ratio.

This is one argument that many bearish investors have bandied around -- that the price-to-book ratio (P/B) is extremely high. The P/B ratio is a common metric that compares a company’s market value to its liquidation amount. Value investors use it in order to determine if a stock is underpriced.

Though this argument appears correct on the surface, investors cannot use this ratio with the same success and accuracy now compared to past years.

The S&P 500 has a P/B ratio of 2.5. This means that the index trades at 2.5 times the net value of its assets. A value of one is common, although higher values are acceptable if you believe the company will create more value than normal from assets. International equities have a P/B ratio of 1.5.

Naturally, investors are concerned that the high P/B ratio from U.S. companies indicates that either we’re in a bubble or a large pullback is coming. Additionally, U.S. equities are priced much higher than their foreign counterparts.

6. Stocks are the Best Investment Alternative -- When bond rates start to go up they will still be low and not attractive for the yield alone. Even worse, the value of bonds will decrease as the rates move higher. As investors see their bond funds drop in value for the first time in 30+ years, they will rotate more money towards stocks.

Also as Treasury rates move higher, so too will mortgage rates. This will make the cost of housing more expensive. And put a damper on real estate investments.

With no real inflation to speak of, then gold and silver will have no luster. And cash will still be trash.

With this scenario, stocks become “the investment to be in”.

7. A Lot of Sideline Cash -- Survey after survey shows that the average individual investor has been scared out of the stock market given the precipitous drop after the Financial Crisis. Then toss in the tremendous volatility the past few years and you can understand why they've been saying "No Thanks!" to stocks for a while. But given human nature they won't stay away for long.

With all the other investment alternatives looking so unattractive, there will be a natural pull back towards stock ownership. Plus as the market makes new highs once again, the media will start making a big deal leading more folks to get on the bandwagon. As they pile back into stocks, it will fuel the rally higher, which will pull even more investors back into the market.

Expectations in the Week Ahead!

In the week ahead, there appear to be few obvious catalysts to change the equation. Only two S&P 500 companies - H&R Block and PVH Corp - are scheduled to report results.

The economic data calendar is light, though May retail sales on Thursday and the preliminary reading on June consumer sentiment on Friday will be closely watched.

Stocks don't move much the week after the monthly jobs report comes out. In the 16 months ended in May, the average change for the Dow in the week after a jobs report was 0.68%. It may have a lot to do with there being few economic reports of consequence and, often, not many earnings reports to digest.

But a quiet week without specific things to react against leaves the market vulnerable to a lot of noise, like the constant debate about quantitative easing and when the Federal Reserve will start the process of slowing its bond-buying program and letting interest rates rise.

That could be a big factor for the week ahead and even beyond. The Fed's rate-making body, the Federal Open Market Committee, meets June 18-19.

So, there's a good chance of some volatility in the week ahead – providing an opportunity for short sellers.

Sentiment Effect in the Week Ahead

Markets typically correct during times of uncertainty, and further fears over what the Fed will or will not do have helped to reduce the too-high bullish sentiment.

It has been the view of many investors that the stock market had gotten too far ahead of the economy, and that a correction would help to bring stock prices back to reality. This process is now underway, so there will be some good buying opportunities as we head into the summer months.

Meanwhile, bearish sentiment has increased, but it can still move higher before it reaches levels normally associated with a market low.

The percentage of bullish individual investors saw a sharp drop, to 29.4%, with almost 39% now bearish. Financial newsletter writers are also less bullish now, down to 45.8% from 52.1%.

The NYSE Composite in the Week Ahead

The number of NYSE Composite stocks above their 50-day MAs peaked near 78 at the May highs, but dropped down to the 48 level last week, relieving the overbought condition.

The March high in the NYSE Composite, at 9,144, held in the past week, although the index came quite close to its daily Starc band, which is now at 9,063. The weekly Starc+ band sits at 8,965, and the 38.2% 'Fibonacci Retracement’ support from the June 2012 lows follows at 8,757.

”The McClellan Oscillator” rallied back to the -114 level by Friday. In an oversold bounce, it could reach the 0 to +50 level.

The daily The weekly NYSE NYSE Advance/Decline (A/D) line dropped below its WMA on May 23, then violated its uptrend (line c) last week. The daily WMA is now clearly declining, as the A/D line has just rebounded back to its uptrend.

Conclusion for the Week Ahead

Even though most stocks, due to the rally, could make an investor profit, it would be prudent to consider the following:-

• First, you need to focus on companies exceeding earnings expectations each quarter, which leads to higher estimates from analysts. This in turn leads to higher investor interest and a higher share price.

• Second, keep an eye on valuations. It was noted earlier in this article, that the overall market was reasonably priced, however many groups, especially large caps and safety-oriented stocks, are overpriced right now. So only select those stocks that are trading at discounts to peers.

The market should tell us by the middle or the end of the week whether we are going to see a further correction, or if the correction is over. If we are going to break out to the upside, expect the market internals to get better.


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