The Week Ahead in the Stock Market
June 25, 2012

Week Ahead: More Drama Associated with Europe!

Economic Outlook Takes Center Stage!

Wall Street: Health-Care Ruling May Be a Catalyst for Stocks!

by Ian Harvey

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June 25, 2012

Expect another week of drama starting as early as Monday when the Supreme Court is expected to issue its ruling on the Healthcare Reform Act, otherwise known as Obamacare. Research In Motion and Nike will dominate earnings. A European summit could get volatile. Economic reports at home could show more softness.

Markets are bracing for the Supreme Court ruling on health care in the week ahead and it could be a positive catalyst for stocks if the new law is overturned.

But any pop is likely to be brief and the focus will return to Europe as the European Union leadership gathers to discuss a banking union at the end of the week. Early in the week, the focus will be on Greece’s efforts to restructure its bailout and Spain’s expected request Monday for funds to recapitalize its banks. There is also a stream of U.S. economic data, including durable goods, weekly jobless claims and consumer confidence readings.

The Past Week

It wasn't a great week for stocks in the past week, but given the dramas that unfolded -- a Greek election, a Federal Reserve meeting and its nasty aftermath on Thursday -- it could have been worse!

Volatility continued during the past week, especially on Thursday when the Dow fell 251 points in a delayed reaction to the Federal Reserve's decision to adjust a program to sell short-term securities and buy longer-term bonds to keep long-term rates low. Data has pointed to slowing growth in the United States, a view corroborated by the Fed.

Corporate earnings have also pointed to strained conditions as more companies signal disappointing results than at any time over the past decade.

• The Dow Jones Industrial Average (DJIA) fell nearly 1.0 percent for the week, to 12640, and

• the Standard & Poor's 500 Index (SPX) was down 0.60 percent to 1335.

• The Nasdaq Composite Index (COMP) was up 0.70 percent at 2892 for the week.

The Major ETFs in the Past Week

What started out as a bullish week, with stocks pushing higher, ended abruptly on Thursday (June 21) as the market had one of the largest single day declines of the year. The S&P 500 SPDR ETF (ARCA: SPY) fell roughly 2.2% on Thursday, and with similar declines in the other indexes, bearish chart patterns emerged. Thursday's decline wiped out multiple days of gains, signaling an end to the short-term rally we have been in since the start of June.

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The Week Ahead

Investors say big gains will be hard to come by in the week ahead amid signs of slowing growth and economic headwinds from the euro zone.

Trading is likely to be volatile in the final week of the quarter as headlines from Europe drive sentiment.

The market also is awaiting a U.S. Supreme Court ruling on the Obama administration's healthcare overhaul in the week ahead, and there are certain to be winners and losers in the healthcare sector, depending on how the justices decide.

Health Care’s Influence on the Market

The Supreme Court decision on President Obama’s health-care reforms could possibly come Monday but certainly by the end of the week. Some analysts say if the law is overturned, stocks could instantly spring into rally mode, though that could be short-lived since uncertainties remain. Health-care stocks have been moving higher ahead of the ruling on the Affordable Care Act, and were the best-performing sector in the past week, gaining 0.8 percent.

Health care stocks were the best-performing sector of the stock market in the past week. The sector has been a source of strength in a difficult quarter. The S&P 500 is off 5.2% so far this quarter. The Healthcare Select SPDR (XLV) exchange-traded fund, which tracks the health care sector of the index, is off 0.52%, third-best among the 10 S&P 500 sectors.

But the fact is there has not been exuberant investing in health care stocks. They were up an average 10.5% for the year through March 28. They're down an average 1.1% since.

Edwards Lifesciences (EW), which makes heart valves and other devices for patients with cardiac problems, is up 44% for the year and 39.1% since March. But most of the gain resulted from a June 13 recommendation for the Food and Drug Administration to approve a new valve product.

Europe and the EU Leaders’ Summit to Remain Major Driver for the Week Ahead

However, the bigger driver of markets, in the week ahead, remains Europe’s debt crisis, and expectations for the EU leaders’ summit are relatively low.

European Union leaders will begin a two-day meeting on long-term plans for fiscal and banking union on Thursday.

Italian Prime Minister Mario Monti said the euro zone countries faced "escalating speculative attacks" unless a lasting solution to Europe's financial crisis is found at the summit.

Spain's bond yields have been steadily rising, and investors urged a faster pace by European leaders toward greater fiscal union and helping the peripheral economies.

The Summit is likely to be another half-hearted set of solutions to the problem. One problem is there’s “bailout fatigue” on the part of creditors, and “austerity fatigue” on the part of countries that have to make tough choices to curb spending.

At the margin, market participants expect some semblance of a banking union, given the recent turn of events in Spain. There could be an FDIC-like deposit insurance scheme and a new approach to broader euro-zone banking supervision. Spain has been negotiating terms of a loan of up to 100 billion euros (US$125 billion) for its bank restructuring.

A banking union is a first step ahead of a tighter fiscal and political union and all are required for the euro zone to create a common euro bond, seen as a necessary solution by many. But a meeting of the leaders of the four largest countries Friday ended with German resistance to a common euro zone bond but an agreement on a 130-billion euro package to revive growth.

Other Hurdles to be Overcome in the Week Ahead

As stocks head into the summer and the start of the third quarter, analysts see other hurdles ahead that could also hold back gains, not the least of which is the slowdown in the U.S. economy. The Fed this past week downgraded its economic forecast through 2014 and extended its bond purchase program, ”Operation Twist” through the end of the year.

Fed Chairman, Ben Bernanke, pointed to labor market data as crucial! Weekly jobless claims have been rising over the past several weeks, so that data on Thursday may be the most important of the week. Last week’s claims were in the survey week for the June employment report so economists are now forecasting another month of sub-100,000 job growth.

The Fed also fears the “fiscal cliff,” a combination of budget cuts and tax hikes that could go into effect in 2013 if Congress doesn’t take action. Analysts say that is one of their top concerns as well for the coming quarter, along with reaction to election news. Earnings could also start to weigh if companies trim their forecasts, as some have already done.

The Major ETFs in the Week Ahead

Multi-day ”bearish” engulfing patterns continue (a big down day that completely wipes out the prior up day) – however, it is possible that a further rally could develop in the week ahead. The markets are still above the support levels mentioned the week before because of the upward direction at the start of the week. Focus does appear to be shifting to the downside, though, as each of these exchange-traded funds (ETFs) once again approached crucial levels, and enthusiasm is coming in on selling, not buying.

The drop on Thursday, June 21 created bearish patterns in all the index ETFs. Further declines are quite likely, although there are still important support levels below that will need to be broken in order to confirm another wave to the downside. A rally is still possible, as the trend remains up from June, yet the possibility of further upside has become more remote based on Thursday's slide. A push back through the recent highs, though, could give some renewed strength to the bulls. When multiple ETFs provide the same signal, it is more reliable than only one moving in isolation.

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The Key Events in the Week Ahead

Data has pointed to slowing growth in the United States, a view corroborated by the Fed.

Corporate earnings have also pointed to strained conditions as more companies signal disappointing results than at any time over the past decade.

The coming week will provide data on consumer sentiment, new home sales and other housing figures, which could shed light on whether the housing market is finally healing. Major companies scheduled to report financial results include Nike, Research In Motion, Monsanto Co and General Mills Inc.

Earnings in the Week Ahead

There are two earnings reports of importance: Nike (NKE) and Research In Motion (RIMM). The BlackBerry maker's stock price fell below $10 on Friday for the first since since 2003 as investors are signaling the company is in crisis.

Nike is expected to be profitable to investors with earnings of $1.37 per share for the fiscal fourth quarter, up 10.5% from a year ago. Revenue is expected to grow 13.1% to $6.52 billion.

The order book will be of importance, which includes an estimate of orders for the next few months. Listen to see if Europe is affecting sales. One analyst believes the European business is still quite strong, the Portland Business Journal noted Friday. Sterne Agee's Sam Poser said in a client note that athletic footwear and apparel brands and retailers are actually growing in Western Europe.

Research In Motion is a different and sadder story. The company expects to report a loss for its fiscal first quarter. It has promised to explore strategic alternatives, which would mean a sale.

The consensus estimate is still for a penny a share in earnings, down from $1.33 a year ago, with a 35.8% decline in revenue to $3.15 billion. And the questions at the conference call will surely be on survivability.

Healthcare Decision -- Influence on Health Insurance Companies

The U.S. Supreme Court is expected to rule on the Affordable Care Act, the healthcare overhaul passed by Congress in 2010 that has faced a number of court challenges.

For health insurance companies and hospitals there are several different scenarios for the impact of the ruling. Some on Wall Street have devised complex strategies - betting on one sector against another - depending on how the ruling comes out.

Stocks of health insurers that specialize in Medicaid programs for the poor, like Centene Corp (CNC) or Molina Healthcare Inc (MOH), could be hit if the law is struck down. Large insurers like Aetna Inc or WellPoint Inc could benefit.

Economy in the Week Ahead

There will be important reports on the economy, personal income and housing.

With the last revision for GDP, reports this past week (and in weeks before that), suggested the economy has slowed down from a quick start in the first quarter. This week's reports will probably confirm that.

There may be some light at-the-end-of-the-tunnel from housing. Nomura Securities is expecting May new-home sales to rise 4% in May to 375,000 units. That will undo some of the gloom from Thursday's existing-home sales report for May, which said sales on analyzed basis were off 1.5% from April.

Here's another bit of good news: We're far enough along in the year that unadjusted sales (that is actual sales) were up slightly in May.

For more information and a list of key events and earnings in the week ahead………CLICK HERE.....

Other Articles of Importance to the Upcoming Week

1. The Economy and Earnings in the Week Ahead - June 25, 2012

2. The Past Week Stock Market Results - June 25, 2012

3. Technical Analysis - Comparing Tools - Market Indicator for the Week Ahead - June 25, 2012


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