The Week Ahead in the Stock Market
July 30, 2012
Week Ahead: Central Bankers will be the Key to Market Direction!
Wall Street: Fed In Focus Ahead of Jobs Report!
Major Earnings Ahead for the Stock Market!
by Ian Harvey
July 30, 2012
The U.S. Federal Reserve and the European Central Bank both meet in the coming week amid investor expectations of action to stimulate economic growth and, in the case of the ECB, tackle the spreading euro zone debt crisis.
Most Fed watchers do not expect the Fed to announce a new Quantitative Easing (QE), or asset purchase program, Wednesday, but it could take smaller steps and lay the groundwork for more easing later in the year. Besides the July employment report, which is expected to show that just 100,000 jobs were added this month in a slow growing U.S. economy, there are also earnings from about a fifth of the S&P 500, such as General Motors, AIG, Procter and Gamble, Kraft, Time Warner, Berkshire Hathaway and MasterCard, in the week ahead.
The markets finally broke free of their recent trading range -- the SPX cleared its hurdle near the 1,380 area, while the Dow shot above the round-number 13,000 level. Both respective indices have taken out their previous June and July peaks, which is a good sign for the market as July comes to a close.
Stocks ended the past week with strong gains, after starting the week gripped by worries that the Spanish sovereign would need a bailout, and by association Italy might as well. Risk assets sold off, and investors ran to the safety of bunds and Treasurys, sending yields to record lows across the curve. Also, at the same time yields on Spanish debt shot higher, with the five year surpassing the 10-year, which is a sign of stress.
But Draghi turned the tide Thursday with a comments that the ECB stood ready to do whatever it takes to support the euro, and that the ECB’s action would be enough. On Friday, German Chancellor Angela Merkel and French President Francois Hollande, in a joint, communiqué, said they too were prepared to support the euro.
Reports that Draghi was speaking to ECB council members about taking action helped spur an even bigger rally Friday afternoon. There were also reports that Treasury Secretary Timothy Geithner is expected to meet with Draghi Monday, giving traders more confidence that some actions are being planned.
• The Dow Jones Industrial Average (DJIA) soared up 253.09 points this week, or 1.97 percent, to close at 13,075.66, crossing the psychologically-important 13,000 level for the first time since early May.
The Dow marked its loftiest daily close since May 3, jumping 187.7 points, or 1.5% on Friday, with all 30 blue chips climbing higher -- Merck & Co., Inc.'s (NYSE:MRK) earnings-related 4% rise leading the charge.
• The Standard & Poor's 500 Index (SPX) rallied 23.31 points last week, or 1.71 percent, to finish at 1,385.97.
The S&P 500 Index also ended at its highest point since May 3.
• The Nasdaq Composite Index (COMP) jumped 32.79 points last week, or 1.12 percent, to end at 2,958.09.
On Friday, the Nasdaq turned in the best performance of its fellow benchmarks, soaring 64.8 points, or 2.2%.
The CBOE Market Volatility Index (VIX), widely considered the best gauge of fear in the market, suffered its third straight pullback on Friday, lopping off 4.7% and closing just atop its daily low of 16.52. The VIX was still able to notch a 2.6% win for the week.
**For a more in-depth look at the past week…..CLICK HERE…..**
The Major ETFs in the Past Week
What started as a negative week for the major stock indexes ended with in bullish style. July 26 and 27 saw a push higher in the index Exchange-Traded Funds, with the S&P 500 SPDRS (ARCA: SPY) and the Dow Jones Industrial Average SPDR (ARCA: DIA) pushing at resistance once again. The late week surge higher keeps the short-term (June and July) uptrend intact for these ETFs. Not all of the major index ETFs are confirming though. PowerShares QQQ ETF (Nasdaq: QQQ), representing the Nasdaq 100 index, and Russell 2000 iShares Index (ARCA: IWM) ETF, representing the Russell 2000 index, are not close to resistance, and therefore will not be making new short-term highs.
Volume also continues to be an element of concern. Indicators such as on-balance volume show declining interest in this rally, indicating it is more likely a bear market rally as opposed to the next wave higher in a longer term bull market.
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TOP OPTIONS TRADES SINCE JUNE 01, 2012 | |||||||
|---|---|---|---|---|---|---|---|
| TRADE | GAIN | TRADE | GAIN | ||||
| HLF July 47.50 Calls | 53% | APPL Aug 650 Calls | 67% | ||||
| DLTR Aug 110 Calls | 32% | UIS Oct 17 Calls | 79% | ||||
| HSY Aug 70 Calls | 56% | TSO Nov 25 Calls | 54% | ||||
| NKE Oct 92.50 Calls | 49% | HLF July 47.50 Calls (again) | 38% | ||||
| FB Aug 25.00 Puts | 500% | DISH Sept 30.00 Calls | 100% | ||||
The Fed in the Week Ahead
While there is a chance, Fed watchers say it’s not likely the Fed will announce a QE3 bond purchase program when its meeting ends Wednesday. It is more likely the Fed uses communications, or even cuts the rate on reserves to stimulate activity.
Some economists expect the Fed might extend the time frame on its extreme low rate policy to mid-2015 from the end of 2014.
It is not inconceivable that the Fed do another round of QE, but it’s more likely they do it in September rather than they do it next week -- it’s going to be very dependent on how the next few jobs reports look!
Some economists do not expect the Fed to take action Wednesday at all – more likely to continue with ”Operation Twist”, and if growth improves to the 2 percent growth rate expected in the third quarter, it may not take any further action beyond twist.
In Operation Twist, the Fed has been buying Treasurys at the long-end of the curve, and selling the same amount of shorter duration Treasurys, but it does not expand the Fed balance sheet as QE does.
The ECB in the Week Ahead
The ECB, reported to be considering a range of actions, may take some steps at its meeting Thursday toward resolving its problems; however, not all the steps looked for by markets will be addressed immediately. There were news reports Friday that ECB President Mario Draghi was discussing a rate cut, a new liquidity program, and a plan to give a banking license to its bailout fund.
European policy makers would need to be involved with some of the changes, such as giving bank status to the European Stability Mechanism so that it could directly aid banks.
'European Central Bank - ECB' is the central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed in Germany in June 1998 and works with the other national banks of each of the EU members to formulate monetary policy that helps maintain price stability in the European Union.
The European Central Bank has been responsible for the monetary policy of the European Union since January 1, 1999, when the euro currency was adopted by the EU members. The responsibilities of the ECB are to formulate monetary policy, conduct foreign exchange, hold currency reserves and authorize the issuance of bank notes, among many other things.
The Market Outlook’European Stability Mechanism - ESM' is a permanent rescue funding program which is due to succeed the temporary European Financial Stability Facility (EFSF) in mid-2013. It is intended that the ESM will complement a new framework of reinforced economic governance, aiming at an effective and rigorous economic surveillance, which will focus on prevention and will substantially reduce the probability of a crisis arising in the future.
The market's outlook is very worrisome. Third-quarter earnings are now expected to decline 0.4 percent from a year ago, compared with an expected rise of 1.4 percent last week, according to Thomson Reuters data.
Also on investors' radar in the week ahead is another legal battle in California over patents between Apple (AAPL) and South Korea's Samsung (005930.KS). The trial's outcome could reshape the smartphone and tablet wars between the iPhone's maker and its rivals.
The Major ETFs in the Week Ahead
The uptrend for June and July remains intact for the index ETFs, and can continue as long as the short-term highs are created and support levels hold.
Currently, the ETFs, S&P 500 SPDR and Dow Jones Industrial SPDR appear to be in the best shape, with the strongest short-term uptrends at this time.
Volume and buying interest are a concern for all of the ETFs though. On-balance volume is declining and price highs are not being confirmed by the indicator. In order for these rallies to sustain themselves, buying interest needs to pick up otherwise the downtrend is likely to resume.
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Stocks are riding high on the prospect that central bankers will take action in the week ahead to kick start the economy and stem the euro zone’s debt crisis.
Both the Federal Reserve and the European Central Bank meet, and while they may take some action, neither is expected to deliver the whole menu of items looked for by markets. At the end of the week, the July employment report looms large and is expected to show on Friday that just 100,000 jobs were added this month in a slow growing U.S. economy.
Auto makers also report monthly sales Wednesday, and chain stores report their July sales Thursday.
Earnings in the Week Ahead
There are also earnings from about a fifth of the S&P 500 and General Motors (GM), AIG (AIG), Procter and Gamble (PG), Kraft (KFT), Time Warner (TWX), Berkshire Hathaway (BRK.A) and MasterCard (MA) are among the companies reporting.
Economy in the Week Ahead
The economic reports will be dominated by the July jobs-and-unemployment report, due Aug. 3. Capital Economics, the London-based economic consulting firm, estimates payrolls will rise by 100,000 jobs, with the unemployment rate holding at 8.2%.
Economic Reports to Watch in the Week Ahead
1. For the fourth month in a row the number of jobs added to U.S. payrolls are expected to fall far below the 200,000 figure that briefly became the norm earlier this year. But job creation has slowed considerably since March and that isn’t expected to have changed in July.
After a decidedly disappointing June, during which 80,000 jobs were added, economists have lowered their expectations for July, forecasting an additional 100,000 jobs which would keep the unemployment rate steady at 8.2%.
2. Auto sales are due on Wednesday, and demand for smaller more fuel-efficient cars is expected to help car makers report sizable increases from sales a year ago. Toyota (NYSE: TM) and Honda (NYSE: HMC) are expected to benefit from the growing demand for small cars.
3. U.S. retailers will release July figures on Thursday. Despite falling consumer confidence due to a fragile labor market, analysts believe retailers will report an increase in same-store sales.
Overseas Events
The European Central Bank and Bank of England are also meeting in the week ahead.
The European Central Bank policy announcement on Thursday will be closely watched after Draghi's dramatic declaration this week to support the euro no matter what.
Conclusion for the Week Ahead
The week ahead should be quite interesting, as we have the FOMC meeting, possible ECB action, and another jobs report. The last two have been pretty bad, and if a surprise occurs -- a very positive report -- it could light a fire under the stock market.
A more complex bottom pattern may still be forming, as the lagging action of all the Advance/Decline lines is not a healthy sign. Much stronger signals would be appreciated to make more commitment to the market -- and the use of stops for damage control would be advisable!
Further Articles Relating to the Week Ahead
1. The Economy and Earnings in the Week Ahead – July 30, 2012
2. The Past Week Stock Market Results – July 30, 2012
3. The Major ETFs in the Week Ahead – July 30, 2012
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