The Week Ahead in the Stock Market
August 06, 2012

Week Ahead: Positive Momentum Despite Headwinds!

Wall Street: Disney Earnings; Manchester United IPO!

No News May Be Good News for the Stock Market!

by Ian Harvey

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August 06, 2012

Stocks have definitely been riding the tailwinds of central bank promises – the up-down, up-down scenario – with a little more up than down -- and could continue to drift higher in the absence of any nasty surprises from Europe.

After four days of losses, the benchmark Standard & Poor's 500 Index (SPX) rallied on Friday, finishing the week in the positive for a fourth straight time and reaching three-month highs.

Sustaining momentum are valuations that make stocks attractively priced relative to other assets. Some corporate earnings have been very impressive, especially in defensive stocks such as utilities.

The Past Week

Stocks rallied to a three-month high in the past week, helped by more assertive language from the Fed Wednesday. But the market rose sharply Friday after the July employment report showed a surprise gain of 163,000 jobs to nonfarm payrolls, breaking a string of disappointments.

After the Federal Reserve and the European Central Bank didn't take aggressive, immediate measures to spur growth, the market disappointment was fairly short-lived, considering how hotly the actions had been anticipated.

The jobs report was one factor that boosted stocks. Also fueling the rally: better-than-expectedresults from social-media site LinkedIn (LNKD). Procter & Gamble (PG) shares were higher as an announcement of a $4 billion share buyback program offset weak guidance. The Institute for Supply Management's July report on the services economy was a touch better than expected.

This year has seen quite a few wide swings in three of the main asset classes, gold (GLD), bonds (TLT), and stocks (SPY).

GLD was up over 14% early in the year, but by early in the summer had given up those gains. Bonds as represented by TLT were down 9.5% in March, but up over 9% just a few weeks ago. Stocks have been positive since the beginning of the year, peaking at over 13% in early April. With Friday’s gain, stocks have once again taken over leadership.

• The Dow Jones Industrial Average (DJI) regained its perch atop 13,000 on Friday, and finished at its loftiest price since May 3, posting a 217.3-point, or 1.7%, rise. At its session best of 13,133.18, the Dow was up more than 254 points.
The rally was big enough to completely offset four straight down days and allow the major market indexes to finish higher for the fourth straight week.
Over the past week, the blue-chip barometer eked out a 0.2% increase, marking its fourth-straight weekly gain.

• The Standard & Poor's 500 Index (SPX) pierced the 1,390 mark for the second time in a week on Friday, and leapt to its highest perch since May 3.
The S&P fell about 0.7 percent on Thursday following the ECB's comments compared with a nearly 2 percent rise before in anticipation of action.
The SPX ended the week up 0.4 percent.

• The Nasdaq Composite Index (COMP) charged to a 58-point lead on Friday, or 2%, win.
The COMP found a foothold above the 2,960 level, and saw its best finish since July 5. For the week, the COMP gained 0.3%.

• The Nasdaq-100 Index (NDX), which tracks the largest Nasdaq stocks, surged 50 points to 2,676. Apple (AAPL), the biggest influence on the index, was up $7.91 to $615.70.

The CBOE Market Volatility Index (VIX), widely considered the best gauge of fear in the market, fell back nearly 11% Friday, and landed at its session lows. The VIX gave up 6.3% on the week and closed at its lowest point since July 19.

The Markets Ending August 03, 2012

**For a more in-depth look at the past week…..CLICK HERE…..**

The Major ETFs in the Past Week

For the first time since May, the monthly jobs report did not disappoint the stock market, as it surged to new rally highs in reaction to the best job growth in some time. The overall unemployment rate actually rose, but that did not stop the buying and the short covering.

And, Friday also proved to be a strong day once again for the major Exchange-Traded Funds (ETFs). For two weeks in a row now we have seen a Friday jump, after sideways-to-lower price movement during the week. The strength on Friday is significant though, creating two month highs in three of the four index ETFs.

The short-term trend remains higher for all the indexes, although some are performing better than others. Also within striking distance in several of the ETFs are the 52-week highs.

However, even these impressive gains were not enough to turn the technical outlook positive. Signals are mixed though on different time frames - with certain time frames pointing to a correction, while the two month uptrend seems to be strong and signaling higher prices.

The market internals, like the Advance/Decline (A/D) line, are still lagging the price action -- the majority of strongly trending moves in the stock market are characterized by the market internals leading prices, not lagging them.

The Spyder Trust (SPY) had its best day in quite some time, gaining 2%. The S&P 500 is now not far below the widely watched 1,400 level, and the Dow Industrials has settled well above 13,000.

**A more detailed report can be obtained by ……CLICKING HERE…..**


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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%
APPL Jan 13 650.00 Calls 71% CSTR Oct 42.50 Puts 400%
LNKD Aug 92.50 Puts 30% LNKD Aug 100.00 Calls 250%

The Week Ahead

Reduced Risk in the Stock Market

There are not a lot of things for the markets to be afraid of!

Last week was full of event risk – and the stock market has weathered that scenario -- we are through that, and the markets are coming out with some confidence when it comes to risk assets. With the markets not having a lot to be afraid of, and no blatant ‘risk off’ events on the calendar, we’re looking at auction supply. The Treasury auctions $72 billion in 3- and 10-year notes, and 30-year bonds Tuesday through Thursday.

The path of least resistance is higher yields and we could get the 10-year (yield) up to 1.70 through the auctions. The 10-year yield was at 1.575 percent Friday.

The July employment report was strong enough to boost confidence slightly about the sluggish economy, but also keep alive the idea that the Fed will restart its asset purchase programs, which have been positive for equities. The unemployment rate rose to 8.3 percent, from 8.2 percent, reflecting the increase in individuals seeking work.

The past week with the mix of economic data shows that the economy has some inertia, but it wasn’t so good that the Fed had to provide another escape route – therefore leaving QE3 alive and well for another day – maybe more from the Jackson Hole meet!

The Future Optimism of the QE Plan

The idea of Fed and 'European Central Bank - ECB' easing has helped keep stocks aloft. However, the ever-present threat of the European debacle could undermine the stock market momentum.

Many economists also expect the Fed to announce a new Quantitative Easing (QE) plan at its Sept. 12 meeting, and this time the estimated $500 billion program could involve mortgage securities. This method would employ the most effectiveness for the dollar by stimulating a sector that’s already beginning to heal. Housing has been showing signs of a pickup over the past couple of months, as other data, such as manufacturing data in this past week’s ISM, show signs of slowing.

Strategists and Pull-backs in the Week Ahead

Some strategists have a feeling that while markets rallied this past week, there may be some more bumps ahead in the near future. Investors could get impatient anticipating central bank easing and while promises were made, the lack of concrete plans and action from Europe is a risk for markets.

They see the market at risk of a dip — a five to 10 percent pullback — not a full-blown correction, but something that could get back to the lows of early June.

They see the July employment report as encouraging, but the U.S. ISM manufacturing survey and PMI manufacturing data from around the world were disappointing. U.S. data showed contraction in the manufacturing sector, a source of strength during the recovery, for the second time since July 2009. The weak numbers are a negative sign for corporate profits.

The strategists think the third-quarter earnings are likely to be down year over year … which doesn’t happen too much outside of recessions – and they do not expect stocks to do better later in the year.

However, there is the positive belief that there will be a major move to the upside after the break to the downside.

The Major ETFs in the Week Ahead

The market surprised many with its great finish to a somewhat choppy week -- even though the Spyder Trust was only about 0.5% higher on the week!

The negative divergence between the major ETFs and their Advance/Decline lines, have not been overcome. This does not mean the market cannot move higher, but it is not the strong technical reading that was evident in September 2010 or October 2011.

Of course, this could change in the next few weeks, but there are a few things that must occur to turn the outlook bullish.

**…..CLICK HERE….. for more detailed information…..**


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OPTION TRADES FOR $39.00/MONTH
Click here TO FIND OUT MORE INFORMATION


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Optimism in Equities

Even though there is still a fair amount of pessimism, equities are so much more attractive than bonds – for example -- the dividend on Johnson & Johnson (JNJ) offers a better yield than the company's bonds.

An investor would do better with the stock than the bond over the next ten years even if the stock price went nowhere because of the stock dividend.

Based on measures like dividends and price-to-earnings ratios, equities appear cheap compared to other assets like Treasuries where yields on the 10-year note fell to a record low this past month.

Momentum on the Stock Market Side

After the Federal Reserve and the European Central Bank didn't take aggressive, immediate measures to spur growth, the market disappointment was fairly short-lived, considering how hotly the actions had been anticipated.

The S&P fell about 0.7 percent on Thursday following the ECB's comments compared with a nearly 2 percent rise before in anticipation of action.

This indicates that there is near- and long-term momentum on the side of the stock market.

In another positive sign, large blocks of upside calls were apparently bought on Friday in an exchange traded fund designed to measure equity performance in the global emerging markets.

The option flow in the “iShares MSCI Emerging Markets (EEM) fund"seems to express confidence that today's global equity market rally can continue over the next several weeks.

The Key Events in the Week Ahead

The week ahead has a fairly light economic calendar, though Ben Bernanke is speaking on Monday and Tuesday. The week after the jobs report is usually light on economic reports. The most important will be reports on consumer credit outstanding (Tuesday), productivity (Wednesday) and jobless claims (Thursday).

This light calendar suggests that any market moving news is likely to come from overseas.

Investors will continue to watch the saga around Knight Capital, which reported a more than $400 million loss after a software program triggered a major trading snafu. The firm Friday was seeking capital, but the incident was another black eye for Wall Street, coming quickly on the heels of the Facebook IPO trading debacle.

Most of the action affecting markets in the week ahead could come from Europe, but the discussion around the U.S. ”fiscal cliff” is getting louder. The “cliff,” is a term coined for the double expiration of tax cuts Dec. 31 and beginning of automated spending cuts Jan. 1.

Earnings in the Week Ahead

Quarterly earnings due in the week ahead include Walt Disney Co (DIS), Priceline.com (PCLN) and Chesapeake Energy (CHK). Results from Macy's Inc (M) and J.C. Penney Co Inc (JCP) should shed light on the strength of consumer spending.

A handful of companies are also scheduled to go public in the week ahead. U.K. soccer club Manchester United's debut will make it the first sports teams to go public in the U.S. in a long time.

Other companies expected to debut next week include restaurant operators Bloomin' Brands Inc. and CKE Inc. and recovery services provider Performant Financial Corp.

On Wednesday, Eastman Kodak Co. (EKDKQ) will auction off more than 1,000 of its lucrative imaging patents, which are worth as much as $2.6 billion.

Quarterly Earnings From Disney

Analysts polled by Thomson Reuters project Disney to post stronger top- and bottom-line results. The company is expected to benefit significantly from its release of "The Avengers" superhero movie, which became the all-time third-highest-grossing movie domestically, a welcome change for the company following the second-quarter flop "John Carter." The company has been seeing strength in its cable channels, thanks to higher programming fees and advertising sales, as well as in its theme parks business.

Retail Store Results – Macy’s, Kohl’s Corp. & Nordstrom Inc.

Meanwhile, retailers are projected to post a mixed bag of results in the week ahead. Macy's, which has been one of the industry's strongest performers, is expected to report another quarter of improved profit. Earlier this week, Macy's reported that its second-quarter sales jumped 3% to $6.12 billion, slightly above the $6.11 billion estimate from analysts, and said its spring season met its expectations.

Analysts see weaker profit from department-store chain Kohl's Corp. (KSS) and high-end retailer Nordstrom Inc. (JWN). Kohl's efforts to better compete on price have weighed on its bottom line, while Nordstrom has projected higher overhead expenses for the year amid increased spending for e-commerce. Both companies recently reported quarterly revenue figures that missed analyst expectations.

Manchester United Scheduled to Debut

English soccer club Manchester United's shares are expected to begin trading on the New York Stock Exchange toward the end of the week ahead. The company is aiming to sell 16.7 million shares in its initial public offering at a price within the $16 to $20 range for each share. The shares are set to price Thursday.

Manchester United, one of the most successful teams in professional soccer, would be the first sports teams to go public in the U.S. in quite some time. The last team to do so was the Cleveland Indians Baseball Co., which launched in 1998, according to data tracker Dealogic, and was later taken private.

Manchester called off plans for a $1 billion initial public offering in Singapore last year amid volatile markets.

Other companies expected to debut next week include restaurant operators Bloomin' Brands Inc. and CKE Inc. and recovery services provider Performant Financial Corp.

Kodak -- Patent Auction

Eastman Kodak Co. (EKDKQ) in the week ahead will put more than 1,000 of its lucrative imaging patents on the auction block, a sale the company's creditors are counting on for payment.

The imaging company is seeking to keep the auction process confidential, but The Wall Street Journal reported that Apple Inc. (AAPL), Microsoft Corp. (MSFT), Google Inc. (GOOG) and Samsung Electronics Co. (005930.SE) are among the giant technology companies that are vying for the patents.

Worth as much as $2.6 billion, the patents cover the technology used in digital cameras, smartphones and tablet computers to capture, transmit, manipulate and store images. According to Kodak, it has been able to earn more than $3 billion over the past decade by licensing the patents.

The patent auction is slated for Wednesday, but Kodak will head to the Manhattan bankruptcy court Monday to seek approval of a bonus plan for executives and managers.

Economy in the Week Ahead

There are a few economic reports and a steady stream of earnings news in the week ahead. But after major meetings this past week where both the Federal Reserve and 'European Central Bank - ECB' held out the idea of more quantitative easing (QE), the markets could coast in anticipation of central bank action in the fall.

While Fed Chairman Ben Bernanke appears twice in speaking engagements in the coming week, his next major speech is not expected until he attends the Fed’s Jackson Hole symposium at the end of the month. It was at that event two years ago that he discussed quantitative easing, and traders are hoping for a repeat performance, anticipating that QE3, or that a third asset purchases could be announced when the Fed meets in September.

Economic Reports to Watch in the Week Ahead

Data on the June U.S. trade deficit and July import prices are among the economic reports on tap next week.

The U.S. trade gap narrowed for the second straight month in May, as exports picked up and falling oil prices helped drive down imports. Meanwhile, the cost of goods imported into the U.S. posted the largest decline in more than three years in June, also reflecting the continued fall of oil prices.

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

Conclusion for the Week Ahead

Last week’s action has not clarified the short-term outlook for the stock market, while the longer-term outlook remains positive. A stronger market in the last half of the year is quite likely, even though the technical readings have not yet confirmed that stocks are trending higher.

It would be much more acceptable if the outlook turned more bullish than it already is, but commitment to the stock market should see a gain in profits for the investor in the week ahead and weeks to come.

With the increase in the major indexes and many of the stocks, it is at a stage to appropriately raise stops further to protect against a downward reversal. There are definitely many stocks, ETFs and certainly options, when viewing the current stock market outlook, that I will be participating in vigorously.

If you are not in the stock market but want to start adding some exposure, it would be advisable to do some gradual buying in ETFs or even a low-cost fund. A dollar-cost-averaging approach would probably be the best, especially with a firm that does not charge commissions on ETF purchases.

This week’s action supports the view that stocks could be 8% to 10% higher later in the year, so stocks should still be a part of your portfolio.

For those who wish to take a lazier approach to the stock market check out the “Armchair Traders Membership”.

Further Articles Relating to the Week Ahead

1. The Economy and Earnings in the Week Ahead – August 06, 2012

2. The Past Week Stock Market Results – August 06, 2012

3. The Major ETFs in the Week Ahead – August 06, 2012


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