The Week Ahead in the Stock Market
August 13, 2012
Week Ahead: A Continued Bull Market Rally!
Wall Street: Reasons to Stay in the Market!
The Stock Market and Technical Fundamentals!
by Ian Harvey
August 13, 2012
It is obvious from last week’s progress that we are in a bull market – and the mistake that many investors are making is paying too much attention to global risk, and not enough attention on fundamentals that are very resilient!
Stocks should continue to move higher in the week ahead, as the dog days of summer take hold and markets await central bank action in September.
The week ahead should also provide insight into the consumer, and the take on the economy, with earnings reports from major retailers, including Home Depot (HD) and Wal-Mart (WMT), as well as the July retail sales report. A few other important economic reports, such as industrial production and consumer and producer inflation data, punctuate a week that promises to be otherwise quiet.
The market is presenting a difficult dilemma, and strong convictions either way are elusive.
It seems to be an uncomfortable time for many investors, who are caught between missing a rally and getting blindsided by some nasty event that sends markets into a tailspin.
The rally, at this stage, is being driven by the hope of more "easy money" policies from central banks in the United States, Europe and China.
The strength of the economy for the past months has not been extremely strong, combined with the recent spate of cautious outlooks from corporate managers, therefore expectations for future months is very unpredictable -- investors ignore at their peril: "You can't fight the Fed."
“Central Banks” appear to be the key to conquering the fundamental problems, economical situations and the earnings forecasts going forward.
Both the European Central Bank and the Federal Reserve are due to meet during the first half of September. Investors are hoping the ECB will buy bonds of troubled European nations in a bid to ease the debt crisis.
The market was hit with some early selling Friday, but rallied sharply in the last hour, and all the major averages closed higher for the fourth week in a row.
The S&P 500 had its sixth higher close in a row, which has not happened in some time. Those that feared another repeat of last year’s late July plunge in stock prices are no longer voicing their gloomy forecasts.
As of Friday’s close, the Spyder Trust (SPY) was higher than it was at the end of April, so those who sold in May are either frustrated or confused. Even the mixed to slightly negative economic news has not dampened the stock market’s slow, steady climb.
Even the weaker than expected economic news that China’s exports grew at only a 1% rate from last year was interpreted by some as being bullish, as it will give the government more reason to stimulate their economy.
Investors are apparently banking on a fix from the Fed and/or the ECB, should the global economies weaken further, or if the Eurozone crisis heats up again.
The major averages are up at least 4% since July 26. But the rally's downside is that it comes in the middle of summer when most big money managers are on vacation. So trading volume has been quite light -- less than 500 million shares on the New York Stock Exchange on Friday.
• The Dow Jones Industrial Average (DJI) marked its fifth straight settlement atop 13,100, and ended with its best daily close since May 2. In the last hour of trading on Friday, the Dow tore through breakeven and notched a 42.8-point, or 0.3%, rise, to finish at 13,207.95.
For the week, the Dow gained 0.85 percent and for the year, it is up 8.1%.
H-P was the biggest weekly gainer, while AmEx (AXP) lagged.
• The Standard & Poor's 500 Index (SPX) enjoyed a sixth straight win and moved higher above the 1,400 level, to settle at 1,405.87.
The S&P 500 is up 1.1% for the week, and is up 12% for the year.
• The Nasdaq Composite Index (COMP) ended with a fractional gain on Friday, which pushed the index atop 3,020 for the first time since May 3.
The Nasdaq was up 1.8% for the week to settle at 3,020.86, and is up 18.7% for the year.
• The Nasdaq-100 Index (NDX), which tracks the largest Nasdaq stocks, was up 3 points to 2,723, to end the week up 1.8%.
Apple (AAPL +0.16%), the biggest influence on the index, was up 97 cents to $621.70 and ended the week up 1%.
The CBOE Market Volatility Index (VIX), widely considered the best gauge of fear in the market, declined 3.5% on Friday and drifted to its worst price since March 30, finishing below 15. The VIX dropped off 5.8% during the week.
The VIX peaked in May at over 28, and has been in a steady downtrend ever since. It hit the 16.5 level last week, not far below the March low of 15.5.
**For a more in-depth look at the past week…..CLICK HERE…..**
The Major ETFs in the Past Week
The stock market index Exchange-Traded Funds (ETFs) pushed slightly higher last week, for the most part, but some performed better than others. The last four days of the week was flat for the major index ETFs, with the price action confined to a small range.
Volume was also near the lowest levels seen in the last year. Close proximity to 52-week highs in three of the four index ETFs could attract buying to test those levels. Therefore, the trend currently remains up, but a break below key support levels would warn of a significant decline.
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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% | ||||
Stock Market Rallying Despite Technical Fundamentals
Due to the thinking of many investors that the fundamentals were weaker, which they are, the rally came as a surprise and caught many unprepared!
Many analysts and traders have been befuddled by the stealthy summer rally, coming even as earnings reports reveal weaker revenues and slowing earnings growth.
The market’s certainly showing signs of fatigue -- the market internals are not great --transports are not keeping up and volume is weak. However, the stock market has not collapsed – it hasn’t moved back -- the explanation appears to be the expectation of aggressive monetary policy.
Stocks have also been moving higher in the face of a litany of other worries, most particularly, the European debt crisis. While the sovereign debt drama is far from over, markets were reassured by a plan of action laid out by European Central Bank (ECB) President Mario Draghi, even though it lacks details and requires buy in. At the same time, the Federal Reserve has promised to take action if necessary, and traders are looking to its September meeting for a possible announcement of a new bond purchase program, or quantitative easing (QE).
But even as the central banks hold out the promise of more policy easing, worries about the economy, the U.S. elections and so-called ”fiscal cliff” are containing gains, and strategists say there’s not a compelling enough case to be made for the stock market either way – there is no “catalyst” to propel the stock market in any particular direction with determination!
While September is usually the worst month for the stock market, August is one of the most volatile and volatility could pick up before it’s over – and as we get closer to the election, around Labor Day, there’s going to be more and more focus on the fiscal cliff, more and more focus on the election. The fiscal cliff, as its known, is the dual expiration of tax cuts Dec. 31 and the automatic, dramatic hits to federal spending and programs starting Jan. 1 if Congress does not act.
It is a reasonable scenario to see stocks move back to the bottom of the channel that the stock market is in at present.
Reasons to Stay in the Market
Just as they spell out the concerns, strategists still see compelling reasons to stay in the market:
• There are investors who believe the prospect of Fed stimulus is creating a “sugar high,” helping to keep stocks aloft.
• The other position is the market is signaling gloom and doom is overdone, and when you assess this closely there will be very good value to be gained.
• The election and the fiscal cliffs are all things to be nervous about but the market still moves higher despite them. You can get a 2 percent dividend yield from the S&P or you can get 1.6 or 1.7 percent from the 10-year Treasury bond – which are one of the best ratios seen in a decade, plus with stocks you get some long term protection against inflation.
• The Citigroup G-10 economic surprise index, is starting to show a turn. The indicator, including a separate one for the U.S., has been turning higher. It is based on the difference between economists’ forecasts and actual economic data. Economists, for now, have become so gloomy in some cases that their view is worse than the actual data.The Citigroup Economic Surprise Indices are objective and quantitative measures of economic news. They are defined as weighted historical standard deviations of data surprises (actual releases vs Bloomberg survey median). A positive reading of the Economic Surprise Index suggests that economic releases have on balance beating consensus. The indices are calculated daily in a rolling three-month window. The weights of economic indicators are derived from relative high-frequency spot FX impacts of 1 standard deviation data surprises. The indices also employ a time decay function to replicate the limited memory of markets.
One example was the better-than-expected July jobs report, which showed 163,000 nonfarm payrolls compared to economists’ 100,000 consensus forecast. Plus, there’s been improvement in weekly jobless claims for the last two weeks, though it is too soon to declare stabilization in the data.
• However, investor expectations in the stock market maybe starting to actually turn, and finally close the gap, with what is actually happening to the stock market in the past few weeks -- the expectations index is on the rise. There’s still a big gap --stocks are still ahead of where the economic data is relative to expectations – and now the economic data has to play catch up, if these gains are going to be sustained.
• There has been an improvement in data, but specifically the improvement in housing, which has been a major drag on the economy for years. Plus the consumer has been successfully deleveraging -- it is likely that the fourth quarter might be a little bit better than expectations.
Definitely a “Bull Market Rally”
The S&P 500 is up 12 percent so far this year. Through July, it had its best first seven months since 2003 and its second- best seven-month run since 1998. That sounds like a bull market.
But there is clearly a disconnect between the way markets have performed and the high level of caution among many investors. That is mainly due to the perception that things have the potential to go horribly wrong - incredibly fast.
The danger for investors is that they focus too much on the potential risks, such as the break-up of the euro zone, and end up getting left on the sidelines when markets move higher as they have done since the start of June.
Cote believes that record high aggregate earnings for S&P 500 companies this year and signs of improvement in the labor market mean investors should be taking on more risk rather than fretting about the dangers stemming from Europe's debt crisis.
The Flight to Safety from Overseas
Any investors are cautious about what many are describing as early signs of stabilization in the U.S. economy after a soft patch earlier in the spring and summer.
The July nonfarm payrolls report, which showed U.S. employers had done the most hiring in five months, is not enough to convince many investors who want to see more confirmation before unwinding their defensive stance and getting more aggressive.
This cautious view leads investors to cut bond-equity allocation and lean more toward defensive areas of the stock market, such as consumer staples, healthcare and utilities, which helps explain an oddity of the market's rally since June.
Much of the money heading into U.S. equity markets over the last two months has been heading into defensive sectors, some of it in a flight to safety from overseas markets, especially Europe.
Of two classically defensive sectors - utilities and telecoms - the utilities sector is trading at a 24 percent premium to the S&P 500, compared with an average 5 percent discount over the last 10 years, while the telecom sector is trading at a 50 percent premium compared with the usual 5 percent, according to data cited by UBS Wealth Management.
Other strategists and investors see this as both a red flag highlighting the market's misgivings and a potential opportunity, should that differential start to narrow. Many employ a bit of a pro-cyclical tilt to their sector strategy within the U.S. stock market, largely because the market seems to be positioned so defensively – and are very highly priced.
Cyclical sectors are trading at a nearly two-decade valuation low relative to defensive sectors.
Of course, the market could also be setting itself up for a fall. Betting on what central bankers will and won't do is a risky game.
Investors who have been hopeful that policymakers will take stronger action through this entire sovereign debt crisis have been consistently disappointed -- the notion that someone with very deep pockets will come along and pay the bills without conditionality is likely to be a foolish one.
That is why many are still erring to the side of caution.
The Major ETFs in the Week Ahead
In the short-term the trend remains higher for these stock market index ETFs. For three out of four the 52-week high is within striking distance, and those pivotal levels could be tested and even exceeded. If the price approaches those levels watch for double tops or false breakouts.
Declining volume and indicator divergence warn of underlying weaknesses. The short-term trendline is also a valuable tool. As long as the price remains above trendline support the ETF is creating higher lows and the push higher can potentially continue. If that trendline support is broken though, it warns of a longer-term correction.
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The second-quarter earnings season comes to its unofficial end in the week ahead.
Cisco Systems (CSCO) and Home Depot (HD) report quarterly results, along with Wal-Mart Stores (WMT), Target (TGT) and farm equipment manufacturer Deere (DE).
A very full calendar in the week ahead will cover U.S. reports on homebuilding, shopping, manufacturing, inflation and consumer sentiment. The most important of these are likely to be reports that give early glimpses at August activity.
The data for the economy includes the Producer Price Index and Consumer Price Index reports on Tuesday and Wednesday, respectively.
A report on housing starts comes Thursday, along with the weekly updates on jobless claims and the Philadelphia Federal Reserve Bank's monthly report on manufacturing in its district.
Earnings in the Week Ahead
Several major U.S. retailers are due to report their latest quarterly results in the week ahead, including the world's biggest retailer, Wal-Mart Stores Inc. (WMT), as the sector contends with waning consumer confidence and global economic woes.
Meanwhile, monocrystalline sand producer Hi-Crush Partners LP is expected to go public next week, the only initial public offering scheduled for the week.
Retailers to Report Quarterly Earnings in the Week Ahead
Earnings from the retail sector will continue in the week ahead, with results due from Wal-Mart, Abercrombie & Fitch Co. (ANF), Aeropostale Inc. (ARO), Gap Inc. (GPS), Saks Inc. (SKS), Sears Holdings Corp. (SHLD) and Target Corp. (TGT), among others.
Analysts polled by Thomson Reuters expect retail giant Wal-Mart to post another quarter of stronger earnings. Same-store sales in the company's key U.S. stores have improved in the prior three quarters. However, Wal-Mart's recent gains come as its core lower-income customers are grappling with high gasoline prices and a still-soft jobs market that have moved many consumers to keep a tight watch on spending.
In the teen retail space, Abercrombie, normally an edgy bellwether for the group, earlier this month projected very soft second-quarter and full-year earnings, while smaller rival Aeropostale lowered its guidance for the quarter. Both companies were hurt by fashion misses, and inventory backup and slow sales led to heavy discounting at Abercombie.
Hi-Crush Partners to Begin Trading in the Week Ahead
Monocrystalline sand producer Hi-Crush Partners LP is expected to go public in the week ahead, with units scheduled to price Wednesday.
The company has said it expects to offer 11.3 million common units between $19 and $21 each in its IPO, which was first filed in July.
Hi-Crush's reserves consist of sand primarily from Wisconsin--where it is based--and other parts of the upper Midwest U.S. region. It said the demand for its sand, which is used as a "proppant" to enhance recovery rates of hydrocarbons, increased at an annual rate of 28% from 2006 to 2011.
The company plans to list its units on the New York Stock Exchange under the symbol HCLP.
Economy in the Week Ahead
A full calendar next week will cover U.S. reports on home-building, shopping, manufacturing, inflation and consumer sentiment. The most important of these are likely to be reports that give early glimpses at August activity.
Markets will examine factory reports from two regional Federal Reserve district banks on Wednesday and Thursday for timely readings of the economy. Because the surveys are done by various Fed banks to cover the concurrent month, financial markets pay attention to them for a timely read on the economy.
Economic Reports to Watch in the Week Ahead
• On Wednesday, the New York Fed will release its Empire State Survey. The median forecast of economists surveyed by Dow Jones Newswires is that the top-line business conditions index will weaken to 6.0 this month from 7.39 in July.
• Economists expect some improvement in the Philadelphia Fed manufacturing survey, scheduled for Thursday, but the expected reading will still indicate a sector in recession. The general business activity index is projected to rise to -4.5 this month, which would be the fourth consecutive reading below 0, indicating the area factories are contracting.
• A look at August housing conditions will be reported Wednesday with the release of the National Association of Home Builders' housing-market index. The July index jumped six points to 35, the best reading since March 2007. Economists expect some giveback in August, with an expected index of 34.
• A first look at consumer sentiment will be reported Friday with the consumer-sentiment index for early August. The index is expected to stand at 72.2, little changed from an end-July reading of 72.3.
• The two major July reports on inflation are also on tap in the week ahead, but neither is expected to show a flare-up in price pressures.
• The median forecast for the producer-price index calls for a 0.3% gain in the July top-line index and a 0.2% rise in the core index that excludes food and energy.
• The consumer-price index, out Wednesday, is expected to show a 0.2% gain in both the top-line and core indexes.
Conclusion for the Week Ahead
With record high aggregate earnings for S&P 500 companies this year and signs of improvement in the labor market means investors should be taking on more risk rather than fretting about the dangers stemming from Europe's debt crisis.
It is wise to continue to positioned defensively, as there are always potential bumps ahead for the stock market -- September is the worst performing month for the market for the last 25 years – but erring on the side of caution could also mean that profits could be left on the sidelines if the rally persists!
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 13, 2012
2. The Past Week Stock Market Results – August 13, 2012
3. The Major ETFs in the Week Ahead – August 13, 2012
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