The Week Ahead in the Stock Market

The Week Ahead in the Stock Market
August 27, 2012

Week Ahead: “The streak has been broken, but the trend hasn’t!”

Wall Street: Bernanke Under Pressure -- But Will He Say Anything?

The Stock Market and the Wild Ride for the S & P after Jackson Hole!

by Ian Harvey

August 27, 2012

A six-week string of gains in the Standard & Poor's 500 Index (SPX) ended on Friday amid shifting expectations for central bank stimulus. The week ahead could bring clarity on that issue, and that could determine whether the recent rally that took the index to four-year highs will persist.

The streak has been broken, but the trend hasn’t, therefore the next major move on the S&P will probably push the stock market S&P500 up towards 1,450 or 1,500. With small- and mid-cap stocks at near their all-time highs, and if they break those highs, this will prompt the market to move much higher.

Still, the market could be in for a bumpy ride in the week ahead before Friday's meeting of central bankers in Jackson Hole, Wyoming. Investors are looking for clues on whether Federal Reserve Chairman Ben Bernanke will announce a third round of quantitative easing.

Bets on aggressive action to increase growth have spurred most of the market's recent gains, meaning any disappointment could stop the rally in its tracks. The CBOE Market Volatility Index (VIX), a measure of investor anxiety, jumped almost 13 percent last week.

However, Fed Chairman Ben Bernanke’s speech in Jackson Hole is long on anticipation but will probably come up short on news.

The Fed chairman speaks at 10 a.m. ET Friday at the St. Louis Fed’s annual symposium in Wyoming, and traders are hoping for some new insight into what the Federal Reserve is thinking, including whether and when the Fed might take further easing steps. However, economists and Fed watchers don’t expect Bernanke to say much new, as the Fed continues to weigh incoming economic data ahead of its Sept. 12 meeting.

Also, volume may actually be weaker in the week ahead, in spite of the Federal Reserve retreat in Jackson Hole, Wyo., due to the fact that it's the week before the Labor Day weekend, and many investors will head to the beach.

The Past Week
Stocks rallied to close near session highs Friday after Bernanke reiterated that there is further room for the central bank to act and following reports the ECB is considering setting yield band targets in a new bond- buying program.

Still, all three major indexes failed to log gains for the past week, with the Dow and S&P 500 snapping a six-week winning streak.

Early Friday, the S&P 500 briefly fell below the 1,400 level following cautious comments from German Chancellor Angela Merkel about Greece staying in the euro zone.

German Chancellor Angela Merkel said the debt-ridden nation must stick to its commitments to stay in the euro area and did not commit to granting more time for Greece to complete the required reforms to receive bailout loans.

It was the first time in two weeks that the benchmark S&P 500 had dipped below 1,400.

Shortly after this weak open, the market popped as traders reacted to a letter from Bernanke, obtained by the Wall Street Journal, who said there is "scope for further action" by the Fed to ease financial conditions and support the economy. The letter was in response to questions from Rep. Darrell Issa.

The Chairman's comments echoed remarks from the Fed's latest meeting minutes from earlier in the past week.

The market was in a good mood Friday, based on the Fed’s statements and Bernanke’s being very consistent— it seems that he’s going to do whatever it takes and will be ready to make a move possibly as early as September.

Growing doubts over whether the Fed will introduce further stimulus measures put a damper on equities in the previous sessions in the past week.

Around the same time, equities were also boosted after a report ECB is considering setting yield band targets under a new bond-buying program that could help contain borrowing costs for Greece, Spain and other euro zone countries.

• The Dow Jones Industrial Average (DJI) erased 0.88 percent for the week, to close at 13,157.97.
The Dow's gain was its largest since Aug. 3, when it jumped 217 points.
The Dow ended the week less than 1% below its 2012 closing high of 13,279, set on May 1.

• The Standard & Poor's 500 Index (SPX) lost 0.50 percent, to end at 1,411.13.
The gains for the S&P 500 were their best since Aug. 16.
The S&P 500 is about 0.5% below its 2012 closing high of 1,419.04, set on April 2.

• The Nasdaq Composite Index (COMP) slipped 0.22 percent, to finish at 3,069.79.
The gains for the S&P 500 and Nasdaq were their best since Aug. 16.
The Nasdaq is 1.7% under its 2012 high of 3,122.57, set on March 26. • The Nasdaq-100 Index (NDX), which tracks the largest Nasdaq stocks, gained 16 points to 2,778.
The gain came despite Apple (AAPL), the largest influence on the index. The stock saw a gain of nearly $7 Friday morning slip to 59 cents at $663.22

However, the picture for the month is much better. The Dow is up 1.2%, while the S&P 500 has gained 2.4% and the Nasdaq up 4.5%. For the year, the Dow is up 7.7%. The S&P 500 is sporting a 12.3% gain, with the Nasdaq up 17.9%.

Most key S&P sectors finished higher, led by telecoms and consumer staples, while materials ended in the red.

The Markets Ending August 24, 2012

The CBOE Market Volatility Index (VIX), widely considered the best gauge of fear in the market, ended its four-day win streak Friday, and fell 4.9% to close at its intraday low. However, the market's fear gauge notched a weekly return of more than 12.8%.

Trading Volume

Trading volume was extremely light for the past week due to the summer holiday season and ahead of the Fed's symposium at Jackson Hole, Wyoming, where Bernanke and ECB President Mario Draghi are expected to speak.

Volume, on Friday, was the second lowest for a full day this year, with 4.6 billion shares trading on the New York Stock Exchange, the Nasdaq and the Amex. The year-to-date average is 6.6 billion.

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

The Major ETFs in the Past Week

Markets lost ground in the past week, but managed to claw back some of the losses on Friday, August 24.

While the week was still down overall, the index Exchange-Traded Funds (ETFs) remain very close to 52-week highs and two of the ETFs actually made new 52-week highs this week. That is a positive sign, but as mentioned in prior market summaries, this is a critical juncture for stocks. Declining volume warns the rally may be running out of steam, but price - the ultimate indicator - continues to move higher. Using another indicator, the true strength index (TSI), you are able to isolate potential turning points quite early, and keep yourself in the trend if the price continues to rally.

**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%
SLV Nov 30.00 Calls	114%

The Week Ahead
Quantitative Easing

Quantitative Easing (QE) encourages investors to move into riskier assets and has helped support the stock market. The Fed currently is conducting ”Operation Twist”, a program under which it buys longer-dated Treasurys and sells an equal amount at the short end. Unlike QE, twist does not expand the Fed’s balance sheet.

The market’s sensitivity to possible Fed action was seen Friday when a story in the Wall Street Journal during the trading day, quoted part of Bernanke’s written comment to Rep. Darrell Issa (R-Calif.). Bernanke made clear, as he has in the past, that the door is open for more QE if needed and that the Fed will weigh the costs against the benefits.

Bernanke also defended the Fed’s actions in the letter to Issa, while pointing out that politicians need to take fiscal actions. More of that may be heard in his speech Friday, and more criticism of the Fed may be heard from the Republican convention. Romney has said he does not see a need for more Fed easing, and that it will not grow the economy.

The Fed in the Week Ahead

Bernanke’s speech follows weeks of speculation about whether the Fed will carry out another round of quantitative easing, or asset purchases. Risk assets got a temporary boost in the previous week when the Fed’s minutes from its Aug. 1 meeting showed that members were predisposed to more easing, but that meeting was held before a series of economic reports came in better than expected. St. Louis Fed President James Bullard pointed that out this past week, and he also said the market’s expectations for more QE have been too high this summer.

The expectation is that Bernanke will not say anything a whole lot different. He’s going to reiterate that there’s scope for more easing and he’s pretty much told us that asset purchases and changes in the rate guidance are on the path ahead of us.

There is a 70 percent chance that the Fed will extend its rate guidance at the September meeting. The Fed is expected to say it will keep interest rates very low into mid-2015, from its current end of 2014 time frame.

Fiscal Cliff Influence on QE3 Decision

The Fed will have a better sense of what is needed to be done to prevent an economic cataclysm if (Congress) don’t extend the tax cuts which would result in a recession in 2013. It would be expected that if they don’t extend the tax cuts the Fed will take very aggressive action.

The expiration of tax cuts is one part of the ”fiscal cliff” that will hit the economy Jan. 1 if Congress doesn’t move to extend tax cuts or make budget decisions. Congress is not expected to take any action on taxes or the automatic spending cuts, agreed as part of the debt ceiling compromise, until after the election.

ECB Influence on QE3 Decision

Some economists say the Fed may also want to keep its powder dry until it sees how events unfold in Europe next month. On Sept. 6, the 'European Central Bank - ECB' meets, and the market is looking to see more detail on how Europe’s bailout funds will function. Also, a German court ruling on the legality of the ’European Stability Mechanism – ESM’, on Sept. 12, which is the first day of the Fed’s two-day September meeting.

ECB President Mario Draghi will also participate in a panel at the Jackson Hole symposium on Saturday morning.

The market has been so strong lately that there's the idea Bernanke could pull back from QE3 as a result of that – which really means that the market is able to stand on its own two feet.

In the recent six-week winning streak, the S&P's longest since January 2011, the index climbed 4.7 percent. That could indicate QE3 has already been priced into shares.

Since the stock market has priced in a QE3 scenario, it is doubtful that we will see a major move if something is announced. However, if the status quo persists, which is what most analysts and strategists are expecting, that could be a big disappointment for the advancement of the stock market.

Daily trading volume, which has been among the lowest of the year recently, is expected to remain muted ahead of the meeting. Low volume could amplify stock swings in both directions, and there is little other news to otherwise drive trading.

Gains in the Stock Market at Risk in the Week Ahead

The risks to those gains that have been made are considerable, if only because the gains since June is so large, and many analysts see the risks of a market decline rising due to:-

• There's worry that Greece's and Spain's problems won't get neatly solved. The European Central Bank meets Sept. 6 but probably won't announce a program to buy up debt of eurozone nations.

• Details of the bond-buying plan have been sketchy and not likely to be fleshed out until the Sept. 6 meeting in Brussels. Even then, the program might get blown up if a German court says Germany can't participate in the program. A ruling is expected on Sept. 12.

• Despite all the speculation, the Federal Reserve may disappoint and not do a new round of so-called quantitative easing -- the buying of Treasury securities to ensure more cash in the economy. While Bernanke thinks the Fed can do more, there are divisions in the central bank that could derail any stimulus plans.

• A big signal of where the Fed is headed will come in a week when Bernanke speaks on Aug. 31 at the Fed's annual retreat in Jackson Hole, Wyo. A day later, ECB President Mario Draghi also speaks and may get more attention than Bernanke.

• And what promises to be a bitterly fought U.S. election campaign will be in full swing.

The Major ETFs in the Week Ahead

The ETFs pulled off their highs this past week, with two of the ETFs managing to create 52-week highs. The TSI is useful in trend confirmation, and also for isolating potential reversals in the trend quite early. Unfortunately, no indicator is accurate all of the time.

Currently, the price trend remains higher, and that can't be ignored. But with multiple divergences and sluggish volume, there is cause for caution. Use stops and don't get stuck on only one side of the market. At these important levels, there will either be confirmation that the market is indeed going higher, or the warnings signs will be become reality and the price drop will come.

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

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The Key Events in the Week Ahead
There is a busy calendar of economic news in the week ahead, but the Bernanke speech trumps all else. The Fed beige book on the economy, second quarter GDP revisions and consumer confidence are among the reports expected. Retailers will release chain store sales Thursday, giving an early look at the back-to-school shopping season.

The Republican convention will also be underway, and Wall Street will be watching to see how well the week goes for GOP presidential candidate Mitt Romney, favored over President Obama by many in the markets but slightly behind Obama in the polls.

Earnings in the Week Ahead

Earnings season is winding down, with only five S&P 500 components scheduled to report in the week ahead, including Tiffany & Co (TIF), Joy Global Inc (JOY) and H.J. Heinz (HNZ).

With 98 percent of S&P 500 companies having reported results, 67 percent have topped expectations by an average surprise factor of 4.3 percent, according to Thomson Reuters data. The 67 percent beat rate is higher than the long-term average of 62 percent. However, there have been some notable disappointments lately, including Hewlett-Packard Co (HPQ).

Traders in the energy markets will also be watching the progress of Isaac in the week ahead, as the storm moves into the Gulf of Mexico, with oil and gas drilling rigs in its path.

Investors will also be sorting out the aftermath of the late Friday jury verdict, which gave Apple [AAPL 663.222 0.592 (+0.09%) ] a $1 billion victory over Samsung. Samsung was found to have infringed on Apple patents on phones and tablets. Apple’s stock gained more than 1.7 percent in after-hours trading, reaching a new high.

Economy in the Week Ahead

Economic indicators for the week ahead includes August reads on consumer confidence and sentiment, the latest read on Chicago PMI and July pending home sales. The Fed's Beige Book, a collection of anecdotal information on current economic conditions, will also be released.

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

Conclusion

Bernanke will not front run the Fed meeting or speak for the committee, and Fed members will want to get a look at the August employment report and other data before making a decision on easing.

One possible scenario from the meeting will be to see the Fed act on rates guidance in September. The Fed will probably then extend the guidance on rates to 2015, and a possible limited QE — something in the range of $250 billion that will extend into January.

Following the Jackson Hole meeting, there will be a market holiday on September 3 for Labor Day. Trading is expected to pick up after that, with a major catalyst seen on September 6, when the European Central Bank has its next meeting.

The ECB recently pledged to "do whatever it takes" to address the euro zone's debt crisis, comments that contributed to recent positive sentiment.

Further Articles Relating to the Week Ahead

1. The Economy and Earnings in the Week Ahead – August 27, 2012

2. The Past Week Stock Market Results – August 27, 2012

3. The Major ETFs in the Week Ahead – August 27, 2012

4. Stock Market Monday and Underperformance, August 27, 2012

5. Hedge Fund Managers Becoming More Bullish, August 27, 2012

6. New Range Options from CBOE , August 27, 2012

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