The Week Ahead in the Stock Market
September 03, 2012
Week Ahead: Big Week With Jobs Report, Europe!
Wall Street: September Struggle!
The Stock Market: End of summer to bring volume; all eyes on ECB!
by Ian Harvey
September 01, 2012
Marking the end of the summer doldrums, Wall Street is likely to kick off September with heavy trading volume while it hopes that the European Central Bank will hint at further stimulus measures to boost the global economy.
Stocks start the month of September with a boost from the Fed, and now it’s the European Central Bank’s turn to act.
The Labor Day-shortened week is loaded with important U.S. economic news, including the August employment report Friday.
But perhaps more critical to markets will be the outcome of Thursday’s meeting of Europe’s central bankers, after European Central Bank president Mario Draghi kept markets aloft this summer with his promise that they would do all they can to defend the euro.
September historically is the worst month for stocks with more negative years than positive, and traders have been expecting to see a heightened level of volatility along with selling, after the relatively quiet August.
Investors expect the tight presidential race to become more of factor, and a number of big events facing Europe this month to rock markets, as fiscal and monetary policy officials struggle to contain the sovereign crisis.
But the promise of more central bank stimulus could be the counterbalance.
Stocks finished higher in volatile trading on the final day of the month, after Fed Chairman Bernanke reiterated his promise that the central bank stands ready to act and following some encouraging European headlines.
All three major averages also logged their first August gains since 2009.
Fed Chairman Ben Bernanke gave stocks a lift Friday when he left the door open for more quantitative easing in his annual speech at the Fed’s Jackson Hole symposium.
In a Jackson Hole, Wyo., speech, the Fed chairman said the central bank would act because the economy has been slow to recover from the Great Recession of 2008-09. And, he added, "it is important to achieve further progress, particularly in the labor market." Bernanke's vow cheered Wall Street, which was in a buoyant mood anyway because of hopes that leaders in Europe are closing in on their own plan to stabilize financial markets on the continent.
That helped support a rally that had started with news that the Spanish government approved banking reform as the debt-ridden nation looks to accelerate the cleanup of the troubled sector.
Draghi said a month ago that the ECB would buy Spanish and Italian debt and the markets are anticipating more details around that plan Thursday.
European shares finished higher, reversing a three-day decline, amid optimism the ECB will announce a new program of bond buying next week.
With the stock markets solid rally on Friday the stocks ended August with their seventh gain in eight months and 10th gain in the last 11 months. However, the averages did fall for the second straight week.
• The Dow Jones Industrial Average (DJI) was down 67 points at 13,090. The Dow was up 0.6 percent for the month of August, and is now up 5.6 percent in the past three months.
• The Standard & Poor's 500 Index (SPX) regained the 1400 level Friday, but was off 0.3 percent for the week at 1406. It is up nearly 2 percent for the month and 7.4 percent in the last three months, for a year-to-date gain of 11.9 percent.
• The Nasdaq Composite Index (COMP) was down 0.1% for the week but rose 4.3 percent in August to 3066, carried by a nearly 5 percent gain in tech stocks, the market’s best performers. For the year the Nasdaq up 17.7%.
The CBOE Market Volatility Index (VIX), widely considered the best gauge of fear in the market, ended its four-session rise, and inched 0.4 point, or 2%, lower on Friday. On the week, the market's fear gauge surged 15.1%, but buckled 7.7% in August.
**For a more in-depth look at the past week…..CLICK HERE…..**
The Major ETFs in the Past Week
Stock investors found enough positives in the long-awaited comments from Fed Chairman Ben Bernanke last Friday to push stocks higher, as the major averages recouped most of the week’s losses.
For the month, the major averages were higher with the (Spyder Trust (ARCA: SPY) up 2.6%, the SPDR Diamond Trust (ARCA: DIA) up 1.1%, the PowerShares QQQ Trust (Nasdaq: QQQ) up 5.5%, and the iShares Russell 2000 Index (ARCA: IWM) gaining 5.3%.
However, it was a relatively flat for the past week in the stock market, as the indexes paused below recent highs. Three of the Exchange-Traded Funds (ETFs) recently made fresh 52-week highs, but have pulled off those levels. In order for the uptrend to continue, those levels will need to be exceeded. If they are not, the market bears may interpret the recent moves higher as a false breakout, and commence selling.
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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% | JCP Nov 25.00 Calls | 67% | ||||
Most are aware that September is the weakest month for stock prices, but in election years the winners and losers are about even. Given the recent low level of volatility, it is expected that September will be a more volatile month.
This is made more likely by the series of important dates in September that are likely to bring the Eurozone crisis back to the forefront of the news. Also present is the next Fed meeting on September 13, and any action will be heavily influenced by this week’s monthly jobs report.
Overseas Influence on the Stock Market in the Week Ahead
Investors are now awaiting comments from European Central Bank President Mario Draghi after the bank's meeting on Thursday. Many investors will look to the ECB meeting to glean strong clues on what to expect from the Federal Open Market Committee's own policy meeting the following week on Sept 12-13.
Between now and mid-September, investors will be focusing on the ECB, though the next FOMC meeting is also around the time that the German court meets, so there will be news on both those fronts. Any news from Europe will drive markets more than domestic news, with the exception of the payroll report.
But there was further uncertainty within the ECB over President Mario Draghi's bond-buying plan on Friday after German central bank chief Jens Weidmann reportedly threatened to resign, piling pressure on Draghi to mollify opposition.
However, there are growing hopes that Draghi has overcome Bundesbank opposition to announce a bond buying plan at next Thursday's ECB meeting.
The Fed Influence in the Week Ahead
The Fed's Options
1. Analysts say the Federal Open Market Committee, the Fed's policy-making body, may announce a new round of so-called quantitative easing. Technically, this means purchases of Treasury securities and mortgage-backed securities to reduce borrowing costs and spur investment.
2. Others expect instead the Fed will announce its intent to keep its benchmark interest rate near zero beyond its current forecast of late 2014.
Bernanke offered a fairly robust defense of the Fed's quantitative easing programs. The programs helped boost economic output by two percentage points, he said, and boosted employment by some 2 million jobs more than what might have occurred in the absence of any moves.
He said the economy faces three big head winds:
• A still weak housing market. In past recessions, housing has led the economy out of recession.
• Fiscal policies. Federal and state spending is falling on an inflation-adjusted basis and is a drag on the overall economy.
• Credit market stresses -- Europe in particular.
The Effect of the Jobs Report in the Week Ahead
In a holiday shortened week, with U.S. markets closed on Monday for the Labor Day holiday, Friday's employment report will be the final major economic report to impact the results of the upcoming FOMC meeting.
Unless there is a sharp weakening in the labor markets, something the data does not indicate, expect the Fed to sit on the sidelines at the ready to act only if things get really bad.
A Reuters survey forecast nonfarm payrolls rose by 125,000 for the month of August.
In July, nonfarm payrolls added 163,000 workers, breaking three months of job gains below 100,000 and offering hope for the ailing economy. At the same time, a rise in the unemployment rate to 8.3 percent kept alive the possibility that the Federal Reserve could provide additional stimulus to the economy.
The Beige Book prepared for the September 12-13 meeting of the Federal Open Market Committee (FOMC) offered little evidence of a material improvement in broad labor market conditions through Aug 20.
The trend in jobless claims has largely moved sideways over the summer. The forecast is that total nonfarm payrolls increased by 110,000 in August, with the unemployment rate holding steady at 8.3 percent.
Insight to Where the Stock Market is Headed in the Week Ahead
Stock investors should keep a close eye on interest rates in September for insight on where stocks are likely to be headed. Interest rates rose significantly from the latter part of July, as the yield on the ten-year T-Note rose from 1.39% to a high of 1.86%. The long-term downtrend (line a) was just reached.
Rates have since turned lower, and the weekly yield chart shows no strong evidence yet that yields have bottomed. As for longer term rates, the chart of the iShares Barclays 20+ Yr Treasury Bond ETF (TLT) does look more interesting.
The weekly chart shows that TLT dropped from a high of $132.21 to a low of $120.52, which was a fairly normal retest of the breakout level (line b). The on-balance volume (OBV) reflects a less bullish outlook, as it failed to confirm the new highs (line d), then dropped below its WMA.
The long-term uptrend in the OBV (line e) has been tested, and a strong move above its WMA would be consistent with a move to the upside and lower long-term yields. This is likely to correspond with further weakness in the stock market. On the other hand, if the OBV drops below the recent lows, it would paint a more positive outlook for stocks.
The Major ETFs in the Week Ahead
Despite the consolidation below recent highs, the index ETFs remain in uptrends. This is a pivotal area for stocks, as moves higher will confirm there is enough buying pressure to push the stocks well above the highs from earlier in the year. On the other hand, if buying does not pick up, traders will increasingly realize that the moves to new highs were false, and selling will likely enter the market.
There are a few sectors that are worth a consideration when buying. These include the retail sector, which has a strong seasonal bias into year-end, and some of the beaten-down large-cap stocks that have attractive yields.
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U.S. economic data is an important key to the stock market stimulus in the week ahead as it has been setting up a pattern of beating economist’s reduced expectations. Analysts see that as a positive catalyst for stocks.
The all-important U.S. non-farm payrolls report is due on Friday. With Bernanke citing poor improvement in the labor market as part of the reason the U.S. economy faces "daunting" challenges, Friday's data could be a game changer, according to market participants.
Economists expect to see about 120,000 nonfarm payrolls were added in August, a still sluggish pace of job growth.
The jobs report is also an important last piece of data for the Fed ahead of its Sept. 12 and 13 meeting. Fed watchers see a chance the Fed could decide on more easing at that meeting, though many expect to see an announcement later in the fall.
There are also car sales data Tuesday and the ISM manufacturing survey Thursday.
In the euro zone, following the European Central Bank policy meeting on September 6, a German Constitutional Court will rule on the euro zone's permanent bailout fund on September 12, which may affect the ECB's bond-buying plans.
The 'European Central Bank - ECB' meets on September 6, ahead of an important German court ruling on whether the ’European Stability Mechanism – ESM’, Europe’s new bailout fund, is constitutional. That ruling is Sept. 12 so the ECB may not do much ahead of the ruling though some economists say it could cut the refi rate by a quarter point and talk about bond purchases.
(note: refi is short for refinance)
Economy in the Week Ahead
For the next two weeks expect volatility within the stock market as the economy undertakes some critical reports.
The week ahead is all about the lead-up to the European Central Bank's interest rate meeting on Thursday and the August jobs and unemployment report in the United States on Friday.
The week following includes the Fed's meeting on Sept. 12-13 and the German court decision on the legality of its participation in European debt solution plans, also on Sept. 12.
Also on tap in the week ahead are August car and truck sales due Tuesday; payroll company ADP’s employment report on Thursday, which usually provides a fairly accurate preview for the government’s report later in the week, and data from the manufacturing sector on Tuesday with the release of the Institute of Supply Management Index, which surveys activity among 300 manufacturers.
Conclusion
At present, there seems to be two scenarios open to us: a modest correction if ECB leaders disappoint investors, or a surprising assault on SPX 1,500 driven by more central bank support that spurs the shorts into covering.
Further Articles Relating to the Week Ahead
1. The Economy and Earnings in the Week Ahead – September 03, 2012
2. The Past Week Stock Market Results – September 03, 2012
3. The Major ETFs in the Week Ahead – September 03, 2012
4. A Surprise September Rally, August 31, 2012
5. Stock Market Bulls and the VIX Promoting Caution – September 03, 2012
6. Calibrating Stock Charts – September 03, 2012
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