The Week Ahead in the Stock Market

The Week Ahead in the Stock Market November 19, 2012

Week Ahead: Housing Data To Take Center Stage!

Stock Market: “Fiscal Cliff” and War Concerns!

Wall Street: Buying Opportunities Abound!

by Ian Harvey

November 17

Stocks mostly sold off in the past week, but closed higher Friday after Congressional leaders made encouraging comments about negotiations on the fiscal cliff.

And markets could see another volatile week as investors remain anxious about the ”fiscal cliff” and watch escalating tensions in the Middle East.

Fed Chairman Ben Bernanke speaks Tuesday. There is housing data Monday and Tuesday, and jobless claims and consumer sentiment Wednesday, ahead of the Thanksgiving holiday Thursday.

The week ends with a shortened trading day on Black Friday, the traditional start to the holiday shopping season.

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The Past Week

The first round of talks aimed at avoiding the "fiscal cliff" caused a temporary rise in equities on Friday, signaling Wall Street's recent declines could be a buying opportunity. The gains were small and sentiment remains weak, but it suggests hope for market bulls.

Though shares ended moderately higher on Friday, it was not enough to offset losses for the week.

The Dow Jones Industrial Average (DJI) was off 1.8 percent at 12,588 for the week, and the Standard & Poor's 500 Index (SPX) was down 1.5 percent to 1359.
The Markets Ending November 16, 2012

The S&P 500 is down more than 5 percent in the seven sessions that followed President Barack Obama's re-election. Uncertainty arose as attention turned to Washington's task of dealing with mandated tax hikes and spending cuts that could take the U.S. economy back into recession.

Some see the market's move as an overreaction to hyperbolic headlines about policy gridlock in Washington, believing stocks may start to rebound in what should be a quiet few days ahead of the Thanksgiving holiday This coming Thursday.

Not long ago the S&P was on target for its second-best year in the last 10, riding a 17 percent advance in 2012. That's been halved to about 8 percent, which isn't bad but disappointing compared with just a month ago.

Investors have been selling the year's winners. Apple (AAPL) is down 25 percent from its peak above $700. General Electric (GE) is down 14 percent; Google (GOOG) has lost 16 percent. Overall, the stocks that make up the top 10 percent of performers in the month prior to Election Day have been the worst performers since, according to Bespoke Investment Group of Harrison, New York.

The recent selling took the S&P 500's relative strength index - a technical measure of internal strength - below 30 this past week, indicating the benchmark is oversold and due for a rebound.

The RSI in four of the 10 S&P sectors - utilities, telecoms, consumer staples and technology - is below 30 and the highest RSI reading, for the consumer discretionary sector, is below 40, suggesting a bounce is in store.

Oil gained nearly one percent Friday, as Israel began mobilizing tens of thousands of soldiers and increased its air campaign on the Gaza.

Meanwhile, militants there sent rockets deeper into Israel, while Egypt’s new government voiced its support for Hamas, raising concerns of a broader conflict. ”Brent Crude”, the international benchmark, rose to $108.95 a barrel.

Treasury yields fell as investors sought safety in bonds. The 10-year yield was 1.57 percent Friday, its lowest closing yield since Aug. 31.

Economic data, including a very negative Philadelphia Fed survey, weekly jobless claims and industrial production, all took a hit in the past week from Super Storm Sandy’s impact on the east coast.

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The Week Ahead

Volatility Concerns

Volatility is expected to rise through the end of November and to spike in late December if no agreement on the fiscal cliff is reached in Congress. Alongside comes opportunity for those with high risk tolerance.

In 2011, the VIX averaged 19.2 in July and 35 in August. So far this month the average is 17.8 and it is expected to spike if negotiations on the cliff drag into late next month.

Bearish sentiment spiked to 48.8 percent in the past week to its highest level since August, 2011, according to the latest AAII Sentiment survey.

According to AAII bullish sentiment, expectations that the stock market will rise over the next six months, fell to 28.8 percent. When sentiment turns so negative, it often signals the approach of a bottom.

Earnings in the Week Ahead

There has been a total of 70 companies reporting this holiday-shortened week, including 13 from the S&P 500. By the end of the week ahead, there will be results from 489 of the S&P 500 companies or 98% of the index’s total membership.

As of Friday, November 16th, there was a third quarter earnings from 476 companies in the S&P 500 or 95.2% of the index’s total membership.

This has been the weakest quarterly earnings season since the current earnings cycle got underway in 2009. Not only were the actual results quite weak, but the overall tone of management guidance was also quite downbeat. As a result, expectations for the fourth quarter have steadily come down since the start of the third quarter reporting season.

With respect to a third quarter scorecard for the companies that have already reported results, total earnings are down 4.7% from the same period last year and only 62.6% of the companies came out with positive earnings surprises. Total revenues are down 9.9%, with only 38.7% of the companies beating revenue expectations.

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The Economy in the Week Ahead

Housing data will take center stage in the week ahead as financial markets take a day off on Thursday for the Thanksgiving holiday.

A report on existing-home sales is due Monday. Like many housing statistics, existing-home sales data, which measure closings of previously constructed homes, condos and co-ops, have bounced around in recent months but the trajectory seems to be moving slightly higher in the long run.

Also Monday, the National Association of Home Builders will release its monthly housing market index, which is compiled through a survey of NAHB member who are asked their views on the overall economy and housing environment.

On Tuesday data are due related to housing starts, which gauge the level of construction of new homes.

All three of these data releases should be watched closely by members of the Federal Reserve, which tied its fiscal policy directly to the housing market in September by introducing a http://www.stock-options-made-easy.com/quantitative-easing.html"target="_blank"">third round of stimulus (QE3) calling for the purchase each month of $40 billion in mortgage-backed securities.

Housing affects myriad industries, from lending to retail to construction, and a healthy housing market would ostensibly add a much-needed jolt to the U.S. labor market by creating jobs across that array of sectors.

With that in mind, Fed Chairman Ben Bernanke will be speaking on Tuesday in New York at the New York Economic Club. He’ll be taking questions for 20 minutes after the speech and housing and labor markets are sure to be prime subjects.

The University of Michigan’s consumer sentiment index is out Wednesday and economists believe the survey should reflect a slight shift toward optimism due to the improving labor numbers in recent months.

The overall statistics are blurry but the headline unemployment rate has fallen to its lowest level in nearly four years. Consumer sentiment is important because consumer spending accounts for 70% of the U.S. economy.

U.S. stock and bond markets are closed on Thursday and stock markets close early on Friday.

Conclusion

Despite the rally Friday, the market could still see another sharp break to the downside in the week ahead before we get a strong oversold rally. From a technical perspective, we need to see more than a one- or two-day rally to bring us closer to the formation of a market bottom.

Clearly the market, though oversold, is still vulnerable, so a cautious approach is still warranted. If we get another wave of selling in the week ahead like we did last year, it should set the stage for a rally that will make the bears nervous.

The financial and consumer discretionary sectors are currently looking the best.

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