Week Ahead: Housing Data To Take Center Stage!
Stock Market: “Fiscal Cliff” and War Concerns!
Wall Street: Buying Opportunities Abound!
by Ian Harvey
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.
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.
The Week Ahead
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.
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.