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The Week Ahead in the Stock Market
November 28, 2011



The Week Ahead on Wall Street Looks to Recoup After Another down Week Tracking Europe!

Politics to Drive the Week - Stocks Set To Start December Back In Technical Purgatory -- the SPX in a Familiar Sideways Channel!

Don’t Be Late For the ‘January Effect’ & Cyber Monday -- big deals -- record sales!



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week ahead

It was an abbreviated holiday week on Wall Street, but the bears did a remarkable amount of damage over the course of three and a half trading days. By the time Friday's closing bell finally sounded, the major market indexes were sitting on steep losses of roughly 5% apiece -- U.S. investors mostly thankful that the week was a short one or losses could have been larger.

In fact, as traders prepare to run a three-day gauntlet of U.S. jobs data, stocks now find themselves lingering in an all-too-familiar trading range.

With the technical backdrop once again in question, the key support and resistance levels to watch as we head into the final month, and the week ahead, of a trying year for investors are highlighted.

The market has been riding a wave of uncertainty that largely stems from not knowing how far Europe’s debt crisis will spread and reacting on a seemingly minute-by-minute basis to headlines from overseas -- an environment where an erratic drum beat from Europe is setting the pace.

However, a good start to the holiday shopping season may provide a slight boost to sentiment in the week ahead, as investors wait for what's likely to be an improved, but still weak jobs report Friday.

Volume is likely to remain thin in the week ahead — People are interested in getting back in, but although the money is there, confidence is not ... that's one of the problems in regard to getting a sustainable rally.

As another round of news and bond auctions from Europe begins in the week ahead, traders will watch closely sovereign bond yields that have kept markets on edge.

Europe may also continue to unsettle markets, as European leaders look to build consensus around the idea of more integrated fiscal governance, ahead of yet another EU summit Dec. 9. Investors will also focus on the drama around Greece's next aid payment, needed to avoid default in the next several weeks.

The Past Week

Stocks in the past week were repeatedly stung by disappointment from the euro zone, making it the worst Thanksgiving week since the Great Depression. The markets also revealed a further crisis in a new wakeup call midweek, as European sovereign yields continued to rise --Germany's 6 billion euro debt auction stumbled, failing to bring enough buyers for its 10-year note and sending rates higher, a signal the strongest European economy is not immune to the stresses of the debt crisis. The German 10-year bund yield Friday was 31 basis points above the 10-year Treasury, the biggest premium since April 2009.

Major Market Performances

On Friday, the Dow Jones Industrial Average (DJIA -0.23%) fell 25.77 points, or 0.2%, to end at 11,231.78, leaving it down 4.8% for the week and 3% for the year, its third worst week of the year and its worst Thanksgiving week since 1932. Gains evaporated when news arrived that S&P had downgraded Belgium.

The S&P 500 Index (SPX -0.27%) lost 3.12 points, or 0.3%, to close at 1,158.67, off 4.7% from the prior Friday’s close and down 7.9% for 2011, the worst weekly performance in 10 weeks. It’s fallen for seven consecutive sessions.

Down 5.1% for the week and 8% for the year, the Nasdaq Composite (COMP -0.76%) declined by 18.57 points, or 0.8%, to close at 2,441.51.

The 10-year Treasury was yielding 1.955 percent, after a week that saw it on both sides of 2 percent.

European Debacle and it’s Cloying Effect on the Market

The euro, in the past week, lost more than 2 percent and slid below 1.33. It is understood that if Greece doesn't get funded, they'll default before year end -- Greece has 20 days of cash left.

Investors have worried about rising borrowing costs in many euro-zone nations, but Italy, the third-largest euro zone economy, has grabbed most of the focus. On Friday Rome paid a record 6.5 percent to borrow for six months and almost 8 percent to issue two-year zero coupon bonds.

Many market participants have said that the sharply differentiated risk -on and -off trades that the euro zone crisis has generated has seen equities being sold as an asset class, with little or no difference between strong and weak balance sheets and earnings reports. But a wedge has opened, which maybe helpful in the week ahead, at least from a global perspective, as data show stocks of companies with more exposure to Europe are under performing.

112811-stocks influenced by europe problems



The Week Ahead

Domestic Indicators and News - Data will be the Key in the Week Ahead!

Some of the most important U.S. economic monthly data will be released in the week ahead, but will it be enough to unlink the stock market's behavior and European yields?

New home sales and the S&P/Case-Shiller home prices index will start the week showing if the housing market continues on life support. Data on confidence among consumers, who flooded U.S. stores on Friday as the holiday shopping season started, will be released on Tuesday.

The Institute for Supply Management's manufacturing report is due, with investors not only looking at the U.S. number on Wednesday but also factory readings from Europe and China on Thursday.

By midweek labor data takes over with the private sector employment report from ADP and Challenger's job cuts report, followed Thursday by the weekly jobless claims numbers and topped by Friday's monthly non-farm payrolls report.

The November jobs report is expected to show payrolls increased by about 118,000, up from 80,000 in October, and an unchanged unemployment rate of 9 percent. Like other U.S. data, it should paint a picture of an economy that is improving slightly in the fourth quarter. There are also auto sales and the ISM manufacturing index in the week ahead, expected to show improvement and continued economic expansion.

November's chain-store sales, scheduled to be released Thursday, will likely show that the U.S. consumer continues to be willing to spend, despite the wobbling stock market, poor jobs picture and broader economic malaise. Thomson Reuters expects the retailers it follows to report an average sales increase of 3.2 percent, with discount stores, expected to be the best performers, gaining 4.4 percent. Next best should be apparel, up 2.7 percent, but teen apparel is expected to see a decline of 0.9 percent.

The November reports, from the week ahead, should also give a clue about the holiday season, since they include Black Friday, the day after Thanksgiving and the traditional start of the holiday shopping season.

It's one of the more intense Black Fridays but expect the weekend sales to be strong and see total holiday sales to be up 3.5 to 4 percent this year, better than many analysts are forecasting.

Some retailers got a jump on Black Friday by opening Thanksgiving night and offering online bargains all day Thursday.

Retailers can make as much as 40 percent of their annual sales during the holiday season.

Politics will Influence the Week Ahead

President Obama holds a summit with European Union leaders in Washington Monday on a wide range of topics, including, of course, the debt crisis. Expected to attend are European Council President Herman Van Rompuy and European Commission President Jose Manuel Barroso. Europe's response to the two-year sovereign debt crisis is expected to top the agenda.

Not many hopes are set either on Tuesday's meeting where euro-zone finance ministers are expected to agree on how to further strengthen the region's bailout fund.

Also in the week ahead, on Thursday, European Central Bank President Mario Draghi presents the bank's annual report to the European parliament.

As the latest reminder from markets to politicians that they are running out of time, Belgium's credit rating was downgraded by Standard & Poor's.

Catalysts to Re-start the Markets in the Week Ahead

As markets struggle with headwinds from Europe, and investors struggle with markets, some analysts see the U.S. as the best place to put money.

It would seem that the U.S. market is the best location for an investment at this point in time, and may become more prominent in the week ahead. The dollar is definitely a key issue here. Fundamentals in the U.S. are improving slowly but positively. Issues in emerging markets, like Brazil, which reported GDP growth of just 0.3 percent and China, which reported a contraction in manufacturing, both in the past week, is an example of locations not to be investing at present.

The week ahead depends on the following issues:-

1. What happens to underlying fundamentals?

Do earnings stay reasonably strong?

Does the economy continue to improve?

2. Can Washington actually show some leadership?

In the past week, the Congressional super committee failed to agree on any of $1.2 trillion in required deficit reductions, triggering a process where automatic cuts will now take place in 2013.

Citigroup analysts, in a note Friday, also pointed out the attractiveness of U.S. assets, but from the perspective of Europeans. They stated that European investors are the most interested in American stocks since 2000. One reason for this interest was the out-performance, but investors are also concerned about the euro and whether countries will leave the single currency.

History shows that a weak market itself could become a catalyst for a rebound. A study looking back 50 years shows that there is a meaningfully better-than-random probability of a market rebound over the next six months when share prices drop four, five or six percent over relatively compressed trading periods. The current level may be an attractive entry point "barring exogenous shocks."

Also, the negative sentiment toward the market is a signal for a potential turning point. There is very weak retail participation, with many of the institutions basically on hold – not investing. This is the sentiment that could start a bull market cycle.

A Technical Viewpoint – European Influence on Stocks in the Week Ahead

“After the S&P 500 Index (SPX - 1,215.65) was engulfed in a volatile range between 1,120 and 1,220 from August through mid-October, it is becoming clear that another range is possibly taking hold -- this time, between 1,220 and 1,280.....The fact that stocks did not react favorably to stronger-than-expected domestic economic data may be viewed as a concern to bulls in the week ahead, as the market could be saying the data will get worse. And the VIX not venturing back above 40 could be viewed as a complacent reaction to the events unfolding in Europe.....”
- The Week Ahead in the Stock Market, November 21, 2011

With negative headlines from Europe continuing to dictate the market's daily moves, and probably again in the week ahead, the technical backdrop seems to be deteriorating again, with the S&P 500 Index (SPX) declining during the typically bullish Thanksgiving week, and falling back into roughly the middle of the 1,120-1,220 range that engulfed stocks from August through mid-October. In this historically positive seasonal period for stocks, it's disturbing for the bulls that potential support in the 1,220-1,230 area was unable to hold, following a rejection at the various resistance levels discussed in prior weeks.

Longer-term Technical Levels

It may be more appropriate to look further than the week ahead, by observing the longer-term technical levels that could dictate support and resistance levels into year-end.

The various long-term chart areas that major indexes have recently failed at are as follows:

S&P 500 Index (SPX - 1,158.67): Rejection in the 1,215-1,250 area, with 1,215 the site of its 80-week moving average, 1,225 the site of its 80-month moving average, 1,233 double its 2009 low, and its year-to-date break-even at 1,257.

PowerShares QQQ Trust (QQQ - 52.88): Another failure at 60, which has served as resistance throughout 2011, and is half its all-time high.

S&P 400 MidCap Index (MID - 812.43): Rejection at 900, the site of both its 2007 peak and 2011 breakeven level.

Russell 2000 Index (RUT - 666.16): Failure at 700-750, with 700 being double the 2009 low and the site of its 80-month moving average, and 750 marking the peak prior to the 2010 "flash crash."

Critical longer-term support levels that are now in play -- which could set the stage for a volatile range-bound environment into year-end, if selling continues to predominate -- are as follows:

1. On the SPX, the round-number 1,100 area is a potential level of support, with the 40-month moving average situated at 1,105, and 1,102 representing a 38.2% Fibonacci retracement of the 2009 low and May 2011 high. The SPX's 40-month moving average has been a key trend line going back to 1982, acting as support on pullbacks, and signaling buying and selling opportunities on crossovers.

Monthly Chart of SPX since August 1979
With 40-Month Moving Average

SPX since 1979


2. The Nasdaq 100, as represented the Powershares QQQ ETF (Nasdaq: QQQ) ETF, gave an important clue last week when it cracked under a key support level ahead of its peers. QQQ has been acting as a leader since the markets began to rally a couple of years ago, and any behavior that deviates from its peers should be closely watched.

The next easily definable support area for QQQ lies near $50, and QQQ may be headed there in the week ahead for another test of key support. This region acted as support at the August and October lows, and is double the November 2008 and March 2009 troughs. Also, when the QQQ first began trading in March 1999, the 50 area was the opening level. Another key area to watch is the gap left above near $55. This level should act as resistance in the case that QQQ attempts to bounce soon, which would be preferable in the week ahead!

Monthly Chart of QQQ since March 1999

QQQ since 1999


3. Bulls would like to see the 800 level hold on the MID in the week ahead, as this is approximately double the 2009 low. If 800 is unable to contain additional pullbacks, the 80-month moving average is situated at 770. This trend line marked lows in 2002-2003 and the summer of 2010.

Monthly Chart of MID since August 1998
With 80-Month Moving Average

MID since 1998


4. Finally, the 585-600 area marks potential support for the RUT in the week ahead. The index's 160-month moving average is located at 585, and this trend line acted as support in 2001-2002. Meanwhile, 600 was a resistance level in 2000 and 2004, before acting as support in 2010 and October 2011.

Monthly Chart of RUT since September 1998
With 160-Month Moving Average

RUT since 1998



As I have been saying for weeks, the sentiment backdrop favors the bulls, with many fund managers underweight equities and short interest at levels last seen in early 2009. But in the absence of a positive catalyst -- and with the major equity indexes in the red for 2011, and long-term levels of support a healthy distance below current levels -- the contrarian implications of this pessimism are less meaningful. Therefore, be open to both long and short trades amid this uncertainty and questionable technical backdrop.

Cyber Monday Outlook -- Big Deals -- Record Sales

Cyber Monday is a marketing term for the Monday immediately following Black Friday, the Friday following Thanksgiving Day in the United States, created by companies to persuade people to shop online. Similar to Black Friday, (the unofficial start of the holiday season for offline businesses), online retailers will usually offer special promotions on this day -- also known as "Black Monday".

The term made its debut on November 28, 2005 in a Shop.org press release entitled "'Cyber Monday' Quickly Becoming One of the Biggest Online Shopping Days of the Year". According to the Shop.org/BizRate Research 2005 eHoliday Mood Study, "77 percent of online retailers said that their sales increased substantially last year on the Monday after Thanksgiving, a trend that is driving serious online discounts and promotions on Cyber Monday this year (2005)". In 2006, Shop.org announced that it launched the CyberMonday.com portal, a one-stop shop for Cyber Monday deals. In 2010, comScore reported that consumers spent $1028M online on Cyber Monday (excluding travel, 2009: $887M), the highest spending day of 2010.

Cyber Monday has become an international marketing term used by online retailers in Canada, the United Kingdom, Portugal, Germany, New Zealand and Chile.

Analysts are expecting an abundance of deals to bring in record online sales this year on Cyber Monday.

Andrew Lipsman, an industry analyst at data tracking firm ComScore, said sales for the one-day shopping event are projected to hit a record $1.2 billion this year.

Almost every major retailer plans on taking advantage of the hottest day to shop online. According to the Shop.org's eHoliday survey, eight out of 10 online retailers will offer promotions on Cyber Monday.

But the deals aren't just limited to Monday. Ahead of the big day, more than 90% of online merchants will be offering promotions over Thanksgiving weekend.

A survey by comparison shopping site PriceGrabber found that 39% of consumers who plan to shop over the four-day Thanksgiving weekend said they intended to do so, on Cyber Monday. That's up 2 percentage points from last year.

It's a trend analysts are calling ”couch commerce" -- more people want to spend money online from the comfort of their homes rather than head out to the shops.

Don’t Be Late for the ‘January Effect’ in the Week Ahead

The “January Effect” is a general increase in stock prices during the month of January. This rally is generally attributed to an increase in buying, which follows the drop in price that typically happens in December when investors, seeking to create tax losses to offset capital gains, prompt a sell-off.

The January effect is said to affect small caps more than mid or large caps. This historical trend, however, has been less pronounced in recent years because the markets have adjusted for it. Another reason the January effect is now considered less important is that more people are using tax-sheltered retirement plans and therefore have no reason to sell at the end of the year for a tax loss.

The annual fire sale of small-cap stocks may be happening several weeks early, which could give savvy investors a ground-floor entry point. But where to invest?

The action early in the week leading up to Thanksgiving may have dampened investors’ enthusiasm for stocks, but expect that consumers will continue to spend more than most expect. This would allow for stocks to rally before the end of the year.

Since 1925, market data indicates that small-cap stocks outperform the broader stock market in January.

The prevailing explanation for this behavior is that investors dump their small-cap losers before the end of the year to book their losses. This pushes many of these stocks to bargain levels, and sets the stage for a sharp oversold rally into January.

Like many of the seasonal patterns now more broadly recognized by investors, the turn often comes a bit early. The current decline and increase in bearish sentiment with the supercommittee failure suggests that investors may be dumping their stocks now.

Also, for the first time since September, the double-dip forecasts are again hitting the financial airwaves. Though they may eventually be correct, recessionary forecasts ahead of the fact are rarely right.

There are several ways to invest in small-cap stocks, including some very liquid small-cap ETFs, a closed-end small-cap fund, or through individual small-cap stocks, where the risk (as well as the potential reward) is much higher.

• The iShares Russell 2000 Index (IWM) is one of the broadest readings of the small cap market and has a median market capitalization of $473 million. It currently has a price-to-earnings ratio (P/E) of 16.92, with a dividend yield of 1.44%. The largest stock in the index has a capitalization of $3.65 billion.

• An alternative to the IWM is the S&P SmallCap 600, which is a cap-weighted average. The ten largest holdings make up just over 6% of the average. The ETF that tracks this average is the iShares S&P SmallCap 600 Growth (IJT), which trades around 200,000 shares a day—contrast that with the 80 million IWM shares traded daily.

• Another way to invest in small-cap stocks is through a closed-end fund like Royce Value Trust Inc. (RVT). It invests in value-oriented stocks of small-cap and micro-cap companies across a broad spectrum of sectors. It is currently trading at a more than 13% discount to its net asset value (NAV).

• Another small-cap stock that looks attractive is Volterra Semiconductor Corporation (VLTR). It is a $550 million dollar semiconductor company that looks quite interesting technically at the moment.

Since early 2010, VLTR has traced out a broad flag formation which appears to be a continuation pattern. If this is the case, the next major move should be to the upside, with weekly targets in the $34 to $36 area.

Conclusion

The week ahead will probably see headlines again be dominated by Europe, with meetings scheduled among finance ministers of the 17-member euro zone and the 27-member European Union (EU). Additionally, an EU-U.S. summit is scheduled for Monday, Nov. 28, with President Obama an expected participant. This all takes place during a busy week of economic reports on the home front, including data on new home sales and home prices, productivity, and nonfarm payrolls for November.

Whilst the markets have not necessarily broken down, last week’s action was certainly not promising. The markets didn't even pause near their prior breakout levels, instead persistently heading lower. The markets are much oversold, and a bounce should be forthcoming pretty soon. However, traders will need to remain very cautious here, as the markets can theoretically take many different paths here. A flush out can’t be ruled out, and oversold markets can easily become more oversold. That being said, the markets are approaching a seasonably strong period, and any bounce in the markets could ignite a year-end rally. Hopefully the week ahead will provide more clues.

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