Week Ahead: More Rally Mode Expected!
Stock Market: Is The Economy A Worry?
Wall Street: "Fiscal Cliff" Worries May Drive Tax Selling !
by Ian Harvey
December 08, 2012
Investors typically sell stocks to cut their losses at year end. But worries about the "fiscal cliff" - and the possibility of higher taxes in 2013 - may act as the greatest incentive to sell both winners and losers by December 31.
Stocks held up pretty well last week, however, the major averages needed a stronger close to indicate that there may be a further rally in the week ahead. Many of the market averages tested the highs from the start of the week but were not able to exceed them. The Dow Industrials were the exception.
Precious metals had a second day of heavy selling last week, which weakened the short-term outlook. So far, the early November lows are holding, and profit taking was apparent to reduce the exposure on the long side. The intermediate term still appears bullish, and if the technical outlook improves, then the rally will prevail.
Two markets that look interesting are the dollar and crude oil. The yearly closes in both could provide us with some interesting insight for 2013, as the yearly ranges are often important.
A value over 50 indicates an expanding manufacturing sector, so the November report did raise some concerns, as the chart shows a pattern of lower highs (line a) since early in 2011.
This report was followed last Wednesday by the ISM Non-Manufacturing Index, which came in at 54.7, above the consensus of 53.6. It indicates that the non-manufacturing economy is generally expanding. The chart on the right shows a gradual rise from last May's lows, but also shows a pattern of lower highs (line b).
The economic outlook was clouded further Friday when the monthly jobless report was much stronger than anticipated, while the preliminary University of Michigan consumer sentiment plunged to 74.5 from last month's 82.7. This suggests that the concerns over the fiscal cliff are making consumers more pessimistic.
For the week, the Dow Jones Industrial Average (DJI) rallied 0.99 percent, the Standard & Poor's 500 Index (SPX) added 0.13 percent, while the Nasdaq Composite Index (COMP) fell 1.07 percent. Bank of America was the best weekly performer on the Dow, while AT&T (T) slid.
Among the key S&P sectors, financials and industrials gained, while materials and techs lagged.
CBOE Market Volatility Index (VIX) ), widely considered the best gauge of fear in the market, finished roughly 4.1% lower, relatively flat with last week's close.
Overseas Markets in the Past Week
Since early in November, overseas markets have been acting better and looking stronger than the US market. The major US averages need a burst of upside momentum and a close above the Election Day highs to signal the market is trending higher.
While the US markets have failed to break out, the markets in Asia are continuing to look very strong. For the year, the iShares MSCI Philippines ETF (EPHE) is up well over 45%, followed by a 30%-plus gain in the iShares MSCI Thailand (THD) and over 26% by the iShares Singapore (EWS). All three have more than doubled the 13% gain of the Spyder Trust (SPY).
The charts of many of the European Exchange-Traded Funds (ETFs) have completed their three-month corrections and appear to be resuming their uptrends. Some are overbought short term, and could pull back in the week ahead before they again move higher.
The action of the global markets and the apparent bottom for the Chinese economy are likely to translate into higher US stock prices. It may take until early 2013 for the US market to catch up with stronger trends in the global markets, but the belief is that the economy will come out fine.
The Week Ahead
Earnings and Company News
Here is a brief list of some of the companies reporting in the week ahead.
All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.
Earnings: Teavana Holdings (TEA))
Earnings: Dollar General (DG)
Earnings: Costco Wholesale (COST) and Joy Global (JOY)
Earnings: Verifone Systems (PAY), Ciena (CIEN), and Adobe Systems (ADBE)
Earnings: There are no notable earnings results due for release.
The $600 billion of automatic tax increases and spending cuts scheduled for the beginning of next year includes higher rates for capital gains, making tax-loss selling even more appealing than usual.
Tax-related selling may be behind the weaker trend in the shares of market leader Apple (AAPL), analysts said. The stock is down 20 percent for the quarter, but it's still up nearly 32 percent for the year.
Apple dropped 8.9 percent in this past week alone. For a stock that gained more than 25 percent a year for four consecutive years, the embedded capital gains suddenly look like a selling opportunity if one's tax bill is going to jump sharply just because the calendar changes.
Of this year's top 20 performers in the S&P 1500 index, which includes large, small and mid-cap stocks, all but four have lost ground in the last five trading sessions.
The rush to avoid higher taxes on portfolio gains could cause additional weakness.
The S&P 500 ended the week up just 0.1 percent after another week of trading largely tied to fiscal cliff negotiation news, which has pushed the market in both directions.
Apple, Volatility and Volume
Volume could increase as investors try to shift positions before year end, some analysts said.
While most of that would be in stocks, some of the extra trading volume could spill over into options.
Volatility could pick up as well, and some of that is already being seen in Apple's stock. The actual volatility in Apple has been very high while the market itself has been calm which could cause Apple's volatility to carry over into the market volatility. Shares of Apple, the largest U.S. company by market value, registered their worst week since May 2010. In another bearish sign, the stock's 50-day moving average fell to $599.52 - below its 200-day moving average at $601.38.
Sentiment Effect in the Week Ahead
The big change in sentiment last week came from the financial newsletter writers, who became more bullish: they're now 43.6% bullish, up from 39.3% the previous week. The individual investors have also become more positive after a big jump the previous week -- now 42% are bullish, as opposed to a low reading of 28.6% on October 18.
The NYSE in the Week Ahead
The close in the week ahead is likely to be important, as are the market internals. The weekly chart of the NYSE Composite shows the higher closes over the past three weeks as the resistance in the 8,250 to 8,300 area has been reached. There is further resistance at 8,400 with the weekly downtrend (line a) at 8,488.
The weekly NYSE advance/decline (A/D) lines has continued to make higher highs since 2009 (line c), which is bullish for the intermediate trend. The A/D line bounced from the rising 21-week WMA four weeks ago, but was flat last week. A lower close and negative A/D ratio in the week ahead will cause it to turn lower. This would be consistent with further consolidation.
A drop in the A/D line below the WMA and the previous low would be more negative and suggest a test of the uptrend (line d). There is initial support now at 8,225, with the 20-week ’Exponential Moving Average’ (EMA) following at 8,139. The weekly uptrend (line b) is at 7,826.
While investors may be selling stocks to avoid higher taxes in 2013, companies may continue to announce special and accelerated dividend payments before year end. Among the latest, Expedia (EXPE) announced a special dividend of 52 cents a share to be paid on December 28.
The big sell-off in stocks following the November 6 election was likely related to tax selling, making it hard to judge how much more is to come.
However, there's a decent chance that the market could rally before year end. Even with little or spotty news that is positive regarding the (cliff) negotiations, the market has basically hung in there, and it appears that it will hang in there in further in anticipation of something likely to be positive coming forward!
Even though stocks were not that strong last week, the market was quite resilient, as the dips have been brief. The S&P futures tested support at 1,396 early Wednesday, but then rallied to close higher and settled the week at 1,416.50.
There were not many good risk entries last week, so it was more difficult to be a smart buyer by buying at more important support. There should be some opportunities in the week ahead though!
Some of the strong country ETFs is likely to correct back to support, which should provide another opportunity to buy. The industrial sector is an area to keep an eye on, as the weekly relative performance looks very strong.
An alternative to individual stocks might be the equity income funds, as they are still well below their September highs. Since stocks did move higher last week, be sure to check your own positions to see if your stops need to be modified.
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