by Ian Harvey
March 29, 2015
In the week ahead it will be a possibility that the market will continue its disruptive nature on its “track to no-where”, as investors and traders alike will continue to adjust to the lowered earnings forecasts and the uncertain direction of the dollar.
The U.S. market saw the major indices and stocks trend lower last week after rallying on the Federal Reserve's March 18 statement, which suggested a less-aggressive approach to raising interest rates than investors had expected. This uncertainty, as well as little of significance in the way of economic reports, combined with a lack of an earnings season (which won’t begin until April 8th when Alcoa reports), has tended to put the equities market on “pause”.
The uncertainty surrounding the timing of the Fed's rate move has been creating more than necessary volatility, as well as placing an emphasis on economic data which could determine the outlook of the Fed’s decision.
Combining the above factors, with the U.S dollars dramatic rise, has caused worries for investors concerned about earnings for U.S. multinational companies.
Also note that international markets moved lower over the past week.
In the week ahead, there will be a number of key economic events, including personal income on March 30th, ISM manufacturing data on April 1st, jobless claims on April 2nd, and employment data on April 3rd, Good Friday. There will probably be very light market trading surrounding Friday's jobs report, because it comes on a day when the US equity market is closed and most world markets are also shut.
Another area of concern will be any comments out of the Federal Reserve that could signal a change in its plans to raising interest rates slowly over time.
There will also be more euro zone figures, which should underline the ongoing recovery in this part of the world. Having seen a short squeeze in EUR/USD to $1.10, however, it seems likely that the European Central Bank’s quantitative easing operations will start to push the euro lower once again.
There will be little in the way of company earnings data – probably the first-half year earnings on Wednesday by the ASOS plc (LON:ASC) will be the most significant company news.
In the week ahead a great deal of data will be subjected to the market – but the crucial jobs report on Friday will be the most important and possibly have the most lasting impact.
There will also be other important and potentially market moving in the week ahead -- the personal consumption expenditures data that the Fed watches for its preferred inflation reading are released Monday, and monthly vehicle sales, ADP's payroll data and the ISM manufacturing survey are expected Wednesday.
However, investors may not be making any major moves as they will probably wait for the U.S. jobs data and any news that could change expectations for the first interest rate hike in almost a decade, and this will mean that any trading reaction will not be possible until next week.
Also, on Thursday, Federal Reserve Chair Janet Yellen will be speaking at the St. Louis Fed community development conference.
Stocks to Consider
The fact that Q1 estimates came down over the last couple of months is not something unique to the period. This has been the trend for quite some time and has become particularly notable over the last couple of years as management teams have been consistently providing weak guidance, causing estimates to come down.
It appears that the lowering of guidance is that management teams have a big incentive to manage expectations -- under-promise and over-deliver!
Therefore, investors will continue adjusting to lowered earnings forecasts for the first quarter and the uncertain direction of the dollar.
Bear in mind that the first quarter ends Tuesday so portfolio adjustments could have an effect on stocks and bonds, as investors wrap up the old quarter and prepare for the new one.
The S&P 500 is up just 0.1 percent for the quarter so far, and if it loses ground, it would be the first negative quarter in nine.
It is important to note even though the strong dollar and lower oil prices should shave profit growth from multinationals and energy firm, there has not been enough positive impact factored in for companies that benefit from lower oil.
There is likely to be no significant market pullbacks in the near future – earnings season has been reasonable – and the economy will overcome the negative factors and a rebound in the second quarter should ensue.
Among the companies reporting earnings are semiconductor concern Micron Technology, Inc. (NASDAQ:MU), agricultural titan Monsanto Company (NYSE:MON), and automotive holding company CarMax, Inc (NYSE:KMX).
As of Friday, March 27th, results from 16 S&P 500 members have been received already. In the week ahead, results will be forthcoming from 55 companies in total, including 3 S&P 500 members.
Companies to consider for “Options Trades” – calls or puts -- this week are:-
Other considerations are NXP Semiconductor (NXPI), Palo Alto Networks (PANW), and Synaptics (SYNA). And, as always, Apple (AAPL), can be profitable at the appropriate times.
AAR Corp. (NYSE:AIR)
Cal-Maine Foods (CALM)
UTi Worldwide (UTIW)
Freshpet Inc (NASDAQ:FRPT)
Real Goods Solar (RGSE)
Acuity Brands (AYI)
Micron Technology (MU)
• overseas sales of U.S. exports are being impacted.
• the dollar, which is strengthening as investors flock to dollar-denominated assets seeking better returns – and will act as a drag on exports, making American goods more expensive in foreign markets.
• cutbacks in investment spending by businesses is likely.
• cutbacks at U.S. energy companies, which are scaling back drilling plans in the face of tumbling oil prices.
However, despite many negative factors over the past six years — from a European debt crisis to last year’s polar vortex and frigid winter storms -- the U.S. economy has endured and continued to keep moving ahead.
This year, whilst the bad weather depressed first quarter activity, many economists predict a solid bounce back in the second quarter, similar to the March-June period of 2014 when growth jumped to 4.6 percent. This time around, the rebound is unlikely to be as dramatic since the first quarter contraction was not as deep -- analysts forecasting growth rate of about 3 percent for the full year, which would represent an improvement from 2.4 percent growth in 2014 and the strongest pace since 2005.
This market growth has proven to be the most durable since World War II, the current expansion will mark its sixth anniversary in June, meaning it will have already lasted 14 months longer than the average expansion since the end of World War II, and to sustain this continued upward movement will, obviously, depend on a number of factors that will be experienced in the months ahead, such as the potential rate hike by the Fed, the strong dollar, oil prices and consumer spending.
This slow rate of growth -- a lackluster pace that has been far lower than the growth gains normally seen coming out of such a deep recession -- has allowed the economy to avoid the kinds of excesses that can lead to over-building, over-lending or other problems – in other words “slow and steady wins the day”. The longest recovery on record was the 10-year growth period that lasted from March 1991 to March 2001. But many economists believe this expansion could surpass that.
Looking at the volatility experienced in the recent time, it would be best to have cash available – not only to reduce portfolio risk – but having available funds for the stocks that present opportunities. One area to keep in mind for a future investment is the technology sector as it has been weak recently even though it outperformed earlier in the year, and also, the market is entering a seasonally weak period for technology shares, and because profit taking in some better performers might create a bargain or two.
Always remember that, whether the market goes up, down, or sideways from here, options strategies are available to cater for these circumstances.
More and more investors are using options in their trading as a way to beat the market. In fact, the number of options contracts traded has quadrupled over the past 10 years.
Whether that's because of the market's volatility or in spite of it, options can provide staying power.
Plus, options are flexible. You don't need a lot of money to get started. And it's a lot easier than you might think.