by Ian Harvey
April 04, 2015
The week ahead in the stock market will see the focus shift from macro to micro, as investors and traders alike, will be hoping that the new upcoming earnings reports will be stronger than recent disappointing economic figures.
However, it still appears that the domestic fundamentals look strong, and the world’s largest economy is poised for above-trend growth in 2015, despite the shockingly weak job growth for March.
This will become apparent as many on Wall Street will likely look past what is yet another sign of first-quarter weakness if spring data shows signs of rebounding.
This market view will almost certainly cause the Fed to move more slowly than previously expected to raise interest rates, which means that September should be the earliest time frame for the Fed to act. March's report of just 126,000 payrolls was the worst since December 2013, though the unemployment rate was unchanged at 5.5 percent.
This jobs report is a reflection of the weaker GDP growth that has been experienced over the last two quarters, but a reacceleration of growth is likely in the next quarter – one area that should benefit in the coming quarters is the effect of the energy decline. The weak jobs report is also suspected as a reflection of the role that winter weather played.
Monday is likely to create a rocky start to the week ahead in the stock market! However, this is likely to smooth out and the bull rally continue – similar to last year where the economic growth was negative in the first quarter of 2014 before the economy picked up and finished the year strong.
In other news affecting the week ahead in the stock market, besides the Fed minutes, there is also a first trickle of quarterly earnings reports, starting Wednesday with Alcoa. Markets will also be watching the drama around Greece's pending payment to the IMF.
Indicator for the Week Ahead in the Stock Market
When markets are closed on Good Friday, statistically the Monday afterwards is historically the three major indices’, and especially the S&P 500’s, worst post-holiday trading session. More so, when the key monthly jobs report comes out on that Friday, stocks perform even more poorly.
These two events, when markets are closed on Good Friday and the jobs report being presented on the same day has coincided 10 times since 1980, with the last time this happened in 2012. For the Mondays after a jobs Friday and Easter Sunday the following has occurred:-
• The S&P 500 had negative returns 60 percent of the time, with a median percent return of negative 0.82 percent.
• The Nasdaq 100 had negative returns 78 percent of the time, with an average return of negative 0.82 percent.
• The Dow Jones industrial average traded negative 67 percent of the time, with a median return of negative 0.38 percent.
This pattern is very likely to emerge with a downward momentum, particularly after the March nonfarm payrolls report that showed an increase of just 126,000 jobs, far below Reuters' expectations of 245,000. Therefore, come Monday trading, due to the pause suffered by the market rally during the last two weeks, combined with Friday’s selling in the futures, the stage will be set for an eventual test of the support from earlier in the year.
The central bank’s policy setting Federal Open Markets Committee will release its March minutes on Wednesday and all eyes will be on the debate within the Fed over the timing and trajectory of interest rate hikes.
Previously dovish Fed policy makers, such as Chair Janet Yellen, have recently showed an increased willingness to raise rates despite notable holes in the economic recovery such as stubbornly low wages and depressed inflation. But, the market bulls say softening economic data, including U.S. private sector jobs, factory activity and consumer spending, having weighed on stocks lately, and is likely to keep the Federal Reserve from raising rates too soon. However, the Fed is watching for the economy to reach or approach full employment and generate higher inflation before raising interest rates from near zero.
Also due out during the week ahead in the stock market is the ISM Non-Manufacturing on Monday; and a report on import and export prices on Friday. Also included are the JOLTs job openings data, weekly claims, as well as auctions of 3- and 10-year notes as well as the 30-year bond.
There have already been Q1 reports from 20 S&P 500 members, with many of them like FedEx (FDX), Nike (NKE), and Costco (COST), but Aluminum giant Alcoa (AA) will mark the traditional start of the earnings season when it reports its quarterly earnings on Wednesday.
It is still early going on the reporting schedule in the week ahead for the stock market, with roughly 32 companies coming out with quarterly results, including 5 S&P 500 members.
Retailers Bed Bath and Beyond (NASDAQ: BBBY) and Family Dollar Stores (NYSE: FDO) are also out Wednesday, as is drug store giant Rite Aid (NYSE: RAD).
For a full list of companies reporting in the week ahead for the stock market …..CLICK HERE…..
The bigger test will come the following week when most of the major U.S. banks report their earnings.
Analysts have been paring back their earnings expectations for weeks given the weakness of many first quarter economic indicators. Recent estimates say there could be a 2.8% decline in earnings growth, due largely to an energy sector hard hit by the sharp decline in the price of oil.
With this negativity the bar has been lowered considerably which may set the stage for a comeback. The market has developed a habit of trying to price in what has been a lot of bad news in the economic data stream and the expected bad news in the earnings season, which has caused an underestimation of the positives:-
1. There’s a well-established pattern on Wall Street of earnings estimates falling low enough for companies to beat them.
2. Problems relating to the macroeconomics provide a great distraction for investors from company-specific anger.
3. There are always companies that will buck-the-trend -- Darden Restaurants (DRI) and Adobe System (ADBE), have seen their first-quarter earnings estimates rise by double-digit percentages so far this year.
Stocks to Consider
Companies to consider for “Options Trades” – calls or puts -- this week are:-
Federal Realty Investment Trust (FRT)
Altria Group (MO)
Macy’s Inc. (M)
Newell Rubbermaid Inc. (NWL)
H&R Block (HRB)
Pier 1 Imports
Bed Bath and Beyond
The week ahead in the stock market should see the market springing back and continuing its bull rally with new head winds emerging – strong dollar and lower oil prices -- economists expect to see a rebound in the second quarter with growth pegged at more than 3 percent.
Stocks have shown plenty of resilience since the start of the year despite concerns about weaker data for the earnings season with the S&P 500 closing its ninth consecutive quarterly gain last week.
Since the market has already absorbed the fact that estimates are down, a few positive surprises will see shorts needing to be covered – traders who borrow a stock to sell it, betting on a price decline. Positive guidance will likely change the tone of the market quite rapidly.
As of Monday’s expected down day for the stock market – does it really matter? And it does not mean that this doom will continue for the rest of the week. The data provided on Friday was one point, and investors should not read too much bullish or bearish market forecast into this situation.
As to the prediction that this means a stock market crash! Definitely not, as the forces involved in the stock market will continue to see the market continue to rally for a period of time yet; be it months or years. Higher prices could be reached due to easy money, zero interest rates, monetization of bonds, European negative bond yields and a fear factor of deflationary collapse.
Based on similar circumstances as last year, a harsh winter and a lot of negative data points, the market had a fairly strong bounce back in the second and third quarters; and many economists are expecting a similar dynamic this year.
Remember that since European markets and most Asian exchanges are closed on Monday, U.S. markets will have little overseas movement to trade off.
With the stock market still locked in a broad trading range, and a consistent roller-coaster movement, it is advisable for investors to consider their risk tolerance and match stock allocation to this.