by Ian Harvey
August 22, 2015
Introduction to the Week Ahead in the Stock Market
The direction for the week ahead in the stock market will depend greatly on the evolving economic data around the world. There has been a problem with China’s stumbling; emerging markets are seriously on the brink of another extended leg down, oil has continued on its downward trend and the worries of the Fed rate hike; have all contributed to an investor fear – which has not been as high since the spring in 2009. This leads to the scenario where investor’s fears take over and more volatility resumes for the week ahead in the stock market – and the likelihood of the saw-tooth pattern will continue to dominate the market movement.
**“THE ONLY CERTAINTY IS THE LACK OF CERTAINTY”**
Having said that, and stepping back from all the disasters and looking at the market from a birds-eye view, there doesn’t seem to be any technical damage encountered and a bottoming, from some sectors, may be occurring – the stock market has basically been allowed to flatten out, which has now allowed for those longer-term moving averages to be more realistic.
Basically the market has raced ahead of the economy – where the market has tripled but the economy is still trying to catch up -- therefore, an overdue market valuation correction has come into play. The financial markets – where the corporate balance sheets are still strong, providing stability and high profits -- have now come closer to reality.
There is some important data during the week ahead in the stock market, as all eyes will be on Thursday's gross domestic product (GDP) release, where economists expect growth to increase to 3.4 percent, followed Friday with the release of personal income and spending data. Atlanta Federal Reserve Bank President Dennis Lockhart will be speaking, and the annual economic policy symposium will kick off in Jackson Hole, Wyoming.
There are still results from 89 companies reporting in the week ahead for the stock market, including 11 S&P 500 members. Included in this will be more quarterly results from retailers; such as Best Buy (BBY), Abercrombie & Fitch (ANF), Dollar General (DG) and GameStop (GME). Others companies of notable importance that are set to report are; Toll Brothers (TOL), NQ Mobile (NQ), Splunk (SPLK), and Smith & Wesson (SWHC).
The past week saw stocks take their worst loss in four years due mainly to unclear signals from the Fed, China’s economic problems and the oil dip in price. And on Friday the Dow's 530-point drop being the biggest one-day decline in four years, with a 10 percent correction for the first time since October 2011. Also, the S&P 500 fell sharply, quickly moving through key support levels to 1970.
The Dow was down 5.8 percent for the week, to 16,459.75 -- its heftiest week-over-week percentage decline in almost four years. The S&P 500 was down 5.8% at 1,970.89, to end beneath 2,000 for the first time since late January, whilst the Nasdaq finished down 6.8%, to 4,706.04 -- also their worst week since 2011.
The CBOE Volatility Index (VIX) soared into territory not charted since October, more than doubling on a weekly basis at 118.5%, to mark the biggest weekly spike in the modern VIX era.
Oil's tumble was especially notable. For a while, West Texas crude was trading below $40 a barrel — the first time that happened since March 2009. It finished at $40.45, marking an eight-week stretch of price declines — the longest losing streak since 1986.
Other News for the Week Ahead in the Stock Market
The Federal Reserve begins its annual meeting in Jackson Hole, Wyoming, during the week ahead in the stock market where domestic metrics will be discussed. This meeting will draw attention from investors trying to assess the Feds slant on the global issues and also their views on a September rate rise.
North Korea has also become a thorn-in-the-foot, with its ultimatum to halt anti-Pyongyang broadcasts or suffer the consequences.
Emerging markets, particularly China, and to a lesser extent Brazil, and others, has had some effects on the commodity-related companies, and may continue to do so.
• The U.S. consumer confidence index is expected to rise to 93.3 in August from 90.9 last month.
• Financial firm Markit's preliminary reading of its Purchasing Managers Index for the service sector is predicted to edge higher to 56.0 in August from the final reading of 55.7 in July.
• The S&P/Case Shiller composite index of 20 metropolitan areas releases for the month of June. The index in June is projected to have gained 5.1 percent, year over year.
• New York Fed Gives Regional Economic Outlook -- The Federal Reserve Bank of New York economists will provide an update on regional economic conditions. President William Dudley, who oversees one of the most influential arms of the Fed, will answer questions following the presentation.
• The National Association of Realtors releases its Pending Home Sales data for July. Economists expect the index to have gained 1 percent in July after it declined 1.8 percent in the previous month.
• U.S. Consumer Sentiment: presenting an August snapshot, will indicate what the average American is thinking regarding the health of the U.S. economy. This survey, which will capture the month’s stock selloff, will be of particular importance in determining whether or not consumers may change their spending behaviors if the U.S. stock markets continue on their downward spiral.
Earnings for the Week Ahead in the Stock Market
Due to several factors the reporting season has been very weak and has caused estimates for the current quarter to come down; these factors are:-
• a disconcerting mix of Energy sector weakness,
• dollar strength and
• global growth challenges
As of last Friday, there has seen Q2 results from 36 retailers in the S&P 500 index where the total earnings for these is up +4.1% from the same period last year, on +5.8% higher revenues, with 63.9% beating EPS estimates and 47.2% coming ahead of top-line expectations.
So far there have been results from 480 S&P 500 members (accounting for 97.8% of the index’s total market capitalization) for the Q2 earnings season. Total earnings for these companies are down -2.5% on -3.7% revenue losses, with 69.6% beating EPS estimates and 49.5% coming ahead of revenue expectations.
For a full list of companies reporting in the week ahead for the stock market …..CLICK HERE…..
Stocks to Consider for the Week Ahead in the Stock Market
Companies to consider for Trading for the week ahead in the stock market, such as “Options Trades” – calls or puts -- this week are:-
Toll Brothers -- the largest luxury U.S. homebuilder, is likely to report a jump in third-quarter orders as the housing recovery gathers steam. Latest data showed a rise in housing starts as well as mortgage applications, suggesting the market was firing on all cylinders. Demand is expected to spike in the next few weeks, ahead of a possible interest rate increase in September. Toll Brothers is better positioned than most other national homebuilders since its affluent customers are less affected by fluctuations in mortgage rates.
Best Buy -- the electronics retailer, has stabilized the business by aggressively cutting costs under its Renew Blue program but concerns about its market share and margins in the face of intensifying competition persist.
Brown-Forman -- results have been driven by the company’s strong portfolio of premium American whiskey brands and a balanced geographic approach. However, the company’s results reflected significant impact from unfavorable foreign currency translations. Though the company issued a favorable outlook for fiscal 2016, it expects currency headwinds to linger throughout the fiscal, weighing somewhat on its results. Moreover, stiff competition from other players and any rise in excise taxes remain concerns.
J M Smucker -- the maker of Folgers coffee and Jif peanut butter, is likely to report its first-quarter sales above the analysts' average estimate. The company in July cut prices for most of its Folgers and Dunkin' Donuts coffee brands in the United States by 6 percent, partially reversing last year's price hikes, to woo back customers, as green coffee costs fall. Analysts are looking out for cost-cutting announcements following the company's $3.2 billion acquisition of pet food maker Big Heart Pet Brands.
Tiffany -- is expected to report second-quarter sales and profit in line with estimates. Tiffany is heavily dependent on macro economic factors such as the strength of the dollar and other currencies which determine tourists' spending behavior. While a smaller influx of Chinese and Japanese visitors to the United States has taken some shine off sales at stores such as the flagship Fifth Avenue store in Manhattan, the company said last quarter that it saw an uptick in tourist spending in Europe as weaker euro and pound encourage spending in the region.
Dollar General -- is expected to report second-quarter revenue in line with analysts' average estimate. The company, which is set to be dethroned as the top U.S. discount retailer by store count after it lost a takeover battle for smaller rival Family Dollar Stores Inc to Dollar Tree Inc, expects to speed up store openings this year.
GameStop -- the world's largest retailer of video game products, is expected to benefit from the June release of "Batman: Arkham Knight", the latest in the "Batman Arkham" series by Warner Bros. The Street has worried about the impact of digital game downloads on the company's software sales. But in the last quarter, GameStop mitigated the concerns by reporting an increase in mobile game downloads, a trend expected to continue to the second quarter.
Conclusion for the Week Ahead in the Stock Market
Even though the market has suffered a major setback, it appears that there has been less panic during the selloff than was first interpreted – investors, in their trading, are both buying and selling stocks – which are not dissimilar to what occurred in recent periods of volatility.
There have been six and half years of a bull market, with very few corrections throughout. Now is the time to reassess portfolios and decide what stocks that have been missed buying on the way up, and decide if it’s time to buy those names now.