Monday Morning Outlook: Stocks Set to Start December Back in Technical Purgatory
A brutal Thanksgiving week left the SPX in a familiar sideways channel
by Todd Salamone 11/26/2011 11:59 AM
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. 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, Todd Salamone highlights the key support and resistance levels to watch as we head into the final month of a trying year for investors. Meanwhile, Rocky White takes a look back at the market's post-Black Friday performance, and offers up a selection of retail stocks that might be capable of bringing some glad tidings to your portfolio. Finally, we wrap up with a few sectors of note, as well as the key economic and earnings reports for the upcoming week.
Notes from the Trading Desk: Where Will Europe Send Stocks Next?
By Todd Salamone, Senior VP of Research
"After the S&P 500 Index (SPX) 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. For weeks, as noted in this report, the SPX tried to overcome resistance at its year-to-date breakeven point in the 1,257 zone... as we have been saying for weeks, it will take further improvement in the technical backdrop to force the hands of those betting against the market, and pull cash back into equities. Right now, investors do not feel like they are missing out on a lot amid the headline risk, with the Dow Jones Industrial Average (DJIA) and the PowerShares QQQ Trust (QQQ) up less than 2% in 2011, and small- and mid-cap stocks in the red." "The fact that stocks did not react favorably to stronger-than-expected domestic economic data may be viewed as a concern to bulls, 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. But it is hard to imagine that complacency is the order of the day..."
- Monday Morning Outlook, November 19, 2011
With negative headlines from Europe continuing to dictate the market's daily moves, 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 we have discussed in prior weeks.
On the heels of this move back into the middle of the August-October range, I thought it would be appropriate to step back and observe 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:
- 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 trendline going back to 1982, acting as support on pullbacks, and signaling buying and selling opportunities on crossovers.
- For the QQQ, the round 50 area becomes important on additional pullbacks. 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.
- Bulls would like to see the 800 level hold on the MID, 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 trendline marked lows in 2002-2003 and the summer of 2010.
- Finally, the 585-600 area marks potential support for the RUT in the weeks ahead. The index's 160-month moving average is located at 585, and this trendline 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.
As we 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.
Next week, headlines could 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.
Indicator of the Week: Measuring the Market's Reaction to Black Friday
By Rocky White, Senior Quantitative Analyst
Foreword: Last Friday, the day after Thanksgiving, was Black Friday -- the unofficial beginning of the holiday shopping season. This coming week, we can look forward to various articles and reports about how strong sales were, or how long the lines were at different stores. Those stats will surely come with commentary about what this activity is supposedly telling us about the condition of the economy, or the strength of the U.S. consumer. This week, I looked back over the past 20 years to see whether the market's reaction to Black Friday is any indication about what we can expect going forward. I also checked out the retail sector, in particular, to determine whether there are any individual stocks to keep an eye on throughout this holiday season.
This Week's Reaction: So, is the market's performance this week any indicator of how stocks will fare going forward? It sure seems that way. Over the last 20 years, if the S&P 500 Index (SPX) is down during the post-Black Friday week, then the index averages a 0.69% return for the rest of the year. If the SPX is up, then we get an average return of over 2%.
The difference is even more pronounced when you look further out. The table below measures the SPX's performance over the next three months following Black Friday. When the market is down that first week after Thanksgiving, the SPX averages a loss of 1.86%, and is positive only half the time. When the market rises during the post-Black Friday week, then the next three months average a 3.47% gain, and are positive 75% of the time.
Stocks to Watch: Retail stocks are a big focus every holiday season, so I looked back over the last 10 years to see which retailers have a tendency to perform well this time of the year. First, here are 10 of the top-performing stocks during the week following Black Friday (note that the list is limited to stocks averaging at least 1 million shares traded daily). Deckers Outdoor (DECK) leads the roster, averaging a 7.4% return in the week after Black Friday, with a positive performance in eight out of 10 years.
Finally, here is a list of retail stocks that have fared the best during the remainder of the calendar year. To clarify, the returns in the table above are not included in the table below; these figures measure the performance after that post-Black Friday week. These lists could be a good starting point for anyone looking to make some end-of-year trades.
This Week's Key Events: Wall Street Braces for Retail Earnings, November Payrolls
Schaeffer's Editorial Staff
Here is a brief list of some of the key events this week. All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.
Monday
- The economic calendar kicks off Monday with a report on new home sales. Copart (CPRT) and Hillenbrand (HI) headline a light day of earnings.
Tuesday
- The S&P/Case-Shiller home price index is scheduled to hit the Street on Tuesday, along with the Conference Board's monthly report on consumer confidence. Earnings are due out from OmniVision Technologies (OVTI), Tiffany & Co. (TIF), Fifth Street Finance (FSC), and KongZhong (KONG).
Wednesday
- Employment data starts to trickle in on Wednesday, with the release of the Challenger, Gray & Christmas report on job cuts, and ADP's private payrolls number for November. Also on tap are the Chicago PMI, pending home sales, and the Fed's Beige Book. On the earnings front, we'll hear from Aeropostale (ARO), American Eagle Outfitters (AEO), Coldwater Creek (CWTR), Finisar (FNSR), Fresh Market (TFM), Guess (GES), Krispy Kreme Doughnuts (KKD), and Synopsys (SNPS).
Thursday
Thursday features the ISM manufacturing index, as well as construction spending data and the usual report on weekly jobless claims. Barnes & Noble (BKS), H&R Block (HRB), Kroger (KR), Lululemon Athletica (LULU), Talbots (TLB), Ulta (ULTA), and Zumiez (ZUMZ) will share the earnings stage.
Friday
- The week wraps up with a bang on Friday, when the Labor Department unveils its monthly nonfarm payrolls report. Big Lots (BIG) is the day's lone earnings report of note.
And now a few sectors of note...
Dissecting The Sectors
Sector Utilities
Bullish
Outlook: The utility sector has emerged as a pocket of technical strength in 2011, as the PHLX Utility Sector Index (UTY) is up more than 5% for the calendar year -- easily besting the declines suffered by the major broad-market indexes. On the fundamental front, the utility sector also sports some attractive dividend yields, which are certainly a selling point in the context of a choppy market environment. As a point of concern, UTY breached support in the $455 neighborhood last week, setting up a potential move down to $435. However, there's plenty of pessimism already priced into the utilities sector, which could help the index find a floor sooner rather than later. Drilling down, 64% of stocks in the electric utility group are trading above their 200-day moving averages, but they've attracted only 39% "buy" ratings from brokerage firms. Meanwhile, the gas utility group boasts 72% of stocks trading above their 200-day moving averages -- yet these names have garnered only 48% "buy" ratings. Within the group, Duke Energy (DUK) and Consolidated Edison (ED) have racked up double-digit percentage gains in 2011, and both stocks are lingering near annual-high territory. Nevertheless, there's not a single "buy" endorsement between the two. Going forward, a round of well-deserved upgrades could draw a fresh wave of buyers to the table, helping these stocks extend their positive price action.
Sector Leisure/Retail
Bullish
Outlook: Retail sales improved 0.5% in October, according to the Commerce Department -- surpassing the Street's consensus forecast for a gain of 0.1%, and marking the fifth consecutive month of rising sales. Despite this data, as well as a steadily improving stream of jobs reports, expectations for consumer discretionary stocks are still stuck in the basement. For example, the National Retail Federation is predicting a year-over-year slowdown in holiday sales. However, this group underestimated 2010 holiday sales growth by more than half, leaving room for another potential upside surprise this year. In the same bearish vein, a major financial publication recently featured a broadly negative commentary on the retail sector, warning of a bleak holiday shopping season ahead -- which seems to confirm that expectations are pegged very low for the group. That being said, it's crunch time on the charts for the SPDR S&P Retail ETF (XRT), as the fund is sitting right above its 320-day moving average. This trendline previously contained a pullback in September 2010. On the sentiment front, we're currently seeing an influx of put butterfly spreads on XRT options, which is a strategy fund managers use to guard against corrections. This strategy was also popular during a retail-sector rally around this same time last year. Overall, we remain upbeat on select outperformers within the consumer discretionary group, and recommend focusing on stocks in solid technical uptrends that are surrounded by skepticism. A few of our current favorites within the group include AutoZone (AZO), Advance Auto Parts (AAP), and Nordstrom (JWN).
Sector Gold
Bullish
Outlook: The SPDR Gold Trust (GLD) recently pulled back below its 80-day moving average, which may have been prompted by news that a popular hedge fund manager liquidated a portion of his stake during the third quarter. Indeed, on the sentiment front, various indicators we track point to significant pessimism on gold, even as GLD tests support at its longer-term 120-day moving average -- which has played a key role in containing pullbacks over the past couple of years. For example, a recent survey of 121 portfolio managers found that a hefty 34% are bearish on gold. Among all asset classes, only a few predictable underdogs (U.S. Treasuries, municipal bonds, and European stocks) garnered a higher bearish vote. In spite of this downbeat attitude, the World Gold Council reported that gold demand jumped 6% during the third quarter, thanks in part to global anxiety about the European debt crisis. Plus, cumulative buy-to-open option volume continues to accelerate on GLD, following a recent plunge in activity. Previous downturns in buy-to-open option volume have corresponded with periods of weak price action, whereas increasing buy-to-open volume has corresponded with strength.
Sector Financials
Bearish
Outlook: After outperforming during the second half of October, the Financial Select Sector SPDR (XLF) is now trading back below its 80-day moving average and staunch resistance in the historically significant $13.50 area. The fund is currently sitting on a substantial year-to-date loss of 26.1%, significantly underperforming the broader equities market. Meanwhile, as the crisis in Europe continues to rage on, fundamental concerns about sovereign debt exposure are once again on the rise, applying coincident pressure to financial stocks. From a sentiment standpoint, downgrade potential for the group seems to be elevated at the moment. From late May through late November, the percentage of "buy" ratings on bank stocks rose to 40.4% from 32.5% -- a period of time during which XLF shed 25% of its value. As the poor price action persists, some of these bullish brokers may be forced to admit defeat in the form of downgrades or price-target cuts. Also encouraging for the bears is the fact that XLF's 50-day buy-to-open call/put volume ratio is no longer rolling over sharply, which could indicate that shorts are looking to initiate new bets against the banking sector once again. It's too early to tell just yet -- but with the technical backdrop breaking down, shorting opportunities may emerge again.
Prepare for the investing week ahead. Every week, Bernie Schaeffer and his staff provide you with their insight about what has happened and, more importantly, what will happen in the market. We dig deep and show you what's happening behind the scenes, and tell you which indicators are predicting major market moves. If you enjoyed this week's edition of Monday Morning Outlook, sign up here for free weekly delivery straight to your inbox. |
