Monday Morning Outlook: Can U.S. Stocks Climb Out of Europe's Shadow? Despite improving economic data, stocks took a euro-inspired drubbing last week by Todd Salamone 11/19/2011 9:41 AM
Europe remained in the driver's seat this week, with soaring euro-zone bond yields steering U.S. stocks toward tough weekly losses. In the process, quite a few positive economic reports got tossed out with the bathwater -- including a seven-month low in initial jobless claims, and the Empire State manufacturing index's first foray onto positive ground since May. As we enter what's likely to be a light-volume whipsaw of a week, Todd Salamone breaks down a couple of risks to the bullish case, as well as a few signs that negative sentiment is reaching climactic levels. Meanwhile, Rocky White takes a look back at Thanksgiving weeks past to generate a list of stocks that could be poised to outperform as Wall Street prepares for its annual turkey break. Finally, we wrap up with a preview of the upcoming week's major economic and earnings events, as well as a few sectors of note.
Notes from the Trading Desk: SPX Backs Down from a Bout with Breakeven
By Todd Salamone, Senior VP of Research
"The Nasdaq Composite (COMP - 2,678.75) and the SPX continue to dance around their year-to-date breakeven points for the year, which are located at 2,652 and 1,257, respectively... Technical speed bumps remain overhead, and headline risks linger, suggesting hedging is still a prudent strategy. But a breakout above resistance levels could be very rewarding for bulls, as short-covering activity and an abundance of sideline cash could provide the fuel to drive equities during a seasonal period that favors the bulls." "Speaking of the VIX, we find it interesting that the late-October low in the 24 area was half the August peak at 48, while recent peaks on Nov. 1 and Nov. 9 at the 36 area marked a 50% advance from the trough of 24. So, as we said a few weeks ago, not only is VIX 30 significant, but so are VIX 24 and 36..."
- Monday Morning Outlook, November 12, 2011
After the S&P 500 Index (SPX - 1,215.65) 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. In fact, prior to Thursday's session, the SPX traded above and below its breakeven level in nine of the past 10 trading days. Finally, another round of gloomy headlines out of Europe pushed the SPX clearly back into the red for 2011. Yields on Italian and Spanish 10-year bonds traded up to 7%, which is the same level that led Portugal, Ireland and Greece to seek bailouts, and European contagion fears were reignited.
As we enter a holiday-shortened week, the SPX sits around the top of the August through mid-October trading range, which coincides with key peaks in the SPX in 2010, including the top prior to the "flash crash." There is also a multitude of intermediate-term and longer-term moving averages situated in this area that have had historical significance over the years, including the 80-day moving average at 1,200, the 80-week moving average at 1,216 (see second chart below), and the 80-month moving average, situated at 1,226. Looking ahead to month-end, it will be critical for the SPX to remain above 1,180 in order to stay in the green for the past 52 weeks. Bulls would prefer that the SPX experience an immediate bounce, as a break of 1,180-1,200 could immediately lead to a revisit of the August-October lows in the 1,100-1,120 vicinity.
We acknowledge that headline risk has grown with respect to Europe, and that this uncertainty continues to weigh on the stock market. That said, we are intrigued by the fact that:
- There was a host of positive surprises on the economic front this past week, with data on jobless claims, home starts/building permits, and retail sales all coming in better than expected. This might suggest that Europe's problems are not having the doomsday impact some are expecting.
- The CBOE Market Volatility Index (VIX - 32.00) was again capped at 36 last week, which is 50% above the early November low and which served as a resistance level in prior weeks.
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 in light of the following:
- A Bank of America-Merrill Lynch poll of fund managers this month revealed that a net 5% of respondents are underweight equities, compared to February's all-time peak in equity overweights at 67% (the net figure is the difference between overweights and underweights).
- Within the same survey, 84% of respondents expected the situation in Europe to deteriorate in the next 12 months, the worst reading since November 2008.
- Short interest on U.S. equities recently hit highs last seen in early 2009, when we were on the cusp of a major market bottom.
- There have been numerous cover stories recently about Europe and the sovereign debt issues that first came to light at the beginning of 2010.
A contrarian might view the above as suggesting that Europe and its troubles are slowly, but surely, getting factored into the marketplace. Both retail and institutional investors have run for the safety of cash, and some are betting against the stock market, given the uncertainty both here and abroad. But 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 - 11,796.16) and the PowerShares QQQ Trust (QQQ - 55.40) up less than 2% in 2011, and small- and mid-cap stocks in the red.
Then again, rallies could be fast and furious, and one might argue that there has been a certain amount of resilience in U.S. markets going back to early 2010. Our message from last week remains the same:
Technical speed bumps remain overhead, and headline risks linger, suggesting hedging is still a prudent strategy. But a breakout above resistance levels could be very rewarding for bulls, as short-covering activity and an abundance of sideline cash could provide the fuel to drive equities during a seasonal period that favors the bulls.
Indicator of the Week: Trading Thanksgiving
By Rocky White, Senior Quantitative Analyst
Foreword: Thanksgiving is this week, so we can expect some pretty low volumes. But what kind of returns are typical during the four-day trading week? Let's take a look to find out how the market has performed during past Thanksgiving weeks.
Thanksgiving Week since 2000: Below is a table showing how the S&P 500 Index (SPX) fared each day of Thanksgiving week since 2000. The entire week has averaged an impressive 1.3% return, with 64% of them positive. For comparison, the average return for any week since 2000 is pretty much flat, with barely half of them positive. However, the Thanksgiving week returns are boosted by one huge 12% jump in 2008.
It has been typical for Thanksgiving week to get off to a good start. Monday has historically been the best session of the holiday week, averaging a return of 0.74%. Tuesday looks to be a very quiet day; only two times in the past 11 years has this day netted a return of more than 1% in either direction (2010 was one of those years). Tuesday is also the only trading day of the week that averages a loss.
Thanksgiving Week Stocks: So, which stocks typically do well during Thanksgiving week? Below are 20 stocks that would have served your portfolio well during Thanksgiving week over the last 10 years. The first five stocks in the table have been positive every single year during the week of Thanksgiving. The rest of the table includes stocks with the highest average returns that have seen only one down year over the last decade.
There are no turkey producers on the list -- but I do notice quite a few retail names. Could investors possibly be buying stocks expected to have a strong Christmas season?
This Week's Key Events: H-P Earnings, FOMC Minutes Headline a Light Holiday Week
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 monthly report on existing home sales is the lone item on Monday's economic agenda. Hewlett-Packard (HPQ), Tyson Foods (TSN), Tech Data (TECD), and Jack in the Box (JACK) are scheduled to report earnings.
Tuesday
- On Tuesday, the government's latest gross domestic product (GDP) revision will hit the Street, as well as a report on business activity in the Richmond Fed district. Most notably, though, the Federal Open Market Committee's (FOMC) meeting minutes are slated for release at 2 p.m. Eastern. On the earnings front, we'll hear from Campbell Soup (CPB), Hormel Foods (HRL), Nuance Communications (NUAN), and Pandora Media (P).
Wednesday
- On Wednesday, the Labor Department will release its weekly jobless figures a day early, due to the Thanksgiving holiday on Thursday. In addition, Wall Street will digest the regularly scheduled crude inventories report, the final Thomson Reuters/University of Michigan consumer sentiment index for November, and monthly data on durable goods orders and personal incomes and spending. The earnings calendar includes quarterly results from Deere & Co. (DE), Diana Shipping (DSX), ReneSola Ltd. (SOL), and Yingli Green Energy (YGE).
Thursday
- The market is closed in observance of Thanksgiving on Thursday.
Friday
The post-holiday docket is bare on Friday, when U.S. markets will close at 1 p.m. Eastern.
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, and the PHLX Utility Sector Index (UTY) found support this week near former resistance in the $455 neighborhood. However, Wall Street hasn't exactly jumped on the bullish bandwagon just yet. 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. The broader utility sector also sports some attractive dividend yields, which are certainly a selling point in the context of a choppy market environment. Within the group, Duke Energy (DUK) and Consolidated Edison (ED) have racked up double-digit percentage gains in 2011, and both stocks are lingering in 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 -- easily surpassing the 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 remain remarkably low for consumer discretionary stocks. For example, the National Retail Federation is predicting a year-over-year slowdown in holiday sales -- but this group underestimated 2010 holiday sales growth by more than half, leaving room for another potential upside surprise this year. 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 200-day moving average. This trendline previously served as resistance in August and September. 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) pulled back below its 80-day moving average this past week, 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 holds steady above its longer-term 120-day moving average -- which has played a key role as support 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. 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 21.6%, 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. Also encouraging for the bears is the fact that the 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.
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