July 28th, 2013
by Jeff Miller, A Dash of Insight
In last week's prediction for the week ahead I guessed that it would be "all about earnings". From a market perspective that was mostly accurate despite some competing stories: charges against SAC Capital, fresh speculation about the new Fed Chair, and the arrival of Prince George.
This week will be quite different with three distinct focal points:
- The FOMC announcement – continuing speculation about tapering of QE purchases;
- GDP news – which some will seize as evidence of recession; and
- Another big week for earnings announcements.
This occurs within a technical backdrop that could facilitate a stock market breakout in either direction. Charles Kirk has returned from his annual vacation and his weekly chart show (small annual subscription, and well worth it) shows the tendencies for each of several time frames. Regular readers know that I love this approach – helpful for almost everyone, but without oversimplifying the story. Charles sees resistance in the current consolidation range, but plenty of room to move if there is a breakout. Most would be surprised by the possible range, especially the next upside target (not whatwill happen, but what might happen.)
The end of July often starts a very quiet time. Even (!!) Congress will be taking off.
Unless the various factors point in different directions, we could have a surprisingly large move in stocks next week.
Are you ready for action?
I have some thoughts on preparing for next week which I will discuss further in the conclusion. First, let us do our regular update of last week's news and data.
Background on "Weighing the Week Ahead"
There are many good lists of upcoming events. One source I regularly follow is the weekly calendar from Investing.com. For best results you need to select the date range from the calendar displayed on the site. You will be rewarded with a comprehensive list of data and events from all over the world. It takes a little practice, but it is worth it.
In contrast, I highlight a smaller group of events. My theme is an expert guess about what we will be watching on TV and reading in the mainstream media. It is a focus on what I think is important for my trading and client portfolios. Each week I consider the upcoming calendar and the current market, predicting the main theme we should expect. This step is an important part of my trading preparation and planning. It takes more hours than you can imagine.
My record is pretty good. If you review the list of titles it looks like a history of market concerns. Wrong! The thing to note is that I highlighted each topicthe week before it grabbed the attention. I find it useful to reflect on the key theme for the week ahead, and I hope you will as well.
This is unlike my other articles at "A Dash" where I develop a focused, logical argument with supporting data on a single theme. Here I am simply sharing my conclusions. Sometimes these are topics that I have already written about, and others are on my agenda. I am putting the news in context.
Readers often disagree with my conclusions. Do not be bashful. Join in and comment about what we should expect in the days ahead. This weekly piece emphasizes my opinions about what is really important and how to put the news in context. I have had great success with my approach, but feel free to disagree. That is what makes a market!
Last Week's Data
Each week I break down events into good and bad. Often there is "ugly" and on rare occasion something really good. My working definition of "good" has two components:
- The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially -- no politics.
- It is better than expectations.
This was a pretty good week for news and data.
- Voters want more compromise from Congress. While poll resultshave a partisan flavor, the message seems more important for Republicans. Check it out via the interactive charts.
- The Europe story continues to improve. Frank Holmes of U.S. Global Investors cites three themes and also some stock ideas. His Europe economic surprise chart is below. Sober Look is not one for irrational exuberance, but cites a number of elements providing "glimmers of hope."
- The earnings story was good – and even revenues improved. Bespoke has their expected great chart and notes that the revenue beat rate increased 3 percentage points to 53.2%. Eddy Elfenbein shows what this means for stocks in the chart below. See his postfor the full discussion. Also, you should join me in reading his weekly newsletter. Somewhat contra see Josh Brown's interesting "Beat and Lower" story citing David Einhorn. Since my research shows that the one-year forward estimate is particularly strong, it will be interesting to watch this story as it plays out.
- Durable goods orders showed impressive growth. Steven Hansen at GEI takes a deep look at monthly changes, year-over-year changes, and inflation adjustments.
- The oil price spike might be ending, since the gap between WTI and Brent has been closed. (Via Christopher Swann at BreakingViews). (See also NDD at The Bonddad Blog where oil and gas prices are among the high frequency indicators that they track each week).
- New home sales were strong. Calculated Risk remains bullish on the housing story. A key distinction is between new and existing sales. Read the entire post, but the chart below illustrates the significance of the narrowing gap.
- Consumer confidence from the University of Michigan hit a post-recession high. Calculated Risk notes that the trend has been solidly upward except when "Congress threatened not to pay the bills in 2011. Doug Short's fine chart is the best for relating this to the overall economy: