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Note: This week's Market Outlook was covered by Optionetics.com's Chris Tyler.

After a solid start to 2010, investors will be looking to retail sales, a slug of other economic data and the first vestiges of Q4 earnings for market direction. For the five-day period, the SP-500 (SPY) is up 2.68% on increased and optimistic participation to fresh intermediate highs.  

THE WEEKLY NUTSHELL

• Bulls celebrate 2010 with 1.60% gainer to fresh intermediate highs from existing trading range. Oversold technical platform and seasonal “new” and sidelined monies bias help bulls. Global manufacturing data pressures dollar and buoys green shoots sensitive commodity complex (GLD, SLX, KOL, USO and GDX). Upgrade trifecta (MS, INTC) and refiners (VLO, FTO) and “Merger Monday” incentive from Novartis (NVS) bid for 77% balance of Alcon (ACL) aid bid.
• “Tepid Tuesday Follow-Thru.” Last hour rally finds light intraday profit-taking reversing. Upgrades of Aggies (POT, IPI) and coal producer Peabody (BTU) lead for commodity complex, otherwise indulging in profit-taking. Whitney’s second estimate cut for Goldman (GS) in the past month gets dismissed by bulls and serves as a “flu shot” of sorts according to the Mad Money. Barclays (BCS) pegged as “top choice” for Euro bank stocks by DB. Have you driven a Ford (F) lately? Somebody has as sales surge 33% and 20 points above views. Worse than expected pending home sales also finds bulls willing to discount an alternative and more optimistic future in the Homebuilders ETF (XHB).
• Fractionally mixed midweek humper for bulls and bears. Tired cheerleading type data from trending miss in ADP and Challenger jobs reports, as well as expanding but tad light ISM Services index. Dollar weakness prompts bid in commodity complex. Fed minutes indicate members see more stimulus as desirable, aids and abets. Profit-taking and margin concerns in Google (GOOG) weigh in on tech’s laggardship.  
• Bulls grind and prod way to fractional gainer in continued and mostly listless trade on Thursday. Leadership provided by financials (XLF, GE and BAC) on technical driven action and select retail (SHLD, M) compliments of mostly better-than-expected same-store sales results and earnings from Bed Bath & Beyond (BBBY). Pleasing profit beat from Lennar (LEN). Commodity complex pauses on dollar strength compliments of surprise hike in short-term rates by China, prompting worries of other countries following suit.
• “Bulls hire some new recruits” Friday despite unexpected drop of -85,000 in December jobs data. Weaker dollar on less-likely to move Fed helps spur commodities higher, spearheaded by steel group (X, AKS, MT) upgrades and better-than-expected results from Schnitzer (SCHN). Google (GOOG) leads tech to relative strength performance following its hardest back-to-back sessions of profit-taking since July. GE brings second session of relief to life for bulls. UPS (UPS) finds favor after surprise guidance boost above views and target raise to $71. Estimate cuts for financials (GS, MS, JPM) and downgrades of Macy’s (M) and Coca Cola (KO) help keep bulls run for higher ground tempered and on lighter volume.

ON TAP THIS WEEK

For earnings hounds, the week ahead presents a very light schedule but also marks the start to the fourth quarter reporting season. As usual, aluminum concern and Dow component Alcoa (AA) leads the procession of corporate confessionals to follow when it reports Monday evening.

Analysts expect the company to turn in a profit of $0.06 per share versus last year’s woeful loss of -$0.28 and at a time when global economies buckled under the stress of the credit crisis. Guidance, as always and particularly after a strong turnaround in 2009 for equities from the March lows, will be important.

Investors will be keen to find signs of a market with upside potential, but one which could be fully valued or already in the position of having overshot the reality of the economic recovery. Related, a mixed report released over the weekend found China finished 2009 with record imports of commodities such as oil and soybeans, although questions of real demand versus stockpiling and rampant production persist. “A strong appetite for iron and copper” and “welcome increase in export volumes” for aluminum and steel were also announced according to Reuters.

Also on the earnings front, Monday could find a trio of Saudi banks weighing in on the markets following disappointing quarterly results issued over the weekend. Weaker lending and higher loan loss provisions resulted in Saudi Hollandi Bank announcing its first loss in two years.

Stateside, Friday should enjoy some likely earnings-related tone-setting. Intel (INTC), the world’s largest semiconductor company reports after the close Thursday night and money center banker JP Morgan (JPM) posts its results before the open on Friday.

For Intel’s part, analysts are pegging earnings at $0.30 per share versus year ago levels of just $0.04. While growth is certainly apparent, the debate as to where the notoriously cyclical industry is in its cycle rages on between bulls and bears. Technically, shares of INTC appear bullishly poised within a multi-month base-on-base pattern.

Economic data will enjoy a strong playing hand with investors this week. Reports begin slowly with Wednesday’s Fed’s beige book the first release with any likely impact on investors. The report will be sifted through for anecdotal economic evidence from various regions regarding the strength of the nation’s recovery.

Thursday and Friday offer a bevy of reports on manufacturing and production, sentiment and consumer prices. For many investors, the most closely-watched numbers will be retail sales data for December out Thursday morning. After a slightly disappointing November, analysts expect a stronger December sporting a year-over-year increase of 0.5%. Related, on Friday major credit card companies will announce “master trust data” which, according to JP Morgan’s chief equities strategist, “should be telling about the health of the consumer” according to CNBC.com.

Weekly Calendar of Key Reports

Monday
Economic  NA
Earnings  Allscripts Misys (MDRX), Alcoa (AA)

Tuesday
Economic  Trade Balance (-$34.5B), NFIB Small Business Survey
Earnings  A&P (GAP), Infosys (INFY), KB Home (KBH), Supervalu (SVU), HB Fuller (FUL), Linear Tech (LLTC), Xyratex (XRTX)

Wednesday
Economic Weekly Crude, Treasury Budget (-$92.0B), Fed’s Beige Book
Earnings  CLARACOR (CLC), Sealy (ZZ)

Thursday
Economic Weekly Claims (433K, 4.8M), Import / Export, Retail Sales (0.5%, 0.3%), Biz’ invs (0.2%)
Earnings  Briggs & Stratton (BGG), Schwab (SCHW), Origin Agritech (SEED), Intel (INTC)

Friday
Economic  CPI (0.2%, 0.1%), CU & IP (71.8%, 0.6%), Michigan (73.8), Empire (11.25), Credit Card Data
Earnings  JP Morgan (JPM)

TECHNICAL PICTURE 

 

Figure 1: S&P500 (SPY) Daily Chart

The trend on the daily received its latest confirmation for bulls by busting free of a loose but mostly lateral trading range spanning several weeks. The action puts prices in a technical air pocket which still looks to have some room to the upside. Coupled with volume confirmation on the week, the bulls appear to be in the driver’s seat.

For the bears or more aptly, cautious bulls out there, the VIX is near 18% and at fresh pre-Lehman levels. As much, the case for investors being too complacent grows a bit stronger. However, without a short-term extreme relative to the VIX’ 10-SMA, (currently 16.60%) I’d be weary of picking a top without confirmation of a higher volume reversal day back below 1135 in the SP-500 cash.

According to sentimentrader.com, statistically that type action could come this week as the market enters a historically weak period. In saying that, implieds, without having hit extremes just yet, do appear cheap enough to afford participation in the market’s uptrend with the luxury of covering one’s downside risk at reduced cost, should a long-standing trend in motion falter.

MARKET LAB

Bullish Technicals

• Weekly Inverse H & S breakout from October lows. “MM” of 117 – 123.
• November thru April strongest six months for equities historically.
• Uptrend breakout 1.04.10 into large technical air pocket.
• Volume confirmation to fresh highs.
• VIX Stretch currently near 16.60%.

Bearish Technicals

• 1930 Bear Market Rally repeat states EW Intl
• Mostly long-term overbought market conditions/weak internals.
• Q3 “Recession is over” data confirmation.
• Statistically weak period according to sentimentrader.com looming.
• Break of 20% and pre Lehman levels in VIX worthy of shoring up downside.
• Equity Put/Call Ratio most extreme since October.

                                                    

Chris Tyler
Senior Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
Visit Chris Tyler’s Forum
 
The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual. 

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