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Tuesday Look Ahead: Retailers, Data Could Wake Quiet Summer Market

Monday, 16 Aug 2010 | 9:44 PM ET

Inflation and housing data, and big retail earnings could be factors that help stir up a quiet summer market Tuesday.

Wal-Mart and Home Depotboth report ahead of the opening bell, and the PPI and July housing starts are both reported at 8:30 a.m. Industrial production is released at 9:15 a.m. Investors are also watching the Obama Administration's summit on the future of housing finance, which will focus on what to do about the government sponsored entities, Fannie Mae and Freddie Mac.

Stocks were mixed and nearly flat Monday with the S&P 500 inching up just 0.13 points to 1079.38, and the Dow edging 1.14 points lower to 10,302.01. The Nasdaq was the big mover - up 8 at 2181. The dollar was weaker, and bonds saw buying, which continued to push yields lower. The 10-year was at 2.57 percent, its lowest level in 17 months.

"We've seen bull flattening for weeks. The spark of last Tuesday with the Fed's mention of quantitative easing, and then Friday with the (weaker) data and data in between seemed to me to be ample reason for (the Treasury market) to be doing what it's doing," said CRT Capital chief Treasury strategist David Ader. On Monday, the NAHB survey showed home builder confidence at the lowest level since March, 2009, and the Empire State manufacturing index was weaker than expected.

The bond market, in recent weeks, has been full of speculation about what might come of the housing finance conference. The big fear has been that the government will force mortgage refinancings for underwater homeowners, hurting mortgage investors. However, the Treasury has denied that rumor. Treasury Secretary Tim Geithner and HUD Secretary Shaun Donovan are both speaking at the summit.

Ader said it is unlikely much will come of Tuesday's meeting, which includes participants not only from government, but Academia, think tanks and the financial industry. Pimco CEO Bill Gross is among those participating, as is Mark Zandi of Moody's Economy.com. Ader does not expect to see news on Fannie or Freddie or any mortgage refi plan. "This is political dynamite so why would you announce it in August?" he said.

Ader said Treasurys are now trading on momentum, and that trade should continue. "I'm trying to find an excuse to say we're (bond prices) are too rich now -- we should sell. but I can't," he said.

Whither Stocks?

As the bond market pulls in buyers, investors and analysts are deeply divided about the stock market.

John Roque, technical analyst at WJB, says: "It's a sell."

Lord Abbett's Milton Ezrati has a different view. "We think he pessimism is over stated. This is probably a buying opportunity. I feel lonely here," he said.

Roque said he doesn't like the low Treasury yields and thinks they're a warning for stock investors. "The last time the yields were this low, the market was lower. Yields are down there because there's no economic growth. They're not telling you stocks are cheap because yields are down here," he said in a brief interview.

In a note, Roque also pointed to the fact that six of the 10 S&P sectors, contributing roughly 72 percent of the S&P 500's market cap, are all trading below their 200-day moving average. "Can the market really rally with nearly 3/4 of the S&P, as represented by market cap weightings, below its 200-day moving averages?" he wrote in the note.

Roque also looked at oil, which fell $0.15 Monday to $75.24 per barrel, its fifth day of declines. He notes that oil has briefly broken above $80 four times since October, 2009, and it hasn't been able to break out above that level. He said that would suggest $80 is the top of the range for oil, and he believes $60 would be the bottom.

Ezrati believes investors' fears are overblown, and he does not believe the economy is heading for a double dip.

"The market is not doing hand springs, but it's certainly a lot healthier than it's being described," said Ezrati, who is senior economist and market strategist.

"The economy we believe is at least giving some positive growth, while not breaking any land speed records for growth," he said. "When I look at the quality spreads, the liquidity indicators, (corporate bond) issues coming to market, IPOs are increasing..All of this suggests to us this market is not that fragile," he said.

Ezrati said the nervous tone underlying the market has to do, in part, with last week's Fed announcement. The Fed downgraded its view of the economy, and said it would use the proceeds from maturing mortgages to buy Treasurys, essentially keeping the size of its balance sheet steady.

"I think there's a great deal to be concerned about..I think the Fed unnerved a lot of people last week. It said maybe things are worse than we thought. The tax situation also unnerves a lot of people," he said of the expiration of the Bush tax cuts.

"It's going to be pretty volatile until we get some direction," he said.

What Else to Watch

The sale of up to $1.5 billion euros in Irish bonds is being watched closely, as markets fret about Irish banks. The auction is expected to take place at 5 a.m. New York time. On Monday, the credit default swaps on Ireland's 5-year sovereign widened to 300 basis points, the highest level since March, 2009.

Other retailers reporting earnings Tuesday morning include Abercrombie and Fitch and TJX. Analog Devices also reports earnings, after the closing bell.

Questions? Comments? Email us at marketinsider@cnbc.com

Follow me on Twitter @pattidomm.

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    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

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