U.S. jobs data and developments in the Greek financial crisis could be important catalysts for stocks in the week ahead.
Stocks finished February with a more than 2.5 percent gain, the best monthly performance for the market since November. But the major indices were slightly lower in the past week, after some disappointing economic news resulted in several days of choppy trading and raised worries about a double dip recession.
"I do think this is a pause, not a relapse, when it comes to upward momentum," said Joseph Quinlan, chief market strategist at U.S. Trust Bank of America Wealth Management.
"I don't see how we have a double dip when we had a peak in unemployment. We have loose monetary policy. The only way I can see us getting a double dip is if we close the borders. We haven't had an outbreak of protectionism. I don't think we're going to get it," he said.
Ahead of Friday's February employment report, there is a steady stream of economic reports, including manufacturing data, auto sales, monthly chain stores' sales and the Fed's beige book report on the economy. Greece is also expected to float a 10-year bond mid week, in an effort to generate cash, a deal that is being closely monitored in financial markets worldwide.
There are also a number of Fed speakers on the circuit, and a few earnings, including Costco and Anheuser-Busch Inbev. Warren Buffett this weekend releases his widely-followed annual investor letter as well as Berkshire Hathaway earnings. Buffett will also appear as a guest on "Squawk Box" Monday, where he will answer viewers' questions.
The Dow ended the week at 10,325, down 0.7 percent, while the S&P 500 down 0.4 percent at 1104. Financials were the best performer of the week, up 1.5 percent, followed by consumer discretionary, up 0.8 percent. The worst performers were materials and utilities, both down 2.4 percent.
Patrick Kernan, who trades S&P options at the CBOE, said he does not see a directional bias for stocks right now, based on the way options are pricing. "I think the biggest driver is a lack of inertia. People are really waiting to see if there's some driver out there. A lot of people were really spooked by Greece," he said.
Economists expect the next round of U.S. data to have some hiccups, as the impact of major snow storms along the east coast shows up in the numbers. In the past week, jobless claims, housing data and consumer confidence all were weaker than expected due to the impact of snow bound workers and consumers.
"You're going to get a whole bunch of jumbled data. Whereas, the employment number is the one you can usually rely on for setting the stage, I think it's going to be more than a normal amount of confusion," said Robert Sinche, chief strategist at Lily Pond Capital Management.
"I think it's going to be very tough to get a lot of conclusive evidence next week. It's going to be a tough week," he said. In addition to the U.S. data, there are several rate meetings, including the Bank of Australia Tuesday and the European Central Bank and Bank of England Thursday.
The ECB is not expected to raise rates, but it will be an important meeting because it is addressing unwinding some of its quantitative easing, he said.
Greece's capital raising effort could calm markets if it is successful. He said the market is looking for clarity on the role of the German government, which was reported to be considering guaranteeing the purchase of bonds by state-owned lender KfW. Greece's problems have been troubling to Wall Street, which worries a default by Greece would lead to a domino effect among other weak European economies and create stress on the unity of the euro countries.
"If you look at what the (Greek) prime minister said, they sort of have enough cash around until the middle of March, which is when their next round of proposals are due in terms of their budget adjustments. You certainly wouldn't want to be forced into trying to raise funds into that potential turmoil and excitement," he said."So I think, in the sense of trying to stretch it out and not have the middle of March be a serious time frame, I think it's important."
"I think getting some sort of support from the Germans or others in the EU would also be important in terms of diffusing some of the sensitivity," Sinche said. He said the resolution of the bond sale next week could be positive for the euro, but the currency's longer term trend is lower and it would be a good time to take profits.
The dollar gained 1.8 percent against the euro in the past month and is up 10 percent over the past three months. For the past week, it was barely changed, finishing at a level of $1.3617 per euro.
Quinlan expects the Greek crisis to be resolved by EU members. "It's an important risk to keep in mind, but the way I see it...the resolution will involve the core of Europe, France, Germany...Brussels. They want to ring fence the Greek problem now because if it moves into Spain and Portugal, the costs go up. I don't think we're going to to see sovereign default out of Greece. If anything, you're going to see Europe coming to the defense of a very weak partner," said Quinlan.
The snow factor could be an important component in much of the coming week's economic reports, according to Marc Zandi, chief economist at Moody's Economy.com. He expects the February employment report to show the loss of 75,000 non farm payrolls. Before the snow factor, he expected the number to be zero.
ISM manufacturing data, reported Monday, will also see an impact. Moody's Economy.com expects ISM to decline to 57.3 from 58.4 in January. Without the snow, it was expected to be 58.
The lack of shoppers in dealers' show rooms (from both snow and Toyota's troubles) was a negative for Tuesday's February car sales, which he expects fell to an annual rate of 10.3 million in February, from 10.8 million in January. Chain stores' monthly sales will also be affected, as will weekly jobless claims, both reported Thursday.
"It's going to be weak for February, but it's going to bounce back in March and April," he said. For that reason, Moody's Economy.com is not changing its first quarter GDP forecast for growth of 2.5 percent.
Other data expected in the coming week includes personal income and construction spending Monday; ADP employment, ISM nonmanufacturing and the Fed beige book Wednesday; productivity and costs; factory orders and pending homes sales Thursday, and consumer credit, reported Friday.
Quinlan said he thinks the market will continue to move higher despite the multiple issues bothering it. "Here and overseas, I think you're looking at very unsynchronized global economy which creates a lot of head winds, zigs and zags," said Quinlan
"U.S. investors and foreign investors are becoming more comfortable owning dollar assets," he said. Last year, $20 billion left the U.S. for foreign investments, particularly in Europe. "You're going to see less outflows this year among U.S. investors. You're going to see more money come out of Europe into the United States."
He expects the S&P 500 to reach 1250 to 1300 by year end, at the high end of strategists' forecasts.
Quinlan noted that China's moves to tighten lending in recent weeks is another factor that has been a concern to investors.
"With China tightening here, that always creates a knee jerk reaction of money running form the emerging markets," he said. He said the last time China tightened in the summer of 2005, emerging markets actually did well. The MSCI emerging markets index total return was 3.5 percent in the first three months, and 26 percent in 12 months.
On the plus side, Quinlan said U.S. corporate earnings should be a very positive story for stocks this year, after companies trimmed costs and top line growth reappears.
In the past week, both Citigroup and J.P. Morgan raised their 2010 forecast for earnings on the S&P 500. Goldman Sachs strategists, in a note Friday, said earnings will approach prior peak levels in 2011, and that's a key reason they have a bullish view on U.S. stocks.
Scott Redler, who follows the market's short term technical moves, said the stock market in the coming week could be positioning for a push higher.
"Technically, next week's a very important week for the market, and my gut tells me it's going to be to the upside," he said.
Redler said the major indices are setting up a pattern, called a "wedge." For the S&P 500, the wedge would trigger a new directional move if the S&P closes in the 1110 to 1115 range. Typically, a a wedge forms after a big move, when the market consolidates, he said. It created the pattern after the S&P peaked at 1150 in January and then corrected to a low of 1044. Its current level is now in the middle of the pattern, a place from where there could be a volatile move in either direction.
Redler says he has a hunch that move will be higher, based on the recent technical strength of some important tech stocks like
Apple, Research in Motion, Baidu, Microsoft, Cisco and Intel. He said if it does move higher, the next target for the S&P would be 1130, and then a possible return to the January high of 1150.
What Else to Watch
Earnings reports are expected from El Paso, Dish Network and McDermott Monday; AutoZone, Staples and Hovnanian Tuesday; Costco , B.J.'s Wholesale, Foot Locker, Pet Smart and Royal Bank of Canada Wednesday; Anheuser-Busch Inbev and Toronto Dominion Thursday, and WPP Group Friday.
Fed speakers in the coming week include Richmond Fed President Jeffrey Lacker, who speaks on regulatory reform in Washington Monday. Minneapolis Fed President Narayana Kocherlakota speaks Tuesday on the economic outlook, and Philadelphia Fed President Charles Plosser and Boston Fed President Eric Rosengren both speak in Philadelphia Wednesday on rebuilding capital markets. Also that day, Dallas Fed President Richard Fisher speaks in New York on globalization and the recovery, while Atlanta Fed President Dennis Lockhart speaks on the economic outlook at a separate event in New York.
On Thursday, St. Louis Fed President James Bullard speaks at St. Cloud University on the topic of "the Fed at a crossroads."
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