The Week Ahead: Economic Data, Earnings Compete for Attention

by Daniel Putnam | July 22, 2011 5:37 pm

The Week Ahead: Economic Data, Earnings Compete for Attention

The U.S. equity market has rallied in recent days, as the strength in corporate earnings results – particularly in the technology sector – has helped divert investors’ attention from the recent softness in economic data. Next week, however, the spotlight will return to the economy, and the numbers will have to be at least in line with expectations for stocks’ upswing to continue.

Next week’s busy economic calendar is highlighted by housing and employment data, the durable goods report and Fed Beige Book (Wednesday), consumer confidence (Tuesday), and the Chicago PMI (Friday). The report that is likely to receive the most attention is the advance second quarter GDP number, due out Friday morning at 8:30 ET.

In reality though, it is unlikely that this report will be a significant market mover unless there’s a major surprise. The second quarter is now far in the rear-view mirror for investors, and the short-term disruptions resulting from the earthquake in Japan were factored into stock prices months ago.

If anything, there may be some room for an upside surprise in the GDP number because expectations are now so low. Goldman Sachs and Morgan Stanley were among those that cut estimates for the 2Q number during the past week, with Goldman moving from to 1.5% from 2.0% and Morgan reducing its estimate to 1.9% from 2.6%.

Next week’s earnings calendar is also on track to bring a raft of actionable news for investors. In technology, important reports include Netflix (NASDAQ:NFLX[1]), Amazon.com (NASDAQ:AMZN[2]) and Juniper (NASDAQ:JNPR[3]), while 3M (NYSE:MMM[4]) and Boeing (NYSE:BA[5]) highlight a busy week for the industrials sector. A number of mining and energy companies are also scheduled to report, including ConocoPhillips (NYSE:COP[6]) and Chevron (NYSE:CVX[7]).

Even with this heavy flow of news on tap, a more critical measure of market sentiment may be the performance of two stocks that have already reported: Google (NASDAQ:GOOG[8]) and Apple (NASDAQ:AAPL[9]). Google’s shares have surged to about $617 from $473 a little less than a month ago (a gain of more than 30%), while Apple has risen more than  26% in the same time frame. At this point, it’s hard to imagine the broader market sustaining its rally without continued participation from these bellwether names.

Financial stocks also represent an important barometer for the market in the week ahead. The sector managed to pull out of a tailspin this week, with most major bank stocks staging relief rallies in the 5-10% range and the beleaguered Morgan Stanley (NYSE:MS[10]) rocketing about 20% from its Monday low. This represented a fresh source of leadership for the market, given that financials have been a boulder chained to the major indices since mid-February. Watch this sector closely, as a sustainable upturn in financials could be the fuel that finally moves the market out of its longstanding trading range.

Finally, be sure to keep an eye on the technicals. The Nasdaq 100 Index moved out to its high for the year on Friday, which also puts the index at its highest point in over a decade.

ndx The Week Ahead: Economic Data, Earnings Compete for Attention[11]

Typically, when one index moves to a new high, others will follow. In this case, however, the jury is still out since Apple and Google – which make up over 18% of the NDX – have single-handedly carried the index to its current level. Still, the other major indices are all within striking distance of breaking out to their own new highs for the year, as shown in the table below. Watch these levels carefully in the coming weeks, and keep an eye on the mid- and small-cap indices for confirmation. The last time all of the major indices broke out to new highs, in December of 2010, the Midcap 400 and Russell 2000 led the large-cap indices by five to ten sessions. As a result, don’t put too much weight into a breakout by the S&P or other large-cap index until the MID and RUT follow.

 

Index Previous intraday high Friday close % gain needed for breakout
DJIA

12,876.00

12,681.16

1.51%

S&P 500

1,370.58

1345.02

1.86%

Nasdaq 100

2,418.99

2,429.50

Out

S&P Midcap 400

1,018.65

991.79

2.64%

Russell 2000

868.57

841.82

3.08%

Endnotes:
  1. NFLX: http://studio-5.financialcontent.com/investplace/quote?Symbol=NFLX
  2. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  3. JNPR: http://studio-5.financialcontent.com/investplace/quote?Symbol=JNPR
  4. MMM: http://studio-5.financialcontent.com/investplace/quote?Symbol=MMM
  5. BA: http://studio-5.financialcontent.com/investplace/quote?Symbol=BA
  6. COP: http://studio-5.financialcontent.com/investplace/quote?Symbol=COP
  7. CVX: http://studio-5.financialcontent.com/investplace/quote?Symbol=CVX
  8. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  9. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  10. MS: http://studio-5.financialcontent.com/investplace/quote?Symbol=MS
  11. [Image]: http://investorplace.com/wp-content/uploads/2011/07/ndx.gif

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