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Monday Morning Outlook: Are U.S. Assets Starting to Decouple from Europe?

The technical backdrop continues to improve for small- and mid-cap equities

by 1/14/2012 11:18:52 AM
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Indicator of the Week: Martin Luther King, Jr. Day & Short Trading Weeks
By Rocky White, Senior Quantitative Analyst

Foreword: Markets are closed Monday in observance of Martin Luther King, Jr. Day. As I often do, I'm taking a quantitative, historical look at what the market has done over this holiday week. Furthermore, I'll break it down more generally by comparing shortened trading weeks against typical five-day weeks.

Martin Luther King, Jr. Week: Markets began closing for MLK Day in 1998 (although it became a federal holiday in 1986). The first table below shows how the S&P 500 Index (SPX) has performed during the week of MLK Day. Specifically, it shows both Tuesday's return and the return for the entire week. As you can see, there's a lot of red in that table.


S&P 500 Returns Following the MLK Holiday

The second table below compares the MLK holiday week to other weeks. Historically, this has been a brutal week for the market, with the SPX averaging a loss of 1.10%, and ending higher only 29% of the time.


Weekly Returns Following MLK Holiday v. Other Weeks

General Holiday Weeks: Still looking at the SPX since 1998, below is a table that shows how shortened trading weeks have done compared to typical five-day weeks. Despite the generally bearish MLK holiday weeks, the shortened weeks overall tend to outperform other weeks when going by average return (0.34% vs. 0.03%).


Returns for a Holiday-Shortened Weeks vs. Regular Weeks

This final table breaks down the short trading weeks by the weekday of observance (Monday vs. Friday). The trading weeks with a Friday holiday are very bullish. Unfortunately, we have to wait all the way until April for one of those. Meanwhile, weeks with a Monday holiday are most bearish. However, the underperformance is mostly due to MLK week. Disregarding those 14 weeks, Monday holiday weeks average a return of 0.13%, and are positive 54% of the time.


Returns from Shortened Weeks by Day

This Week's Key Events: Blue Chips, Banks in the Earnings Spotlight
Schaeffer's Editorial Staff

Here is a brief list of some of the key events this week. All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.

Monday

  • The market is closed in observance of Martin Luther King, Jr. Day.

Tuesday

  • The economic calendar will kick off on Tuesday with the Empire State manufacturing index. Citigroup (C ), Wells Fargo (WFC), TD Ameritrade (AMTD), Forest Laboratories (FRX), McMoRan Exploration (MMR), Cree (CREE), and Linear Technology (LLTC) are expected to announce earnings.

Wednesday

  • On Wednesday, Wall Street will see the Labor Department's producer price index (PPI) and core PPI, as well as the Fed's monthly report on industrial production and capacity utilization. On the earnings front, we'll hear from Goldman Sachs (GS), US Bancorp (USB), Bank of New York Mellon (BK), State Street (STT), PNC Financial (PNC), eBay (EBAY), F5 Networks (FFIV), and Fastenal (FAST).

Thursday

  • The regularly scheduled report on weekly jobless claims will hit the Street on Thursday, as well as the holiday-delayed crude inventories data, the Philly Fed manufacturing index, monthly housing starts and building permits, and December's consumer price index (CPI) and core CPI. Bank of America (BAC), American Express (AXP), IBM Corp. (IBM), Microsoft (MSFT), Intel (INTC), Google (GOOG), Morgan Stanley (MS), Southwest Airlines (LUV), Intuitive Surgical (ISRG), and BlackRock (BLK) will share the earnings spotlight.

Friday

  • The week wraps up with the latest data on existing home sales. Finally, the earnings calendar concludes with the latest quarterly results from General Electric (GE), Fifth Third Bancorp (FITB), Comerica (CMA), Schlumberger (SLB), SunTrust Banks (STI), and Parker Hannifin (PH).

And now a few sectors of note...

Dissecting The Sectors
Sector
Utilities
Bullish

Outlook: The utility sector emerged as a pocket of technical strength in 2011, as the PHLX Utility Sector Index (UTY) added about 14% for the calendar year -- while the broader S&P 500 Index (SPX) ended just south of breakeven. In fact, following a breakout above its October peak, UTY wrapped up December by rising to a fresh three-year high of $485.14. On the fundamental front, the utility sector also sports some attractive dividend yields, which are certainly a selling point in the context of a choppy market environment. However, there's plenty of pessimism surrounding the group, despite its technical strength and fundamental appeal. Drilling down, 80% of stocks in the electric utility group are trading above their 200-day moving averages, but they've attracted only 44% "buy" ratings from brokerage firms. Meanwhile, the gas utility group boasts 88% of stocks trading above their 200-day moving averages -- yet these names have garnered only 40% "buy" ratings. Within the group, Duke Energy (DUK) and Consolidated Edison (ED) easily racked up double-digit percentage gains in 2011, and both stocks followed suit with UTY by ending the year in annual-high territory. Nevertheless, there's not a single "buy" endorsement between the two. Going forward, a round of well-deserved upgrades could draw a fresh wave of buyers to the table, helping these stocks extend their positive price action. In fact, the recent pullback in UTY could prove to be an appealing entry point for bulls, with the 80-day moving average and former resistance in the $465 neighborhood just below the index's current perch.
Sector
Leisure/Retail
Bullish

Outlook: U.S. consumer borrowing rose by 10% in November -- the most in a decade -- the Federal Reserve reported last week, reflecting Americans' accelerated credit-card usage during the holiday season. In fact, the level of consumer credit outstanding soared by $20.37 billion to $2.478 trillion -- more than doubling economists' forecasts for a rise of $8.0 billion, and marking the 13th increase in 14 months. Separately, business travel activity and tourism are on the rise, according to the Fed's latest Beige Book, further underscoring a strengthening consumer pocketbook. Meanwhile, the SPDR S&P Retail ETF (XRT) remains a technical outperformer. Following a recent bounce from support at its 320-day moving average, XRT is now looking to surmount pressure in the $53 neighborhood. On the plus side, bulls should note that the fund's 50-day buy-to-open put/call volume ratio is turning higher once again, which has been consistent with previous periods of bullish price action in the sector. Overall, we remain upbeat on select names within the consumer discretionary group, and recommend focusing on stocks in solid technical uptrends that are surrounded by skepticism. A few of our current favorites within the sector include retailers AutoZone (AZO), Advance Auto Parts (AAP), Nordstrom (JWN), Limited Brands (LTD), and Whole Foods Market (WFM), along with restaurateurs Chipotle Mexican Grill (CMG), Domino's Pizza (DPZ), and McDonald's (MCD) -- the last of which was the Dow's best-performing component in 2011. In fact, the broader restaurant sector boasts 55% of stocks above their 200-day trendlines, with only 49% "buy" ratings from brokerage firms. With skepticism still lingering toward these discretionary stocks, contrarians can continue to capitalize on situations where sentiment has yet to catch up with the bullish technical performance.
Sector
Homebuilding
Bullish

Outlook: Housing data continues to come in strong, as evidenced by Lennar's (LEN) solid earnings showing last week. In fact, the company's CEO said he's "cautiously optimistic that we are seeing a real bottom form, and will begin to see signs of recovery" in 2012. Furthermore, the firm reported a 20% jump in new home orders, which are a key indicator for homebuilders. In fact, builders have been quietly outperforming for some time now, as the SPDR S&P Homebuilders ETF (XHB) bested the broader equities market with a 3.4% gain in December. On the charts, the fund is trading solidly above its 160-week moving average, which is now turning higher. This trendline covers a roughly three-year period of time, dating back to the peak of the 2008 financial crisis. XHB has already tacked on about 7.8% this month, and still has more room to run before challenging its 2011 high in the $19 neighborhood. In addition to the solid price action, reports indicate that deep-pocketed hedge funds are buying into housing stocks, which could translate into a steady tailwind for the sector. Despite the outperformance, media sentiment remains strongly skeptical toward the group -- and analysts are also unconvinced. Stocks such as Toll Brothers (TOL), Meritage Homes (MTH), and D.R. Horton (DHI) ended 2011 comfortably higher, but brokerage firms have doled out very few "buy" ratings on the trio. Going forward, these names could benefit from a round of upgrades as the positive price action continues. Given the improving fundamentals and encouraging technical outlook, housing stocks could be poised to benefit from a reversal of negative sentiment in 2012.
Sector
Financials
Bearish

Outlook: Banking stocks took a beating late last week, after JPMorgan Chase (JPM) confessed to a "modestly disappointing" fourth quarter. In addition, Bank of America (BAC) fell in the face of reports that it could scale back its U.S. operations. From a broader standpoint, the Financial Select Sector SPDR (XLF) modestly outperformed the broader SPX in December, but swallowed a hefty loss of 18.5% for the recently concluded calendar year. Plus, XLF remains stuck below staunch resistance at its 200-day moving average. On the sentiment front, downgrade potential for the financial sector seems to be elevated at the moment. From late May through late November, the percentage of "buy" ratings on bank stocks rose to 40.4% from 32.5% -- a period of time during which XLF shed 25% of its value. Downgrades in response to the group's underperformance could prompt additional selling pressure. However, as a point of caution, XLF's 50-day buy-to-open call/put volume ratio has turned lower once again, with this sentiment indicator chopping around in a pretty accurate imitation of the group's range-bound price action. Going forward, this could result in a continued sideways price trend, increasing the risk of initiating short positions at the moment. During the very short term, the slew of bank-related earnings reports on the horizon could determine the sector's direction over the coming weeks. While we still see risk in this group, it should be noted that financials rallied into late February last year before the bottom fell out.

Prepare for the investing week ahead. Every week, Bernie Schaeffer and his staff provide you with their insight about what has happened and, more importantly, what will happen in the market. We dig deep and show you what's happening behind the scenes, and tell you which indicators are predicting major market moves. If you enjoyed this week's edition of Monday Morning Outlook, sign up here for free weekly delivery straight to your inbox.

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