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The market prepares for a significant week with votes coming from Congress on the Syria situation. Expectations are that Congress will likely vote on Syria, but many pundits are starting to believe that many Americans may not be supportive of the strike, which could cause Congress to vote down the deal. It will be interesting to see how the plan plays out. Additionally, the market will be facing speculation around the Federal Reserve. After two weak jobs reports last week, the appetite to taper may not be as strong. There is only one speech, but speculation will be plentiful. Overall, it could be a wild week with all attention on the Fed and Syria.

Chart Overview

The S&P 500 (SPY) has held a key channel support line despite August to September weakness. We are still in a long-term uptrend, and even with some more market weakness this week, we can maintain this channel. Common thought around the market now is that the market will flatten out in September and can then rise again to end the year. The Dow Jones (DIA) and Nasdaq (QQQ) look quite similar to the SPY.

Economic Data

Date

Data Report

Market Expectations

Previous Report

September 11

Wholesale Inventories - July

0.2%

-0.2%

September 11

Crude Inventories - 09/07

N/A

-1.84M

September 12

Initial Claims - 09/07

327K

323K

September 12

Import/Export Prices - August

N/A

0.0%/-0.4%

September 13

Retail Sales - August

0.4%

0.2%

September 13

PPI - August

0.2%

0.0%

September 13

Michigan Sentiment - September

82.0

82.1

The economic data week is fairly light without much until Thursday and Friday. With Syria and Fed on the plate, though, economic data would take a seat anyways. The key reports to watch this week are Retail Sales, Michigan Sentiment, and Jobless Claims. Retails sales are expected to show some strength in August, which would be a good sign as retail has been under fire with gas prices rising. Michigan Sentiment is always important, but we would look for jobless claims to be the key report of the week. If more weakness exists in employment, the market could be looking for less interest in taper.

Foreign Markets

Foreign markets have taken a back seat to the Syria and the Fed situation, and we expect more of that to continue this week. The major reports for the foreign markets this week include Japan's GDP and China's Consumer Price Index on Monday. China's Industrial Production and Italy's GDP round out Tuesday. Finally, we get the ECB Monthly report on Thursday, which always gives us solid information about how the ECB feels about their current status.

Earnings

Date

Company

Previous EPS

Estimated EPS

September 9

PVH (PVH)

1.25

1.37

September 12

Kroger (KR)

0.51

0.60

September 12

Lululemon (LULU)

0.39

0.35

September 12

Ulta Salon, Cosmetics, and Fragrances (ULTA)

0.54

0.67

Earnings are quite light this weak. No major reports that can move the markets, but the entire group is good for retail understanding.

Fed Outlook

The Fed is crucial to the market this week and the coming weeks. The Fed has very limited action this week, and that means all movement will be on speculation. There is one speech from Fed President Williams on Monday that should set the tone for the week. Williams may update his recent thoughts based on employment data, and economic data leading up to the FOMC September meeting will help shape the speculation on taper or not. It is crucial to the market if we taper or do not, so as these issues play out, the market should have some definite volatility.

Trades

This week, we like the looks of McDonald's (MCD) long while we believe that Lululemon is a stock with potential for weakness. We have been behind MCD for quite some time, and we believe that the company is looking like it may have bottomed. MCD has been showing solid relative strength, and we like the name for this week and moving forward.

McDonald's looks like it has some solid catalysts moving forward this week, leading into the company's August sales report on September 10. The report looks quite interesting to us. The company had issues earlier this year and last year with domestic US sales. The problem for the company was that they were suffering from a lack of menu change, low margin products, and had not done well as competition was leveraging heavy marketing and new menu offerings. Since its Q1 report, the company has done better with July same-store sales up nearly 2%. Sales were up in May and June as well. The company, since its early year debacle, has launched new menu items likes egg white sandwiches, chicken wraps, and new smoothies.

The company's focus on health items is a big plus as health-conscious consumers will continue to be a trend moving forward. With three straight months of gains, the company has very positive momentum right now that we think should continue with August sales. August, additionally, saw higher gas prices that should have led to better trends there as well.

We like the trends here, and the company is in a great buying spot right now. Wells Fargo noted:

McDonald's same-store sales to improve sequentially in Q2, Q3, and Q4, due to its promotions, easier comps, and new products. The firm expects the company to report in-line Q2 EPS but slightly higher than expected same-store sales. Wells Fargo believes that the company has been gaining market share momentum in the U.S. in recent months and it keeps an Outperform rating on the shares.

Look for shares to start moving if they can break back above the key 50-day MA, and we believe that August sales will provide a very solid catalyst for the company moving forward. Further, as fear enters the market, companies like MCD can attract buyers over discretionary and cyclical stocks.

Trade: Long, MCD

As we enter a rough period in the market, discretionary stocks are likely to underperform. One name we have not been high on for some time is Lululemon. We believe that the stock could hit a weak stretch.

The company is a high-growth name with a lot of overvaluation that seems to have priced most of its near-term growth into the name already. As we wrote in our most recent article:

Two areas in this category that are very strong for growth are LULU's 2014 Sales Growth and their 2014 EPS Growth. In their June 2013 vision and goal setting presentation LULU identified what it perceives as its growth drivers. They are the North American market, the International market, and their smaller men's and Ivivva lines. North America remains LULU's most promising area for growth. The company is at about a third of its 300-store goal with a rate of new stores opening at around 30-40 per year. The lesser recognized but growing lines of men's clothing and Ivivva, their line for younger girls, is also a key component of their North American market.

Yet, we also noted that the value in the company was not attractive:

Lululemon Athletica Inc.'s value lands right in the middle of a neutral rating for us, and overall we see the stock as overvalued. The company's future P/E is 30.7, and we look for value below 15, which means that presently the company is overvalued. While we tend to look for value under 1.0 for Price/Sales LULU is at 8.3. The company also shows weak value ratings in price/book and debt-to-equity ratios.

For us, LULU is an expensive growth stock. The problem we foresee is that a flight to safety has already begun and it will move further if we do go into a strike with Syria and taper happens this month. If that is the case, LULU is one name that we can see will lose value at a faster rate than others. While this may be true f most discretionaries, we prefer LULU due to its recent hardships. In the past three months, the company has seen the loss of its CEO, comps come down for sales, rising competition, and quality problems are still persisting.

Look for LULU weakness into earnings at the end of the week. We like LULU for a short up to the report, and we believe that they could be in for a disappointment.

Trade: LULU, Short

Conclusion

It is first all about Syria, and it is second about the Fed. Data developments will have some importance, but the market will mostly be news watching for how Syria develops over anything else. If the Syria strike does not happen, the markets should rebound strongly. If the strikes do happen, it will create a multi-week challenge for the markets.

Source: Weekly Outlook: Time To Add McDonald's, Watch For Decline In Lululemon