The Week Ahead: Real Estate and Unemployment Are Key

Includes: BIG, HRB, IYR, KR, SPY
by: Price Headley, CFA

Stocks fought off the sellers on Thursday and Friday, though it wasn’t enough to pull the market back into the black for the week. Was it the beginning of a rebound though? We’ll discuss that possibility below.

First, however, we need to work our way through last week’s economic data – and there was plenty of it. We’ll even chart the most important pieces of the economic puzzle,

Economic Calendar


As promised last week, we saw fireworks thanks to a boatload of economic news. In short, the real estate crisis is ‘less worse’ in terms of decline, confidence is more than a little shaky, and joblessness is creeping higher again. (Other than that, everything’s great.)

The Conference Board’s consumer confidence measure was the early bomb for the week, dropping from 55.9 to 46.0 – well short of the expected 56.5. What happened? The confidence reading was largely on the rise in anticipation of a better employment situation and signs of life on the real estate front. When investors saw neither over the last few weeks, fears of the worst-case scenario were revived.

Interestingly, however, the University of Michigan sentiment index score didn’t move much from its prior reading. Don’t read too much into one bad month just yet; we’ve seen blips before end up having no major effect. Here’s a chart of both, compared to the S&P 500.

SPX Monthly Chart with Consumer Confidence & Michigan Sentiment


As was said, the ultimate prompts for the stifled confidence came from a still-declining Case-Shiller Index, weak new home sales, and tepid existing home sales. In fact, new home sales reached multi-year lows last month, of 309,000. Existing home sales sank to 5.05 million, though that’s still better than levels we saw a year ago. The total between the two is also better than it was a year ago.

The concern for both, however, is the renewed or existing downtrend, particularly knowing that the average sale price sank to nearly a twelve-month low of $254,500 last month. Lower volume on top of lower per-sale dollars means there’s still a very tepid amount of real estate activity happening. Here’s a chart of the whole shebang.

SPX Monthly with Existing Home Sales, New Home Sales, and Average Sale Price

And finally, both the new unemployment claims and the continuing claim levels are starting to drift higher again after months of nice downtrends. The market can absorb two or three months of that. Over the last eight weeks though, we’ve seen both numbers move higher as much as they’ve moved lower. IT’S STILL TOO SOON TO CALL AN UPTREND, though it’s not too soon to say the prior downtrend is broken. Take a look at the chart.

SPX Monthly with Unemployment, Continuing Claims, and Initial Claims


By the way, the reason we care so much is that the unemployment claims trend is a very strong predictor of market direction. Moby Waller detailed this idea back on November 10th.

As for the coming week, Monday kicked things off with income and spending levels. There’s a lot on the plate mid-week, but we don’t get into the big announcements until the end of the week with Thursday’s factory orders, pending home sales, and then Friday’s unemployment data and workweek/hourly earnings news.

NASDAQ Composite:

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Thanks to solid effort on Thursday and Friday, the NASDAQ managed to come within 5.6 points of a breakeven last week. It closed just 0.25% in the hole compared to the prior Friday’s close. Though there’s still some doubt about the longevity of this trend, the bulls are in the driver’s seat for the time being.

A couple of bullish clues support the long case right now.

For starters, the composite is back above short-term as well as long-term moving averages again. In fact, the NASDAQ appeared to find support at its 20-day line (red) and its 100-day line (blue) last week after the early dip. Both are currently resting at 2189, but will be at 2190 by Monday. That’s the new line in the sand. The 2125 level is still in play as well though.

The other bullish indication is the VXN – the NASDAQ Composite’s Volatility Index. After it ran into its lower Bollinger band two weeks ago, and pushed a little higher, most expectations were for a repeat of what we’d seen so many times in recent months…a pullback from the market as the VXN ran back up to the upper Bollinger band. But, nope. The VXN is moving lower again. Moreover, now that the lower band has started to dive, the VXN has plenty of room to run before finding a floor again. That actually bodes bullishly for stocks.

That said, given the whole scenario, any bullishness at this point should be very tempered. Our Traders Edge service offers more details to that outlook.

Nasdaq Composite Daily Chart with VXN


Sector Performance

The financial sector staved off the bear attack last week better than any other group, while the consumer discretionary stocks managed to stay afloat as well (a strength that makes sense – see the earnings comments below). However, there are no new ‘trends’ emerging from any sectors right now.


Earnings Calendar

It’s clear from our rapidly shrinking list of upcoming earnings that earnings season is essentially over. And what’s it look like now that more than 75% of the S&P 500 companies have posted results? More than 70% of these companies beat expectations. Y-o-y quarterly revenue was up too, by 4.9%. That’s the first revenue growth we’ve seen since the third quarter of 2008, pointing to a real – not just an accounting – recovery.

The tech sector was the most impressive on the ‘beat’ front, with 90% of its companies doing better than analysts had guessed. However, it was the consumer discretionary sector that saw the biggest y-o-y leap in total earnings. The group was only supposed to increase income by 54%, but actually toped comparable earnings by 110%.

Anyway, here’s the calendar.


Disclosure: No positions