The Week Ahead: Another Last-Minute Collapse?

by: Markos Kaminis

The stock market had a panic attack at the end of the week last week, and for good reason. Unemployment was reported at 5.5% in May, up five-tenths of a percentage point from April. The jobless rate was also significantly greater than economist expectations for 5.1%. As a result, the S&P 500 Index collapsed 3.1% on Friday alone, negating a fractional gain that had been achieved for the week through Thursday.

The largest one-month increase in unemployment since 1986, sent the dollar spiraling against foreign currencies. The greenback moved to $1.578 per euro. As if that was not enough bad news for one day, the oil market turned frenzied as well. Dollar weakness combined with tough talk from Israeli Transportation Minister Shaul Mofaz to send oil skyrocketing.

Mofaz, also a contender for prime minister, said that Israel would have to attack Iran if it did not shut down its nuclear program. Wait, there’s more. A Morgan Stanley analyst suggested oil prices could reach $150 by July. Crude oil for July delivery promptly jumped 8.4% to settle at $138.54 on the New York Mercantile Exchange. Therefore, now more than ever, investors are concerned about what might happen this coming week.

The Week Ahead

Follow through or momentum news flow will likely drive the stock market more than any economic data this week. Market strategists and economists will publish plenty of commentary and make many public appearances, responding to the employment situation and other topics of interest. Wall Street Greek covered the jobless rate topic extensively in our article, “Unemployment Rate Rockets.”

The media will very likely seek out geopolitical news related to Iran and Israel. Even so, given the sharpness of Friday’s oil price rise (the greatest ever one-day increase), and the fact that it came on a Friday, when traders are least tolerant of carrying their book overnight, we expect oil to backtrack a bit to start this week. What happens afterward will depend on news flow from Iran and Israel. In the past week, Iran’s President reaffirmed his view that “Israel will disappear,” while Israel looks to be moving closer toward a bombardment of its enemy. We expect Iran will have more to say on the subject in the days ahead, and give the market more reason to fear.

This week’s economic schedule is light, but includes several important reports. On Monday, look for April’s Pending Home Sales Index. The Fed’s Beige Book release on Wednesday will offer much insight into the state of regional economies. On Thursday morning, the Import and Export Prices data will offer more insight into inflation. Also, Retail Sales will be reported, but we believe this data will benefit from the timely distribution of economic stimulus rebate checks.

Friday the 13th offers the key Consumer Price Index, potentially sending the superstitious stock market into another end of week collapse if inflation is not well behaved. The University of Michigan/Reuters provides its first look at June Consumer Sentiment as well. In conclusion, we do not see catalyst for market rebound next week, and so we may now retest market lows.

The week’s limited earnings reports include: Monday – Krispy Kreme (NYSE: KKD), Pall Corp. (NYSE: PLL); Tuesday – Pep Boys (NYSE: PBY), Quality Systems (Nasdaq: QSII); Wednesday – Korn Ferry International (NYSE: KFY), Piedmont Natural Gas (NYSE: PNY); Thursday – EnerSys (NYSE: ENS), School Specialty (Nasdaq: SCHS); Friday – Synutra International (Nasdaq: SYUT) and a few more.