The Week Ahead: More Bad News?

Over the past few weeks, Wall Street Greek has been warning that as the market digests the new reality that inflation is a serious threat, it would likely retest the March 10 market lows. Ironically, on the same day the Federal Reserve released its minutes from the emergency meetings it held back in March, the market did retest the lows. The Dow Industrials closed the week down 4.2%, settling into a new low at 11,346.51. The S&P 500 drifted 3.0% last week, to close within five points of that aforementioned March floor.

As we pointed out in our article, “Technology Stocks, Underweight Tech Now!,” the Nasdaq Composite has lagged the overall market’s move to the breakpoint. We should point out though, that it’s not as if the Nasdaq has not moved lower in concert with the other indexes. It has, and it declined another 3.8% last week. It’s just that the composite is still 6.7% off the bottom, while the other indexes are already there.

The reason for this divergence is likely because the higher beta, or more volatile technology stocks that dominate the Nasdaq, previously moved sharply lower in exaggerated fashion into the March 10 bottom. This occurred as part of a market capitulation process. Capitulation occurs when investors give up on stocks en masse due to a catalyst-driven event, like the Bear Stearns unraveling. When that happens, high beta issues lead the market lower while exaggerating the broader move. Since we have not had another capitulation (read yet), the Nasdaq has lagged in revisiting its low-point.

“The Greek” believes that this quarter’s earnings season will offer evidence of both consumer spending softness and corporate investment weakness, leading technology firms to reduce their forecasts. We saw two companies do this on Thursday, in Research in Motion (Nasdaq: RIMM) and Oracle (Nasdaq: ORCL). We then warned about Micron Technology (NYSE: MU), which then reported bad news on Thursday evening sending the stock down nearly 13% on Friday. We expect more of the same for the rest of the tech sector in July, and so we are recommending investors underweight technology stocks now.

The Week Ahead

The week ahead is a holiday shortened one, as Americans celebrate Independence Day. The week’s marquee data point is clearly Thursday’s Employment Situation Report, which follows up on last month’s dramatic unemployment increase to 5.5%. Even so, there will be plenty more to keep us busy.

On Tuesday, the Construction Spending and ISM Manufacturing Reports, along with Monday’s Chicago area manufacturing survey, should only offer more bad news on these distressed sectors of the economy. We expect the construction report to indicate the spread of pain from residential into commercial construction, as retail and restaurant chains cut back on investment.

Wednesday starts the flow of monthly employment reports, as the Challenger Job-Cut Report, Monster Employment Index and the ADP Private Employment Report all weigh in on the deteriorating state of the labor market.

On Thursday, the regular weekly Initial Jobless Claims data should be overshadowed by the monthly Employment Situation Report. This data portends trouble if the unemployment rate gets even worse than last month’s 5.5%. After such a dramatic change last time around, further softening would seem to investors as if the wheels were coming off the economy, and they would be...

Also on Thursday, look for an important European Central Bank meeting to potentially offer the ECB’s first rate increase in its well-publicized battle against inflation. There is some hope the ECB might delay, after last week offered poor retail sales and confidence readings for Europe.

The day also offers another tough sentiment measure, the RBC Cash Index, and a check on the state of the non-manufacturing sector from ISM.

The week’s earnings schedule includes: Monday – H&R Block (NYSE: HRB), Mesa Air (Nasdaq: MESA); Tuesday – Apollo Group (Nasdaq: APOL), Constellation Brands (NYSE: STZ); Wednesday – A. Schulman (Nasdaq: SHLM) and Family Dollar (NYSE: FDO).

Comments

[User 138602]

agree with what you said about RIMM and ORCL but you cannot put all the eggs in the same basket. About technology what do you think of ACN and PAYX ? It is really hard to analyse a whole sector and I don t think that we should generalise neither if you really want to help the individual investors like us. Let me finish by telling you that I still appreciate the effort you put to try to help us.Ty

[ajhough]

A good overview that indicates what we can expect next week. Nothing looks good, as usual....

[Pauly B]

The the two big ones next week are employment and the ECB. If for some unknown reason the ECB raises rates to fight inflation it will likely cause gas to spike well into the mid 5.50 range in a few short weeks. If the ECB does raise rates it could have major implications throughout the world as our dollar continues to loose value. It is not in ECB's interest see our dollar fall against the Euro.

[User 201843]

An ECB move up, would indicate :
A parting of ways between the Central Banks!
Major disruption in all markets!

No matter what stocks you hold get out!

Despite the "angst" to come if its done, they have to do it.... raise rates that is.
They (Europe) have had experience with inflation and the effects it has.

Lots of potential for a lot of pain in the future.

[User 218405]

I think you missed one important factor. Congress is talking about oil. T buy oil you may have to pay 100% and that would end speculation. This may cause a run to sell oil and I would hate to be long oil at this time Stay out of the oil contracts.
I would not sell my stocks at this time. A run may come quicker than you think.

[ArtfulDodger]

No hope in the long run to save our nation, as we've known it.

For as long as so many people want to keep leftists in power so that they can create more government to combat the problems and disasters that their government programs and legislation caused in the first place, we are eventually doomed economically.

And government bureaucrats do this over and over, but always wiggle out of what they've done by blaming private industry (Big Oil, Big Pharma, and the like, and of course a bogeyman such as Bush or Cheney or Rove), and the people for what they have brought about.

With the help of the Marxist media, the people then yell for the government to do even more, thus causing problems that will have to be faced in the future—and that means more government rules, regulation, and legislation that brainwashed parrots scream for.

And clearly, it doesn't help sending our forces around the world to carry out other nation's wars for them. You can't blame Bush for all of this either. The Dumborats in Congress voted to go get the Toy Tiger in Iraq (except for the members of the Black Caucus, which only votes for bills to punish American businesses and individuals); and Bush didn't put troops and bases in over 140 nations around the world. They were there when he took office.

Meanwhile, America has an invasion from the south, crashing stock markets and the dollar, along with hyper-inflation, declining property values, exploding crime (see Sean Hannity's America from Sunday, June 22, `08), and energy and food prices nearly equalling Germany's in the 1920s.

Enjoy the ride, especially those of you who're calling for even more leftists to take over so they can create more government to punish businesses and anyone else who is succeeding in the private sector.

Parasites engender more parasites of different types, because when one begins its feeding, it weakens the host, which invites even more suckers to the party. The host soon withers to nothing. Consider the American people the host.

[Jim Hawthorne]

ArtfulDodger.... surely you're not referring to John McCain, the RNC, and the entire current Administration as "leftists"? : )

[ArtfulDodger]

Dear Jim Hawthone:

Both Bush and McCain and Bush's entire Administration are statists. That is, they believe that the government should solve and be involved in nearly every facet of business and the American people's lives.

If you don't understand that that is leftist, then there's no helping you.

Neither Bush nor McCain will try to undo any of the harm that Skinflinton's or Papa Bush's Ads did to the nation through regulation, taxation, and other restrictions on the American people's lives.

Republicrats may speak of freedom and free markets, but look at what they do. When a problem comes up, they create more government, as both Baby Boy Bush and Papa Bush did.

The thing is that the Republicrats are moderately better than any of the Controlrats, either now or all the way back to Woodrow Wilson.

Both are statists, and thus leftists, one only moreso than the other.

[Kunst]

ArtfulDodger, copy/paste is a wonderful thing, but don't abuse it.

[swaps]

I can't see Congress changing oil margin requirements.
They don't even realize that the banking system - which needs continually expanding wages to handle the burden of interest payments owed to the banks - is clashing with the globalists who are lowering wages (at best stagnating them).

The globalists are winning and the people no longer can come up with gouging interest paymends very easily (in the aggregate).

Congress doesn't realize that fearfully sitting by on their hands while the Neocons plan to destroy Iran to proetect Israeli hegemony oil could wind up at $300 - if it can find a way here.

This government inertia, combined with an international policy of hate, makes the fudged reports to be issued this week just background buzz.

All these leadership people chant the mantra of free market forces - but from the existence of the control-the-market Fed to the control-the-world U.S foreign policy - free markets are in chains.

The chaos right now in part is violent struggle against the chains of artificially imposed control.

[Dean Plassaras]

Expect all earnings forecasts to be downwardly revised, especially financials.