What The Market Wants: A Rare Big Zero, A Whale Trade And Unspeakable Fears

Includes: AA, DIA, JPM, QQQ, SPY
by: David Brown

Its earnings season again! Q2 results began today with a so-so report from Alcoa (AA), but they will end the week with much awaited reports from JP Morgan (JPM) and Wells Fargo (WFC). To be fair, the market began the week on the tail end of a trio of bad stories, a not-so-dynamic duo of emerging stories from the banking sector, and a single focus on the upcoming election.

AA barely matched consensus earnings estimates with a big net zero for earnings after a $0.06 one-time charge. Revenues were a little better than expected at $6 billion but weaker than last year's $6.6 billion. The company's initial release indicated strong product demand, tight supply, and rising prices. No word yet on other facets of their outlook for this year. The stock gapped up about 1% on the news but has since settled in around the closing price.

The trio of bad stories was China's CPI report of -2.2%, giving rise to unspeakable deflationary fears; Japan's very nasty 15% decline of machinery orders over last month; and the "mother" of all Spanish problems, the increase of sovereign debt back over 7%!

The first of emerging banking sector stories center on the depth of JPM's whale trade of a loss expected this Friday. Is the trade still on? What is current estimate of loss? Virtually everyone expects the loss to exceed the initial estimate of $2 billion. Some estimates are near $10 billion. If the estimated loss is less than $5 billion, it is likely the market will sigh in relief. Imagine that!

The second half of the un-dynamic banking duo is Barclay's continued fall of about 20% since admitting its role in misreporting (perhaps a euphemism) the LIBOR short-term interest rates. Amid a settlement of $453M to U.S. and British bank regulators over the varying misdeeds, the resignation of their CEO, and amid continued government hearings and a myriad of lawsuits, there are real questions about the survival of the historic bank.

And despite all of that, in U.S. the candidates for November's Presidential election are ramping up their barrage of insults about each other's competence to manage our nation's massive debt, high unemployment, and God only knows what else.

It is a testimony to the market's reasonable valuations that the S&P 500 posted a loss of only two points today--that is to say, only -0.16%, barely worse than Alcoa's big zero. The NASDAQ and Dow were down approximately the same percentage. What will it be when the week is over? Bets are now being taken in the after-market.

Market Stats. Last week seems so long ago. With the July 4th fireworks and all the celebrating, the market seemed downright dull. And it was. The S&P was off -0.5% for the week. The Small-cap market was up about one percent, and a jolly good time was had by all. Well, not really. Ask Barclay and JPMorgan officials. But it was a muted week ahead of this week's barrage of opening earnings reports for Q2. From a sector viewpoint, three sectors were actually positive, led by Non-Cyclicals, up +0.21%, followed by Cyclicals, up +0.19% (on the steady stream of better numbers from the housing and construction industry). And somewhat surprisingly, Basic Materials was up 0.06%. Guess who was near the bottom: Financials was down -0.64% (a major positive surprise). Technology, at -0.86%, was led slightly lower by a downbeat forecast from Seagate (STX) and others. Industrials was also down,-0.88%.

Here are the market stats.

We shouldn't forget the Employment Report, or rather the "unemployment report," which included a shortfall of 80,000 new jobs, compared to an estimated 100,000 new jobs. However, nothing compares to the various announcements cited above. Furthermore, the ADP private sector report was a positive 179,000 jobs compared to an expected 105,000. Initial Jobless Claims were a bit lower than expected (good news). So the tale of the tape will likely fall upon the earnings picture as it unfolds over the next month, along with possible resolutions to the global issues that hang over the market.

Just don't forget the good valuations that are out there for the taking. Last week's hedge recommendation MSCHI, the China Index Fund, worked out well, falling about 2% through today. It's probably worth considering as a continued hedge, along with our bargain choices in the small-cap arena which have led the past week, month, and three months. Any why not? They are cheap and somewhat insulated from global issues in their small niches.

Have a great week!

4 Stock Ideas for this Market

This week, I used the GARP preset search in MyStockFinder, including only Small-cap stocks. Here are four you may find interesting:

Saia, Inc. (NASDAQ:SAIA) - Industrial

ZAGG Inc. (NASDAQ:ZAGG) - Basic Materials

Valassis Communications Inc. (NYSE:VCI) - Cyclical Consumer

Greenbrier Companies (NYSE:GBX) - Industrials

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.