Weighing The Week Ahead: Time For An Upside Breakout?

We have the makings of a volatility cocktail! It is a huge week for economic data. It is the heart of earnings season, with Apple’s (AAPL) report leading off the week. The Fed has a two-day meeting culminating with a policy announcement. Global economic threats continue. Which of these will be the theme? I expect that all of these topics will be considered as part of a single theme:

Time for an upside breakout?

Prior Theme Recap

In my last WTWA I predicted that attention would center on the geopolitical risk to stocks, with housing taking center stage later in the week. The geopolitical idea lasted less than one day, and only because TV producers had already booked their experts for Monday! Before the opening, Chinese policymakers lowered bank reserve requirements. Worldwide markets rallied, reversing much of the prior Friday decline, which had been exaggerated by options expiration. The Greek story provided little fuel for discussion, leaving pundits to discuss the discovery of the lone trader (!?) behind the Flash Crash of five years ago. He wasn’t spoofing the market, he claims. He just changed his mind a lot, often every second or two. Sheesh!

Feel free to join in my exercise in thinking about the upcoming theme. We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead.

This Week’s Theme

This is one of the biggest news weeks in memory, combining new economic data, policy decisions, private data, important earnings reports, and the potential for important international events. In most weeks, any of these might be big news. Because there are so many possible themes I expect the media to search for a unifying concept. We have the makings of a volatility cocktail. With markets at the top of the recent trading range and the NASDAQ (QQQ) at historic highs, expect the experts to be asking:

Is it (finally) time for an upside breakout?

The Viewpoints

The trading range has a way of stimulating strong viewpoints, including these candidates:

• Bubble watch. I already heard this on Friday from multiple CNBC anchors. Markets have risen in defiance of the “fundamentals.”
• Sell in May will say the seasonality pundits. (Fidelity says maybe not).

 

• Trade the range. Sell the rips and buy the dips. If you have been willing to trade small moves aggressively, you have done well. If you bailed out on every dip, you might not have gotten back in. Sam Ro shows the year so far and also discusses past years and the associated drawdowns.

 

• Respect the breakout potential. Sooner or later the range will break. The upside tests are now in place. Charles Kirk’s Weekend Chart Show (small membership required, and well worth it) always has a “Bottom Line” that crystalizes his various scenarios. This week? “U.S. markets are trying their very best to break out of their multi-month trading ranges.” Sign up to see his reasoning and the specific targets for each index.
• NASDAQ 10,000? Howard Lindzon highlights the remarkable changes since 2000. A taste:

Steve Jobs was about to rock Apple’s world and ours. Google (GOOG) was not public. Zuckerberg was in high school. Social and sharing on the web, now fabric, were not in the vocabulary of the web.

As always, I have my own ideas in today’s conclusion. But first, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information.

Last Week’s Data

Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:

1. The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially – no politics.
2. It is better than expectations.

The Good

There was mostly good news last week.

• Washington policymakers make progress on the Trans-Pacific Partnership bill, with some agreement between Republicans and the President. The issue now becomes getting sufficient Democratic support. While this involves politically sensitive issues, it has the nearly-universal support of economists (and is market-friendly).
• Young minority workers are joining the workforce — just in time. (Brookings).
• Consumer spending is moving higher according to the useful high-frequency data from New Deal Democrat. See his post for these results and much more.
• Earnings reports remain slightly positive with a continuing mixed story. Earnings beats are running at 73% versus reduced estimates, but sales growth beats are only 47%. (FactSet) Brian Gilmartin produces the ex-energy numbers, showing growth of 5.1%. Brian also notes an increase in forward earnings estimates. Whether one calls the earnings story “good” or “bad” seems to depend mostly on attitude. The market response has been generally positive. Bespoke shows results by sector: