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  1. Home
  2. / Investing
  3. / Energy

The Week Ahead: An Entirely Unsurprising Slide

Still, the Fed effect should continue to prop up the market.
By CHRIS VERSACE AND LENORE HAWKINS Dec 14, 2014 | 08:00 PM EST
Stocks quotes in this article: FXI, NAV, CAG, GIS, SAFM, NKE, FINL, KMX, AAPL, AIR, IEV

Some would say volatility returned to the stock market last week, seeing as all three major stock market indices took more than a bit of a tumble. Keep in mind, however, that this has come after several weeks of upward moves -- a period that saw the S&P 500 climb more than 11% off its mid-October low.

As the index has approached overbought territory, we have shared our concerns about the market. In our experience, such pronounced and rapid moves tend to bring out something close to what we can only describe as the "Chicken Little" factor. In addition, trading volume has been rising on market downturns and falling amid rallies, something that had given us further reason to worry.

S&P 500 -- Daily
Source: StockCharts.com
View Chart » View in New Window »

During such times, of course, it takes little news to knock the market off its horse -- and the news flow in the last few weeks has significantly raised global growth concerns. The worries have ranged from a pick-up in the velocity associated with the fall in oil prices -- which are now down 46% since June -- to deflationary impact and weakening demand in China, the eurozone and Japan.

As Versace has said more than a few times on TV and across the radio waves over the last few weeks, the fall in oil prices does not merely reflect a supply issue. It also points to weakening demand. We'll learn more about the demand side this week with the December flash purchasing managers index (PMI) reports from Markit Economics on Tuesday (see the Economic Calendar below). But the forecast cut from the International Energy Agency (IEA) certainly didn't help the market with this past week's finish.

West Texas Intermediate Crude Oil -- Daily
Source: StockCharts.com
View Chart » View in New Window »

Another sore point was the headline producer price index (PPI) for November, which reflected a 0.2% drop -- a result that by and large reflected the 3.1% slide in energy costs. We expect a similar effect in the consumer price index (CPI) report, which is due out later this week.

We continue to believe that slowing global growth, and the deflationary environment, will give the Federal Reserve more runway when it comes to raising interest rates on U.S. Treasury bonds. Against that backdrop, Hawkins will be breaking out her Dick Tracy decoder ring this week for the Federal Open Market Committee (FOMC) rate decision statement this Wednesday, as well as for Fed Chair Janet Yellen's question-and-answer session about the FOMC statement. The reality of today's world is that very little can move the markets quite as much as the words that grace the lips of central bankers.

While it may seem counterintuitive, we believe those factors will continue driving the U.S. equity markets higher in the short term, especially since the U.S. seems to be bucking the trend in global growth -- at least for now. We're keeping an eye out for more pronounced stimulative efforts in China, Japan and the eurozone, as well. If these take place, we believe those countries' stock markets will likely see similar moves to those of the S&P 500 after the Fed's post-financial-crisis stimulative efforts.

Of course, all of that hinges on whether the actual stimulus at least meets market expectations, but already the European Central Bank (ECB) is talking about revisiting its efforts in January. On Friday, China reported lower-than-expected industrial-production figures, and in our view this fans the speculative flames of another rate cut before too long. Versace has already started to nibble on the iShares FTSE/Xinhua China 25 Index ETF (FXI), and is eyeing entry points in the iShares S&P Europe 350 Index ETF (IEV).

While we've touched some on what's ahead this week, let's take a closer look at what you can expect. Several regional Fed economic indices are on tap, including the Empire State and Philadelphia Fed manufacturing indices. Also expected are earnings figures out of heavy-truck-and-engine maker Navistar (NAV).

Also on the docket are housing-starts data and the Housing Market Index from the National Association of Home Builders (NAHB). Consensus housing-starts expectations for November call for a modest bump up in the overall figure to 1.035 million, but to us it always comes down to the mix between single-family and multi-family housing. Commentary last week by Toll Brothers (TOL), which subsequently saw its ratings and price targets cut by Wall Street, did not offer an upbeat view on the industry. That was not surprising to us, given a 22% sequential drop in mortgage applications for new home purchases in November, per the Mortgage Bankers Association.

Needless to say, Hawkins remains steadfast in her view on the housing-market and related stocks.

Looking at the insights to be gathered from quarterly corporate results scheduled for this week, in focus will be food, consumer retail and some tech.

On the food front, ConAgra (CAG), General Mills (GIS), Darden Restaurants (DRI) and Sanderson Farms (SAFM) are all due to report. Despite the drop in oil prices, some commodity prices have actually been climbing, including for beef -- and Versace sees that as good news for Sanderson Farms shares.

Meanwhile, Nike (NKE) and Finish Line (FINL) are bound to benefit from the drop in gas prices, but it will be Nike's commentary on the eurozone and China that we'll be watching. CarMax's (KMX) take on auto traffic and demand will prove helpful to investors in Ford (F), General Motors (GM) and other auto-related plays.

At the same time, AAR (AIR) should help paint a picture as to how much more there is to go in the airline-stock rally, given the one-two punch of falling fuel prices and a crowded holiday travel schedule. Versace doesn't think lower fuel prices will pass through to airline tickets in the near term, and he also defers to the world-traveling Hawkins, who claims she's seen no decline in the prices of her frequent trips across the Atlantic.

Finally, Versace is quickly becoming addicted to Apple (AAPL) Pay, and he will be poring over VeriFone's (PAY) earnings release and subsequent conference call looking for mobile-payment take-up data. Hawkins, for her part, is waiting with great frustration for the launch of said service in Europe.

Below is a more detailed look at what's coming at you in the week ahead. Be sure to check back midweek for The Corner of Wall & Main, in which we will dish on the first half of the trading week and other key matters and thoughts, as well as how to play it all.


Economic Calendar

Monday, Dec. 15

Report/Event

Time Period

Empire Manufacturing

December

Industrial Production

November

Capacity Utilization

November

NAHB Housing Market Index

December

Net Long-Term TIC Flows

October

_____

Tuesday, Dec. 16

Report/Event

Time Period

Markit / JMMA Flash Japan Manufacturing PMI

December

HSBC Flash China Manufacturing PMI

December

Markit Flash France Composite PMI

December

Markit Flash Germany Composite PMI

December

Markit Flash Eurozone Composite PMI

December

Markit Flash US Manufacturing PMI

December

Housing Starts

November

Building Permits

November

_____

Wednesday Dec. 17

Report/Event

Time Period

MBA Mortgage Index

Weekly

CPI

November

Core CPI

November

Current Account Balance

Third Quarter

Crude Inventories

Weekly

FOMC Rate Decision

December

_____

Thursday, Dec. 18

Report/Event

Time Period

Initial JoblessClaims

Weekly

Continuing Jobless Claims

Weekly

Philadelphia Fed

December

Leading Indicators

November

Natural Gas Inventories

Weekly

_____

Friday, Dec. 19

Report/Event

 

[No major economic releases scheduled.]

 

Earnings Calendar

Monday, Dec. 15

Ticker

Company

CHRS

Charming Shoppes

PAY

Verifone Systems

_____

Tuesday, Dec. 16

Ticker

Company

DRI

Darden Restrnt

FCEL

Fuelcell Energy

FDS

Factset Resh

NAV

Navistar Intl

PLAY

Dave And Buster's Entertainment

_____

Wednesday, Dec. 17

Ticker

Company

FDX

FedEx Corp

GIS

General Mills

HEI

Heico Corp

JBL

Jabil Circuit

JOY

Joy Global Inc

ORCL

Oracle Corp

_____

Thursday, Dec. 18

Ticker

Company

ACN

Accenture Plc

AIR

AAR Corp

CAG

Conagra Foods

CTAS

Cintas Corp

LTRE

Learning Tree

LUB

Luby's Inc

MLHR

Herman Miller

NKE

Nike Inc

PIR

Pier 1 Imports

RAD

Rite Aid Corp

RHT

Red Hat Inc

SAFM

Sanderson Farms

SCHL

Scholastic Corp

WGO

Winnebago

_____

Friday, Dec. 19

Ticker

Company

BBRY

Blackberry Ltd

CCL

Carnival Corp

CUK

Carnival Plc

FINL

Finish Line

KMX

CarMax Group

PAYX

Paychex Inc

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At the time of publication, Chris Versace and Lenore Hawkins had no positions in the stocks mentioned, but The Thematic Growth Portfolio that Versace manages was long FXI.

TAGS: Investing | U.S. Equity | Energy | Stocks

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