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WEEKLY OUTLOOK, Apr. 26
By Jody Osborne, Optionetics.com
4/26/2004 7:00:00 AM

http://www.optionetics.com/articles/article_full.asp?idNo=10283

Earnings season continues at full force this coming week and had an impact on trading last week. The major market indices gained ground last week, although gains were minor for the Dow ($INDU) at 0.20 percent. The S&P 500 ($SPX) added 0.53 percent, but it was the Nasdaq ($COMPQ) that really experienced a strong week, rising 2.71 percent. Economic news continued to be an important part of traders’ decision making, with Fed Chairman Greenspan speaking about the state of the economy and a number of economic reports released. With the odds increasing for a rate hike by August, traders have been hesitant in buying stocks.

Despite the fact that interest rate fears have kept stocks from rising too high, the fear indices continue to move lower. Last week, the CBOE Market Volatility Index ($VIX) fell 6.22 percent to close at 14.01. However, intraday on Friday, the VIX fell to a new 52-week low of 12.89. The Nasdaq Volatility Index ($VXN) gave up 8.29 percent last week to 20.68. This index is also near a new yearly low, coming within 0.22 points of its 52-week nadir. What this normally tells us is that there is complacency among traders.

Though stocks have not risen substantially, it seems traders are not too concerned with lower stock prices. Unfortunately for the bulls, when complacency sets in, it often signals a market top.

Traders will get a better idea of sentiment among consumers and traders this week from several sentiment reports. Overall, this week will see a large number of economic releases, as shown below:

Monday: UBS Index of Investor Optimism, New Home Sales

Tuesday: Chain Store Sales Snapshot, The Conference Board Consumer Confidence, Existing Home Sales

Wednesday: MBA Mortgage Applications Survey, ABC News/Money Magazine Consumer Comfort Index

Thursday: Jobless Claims, Employment Cost Index, GDP, The Conference Board Help Wanted Index

Friday: Personal Income, NAPM-NY Report, University of Michigan Consumer Sentiment Survey, Chicago PMI

Besides a number of sentiment reports, traders will get a couple of manufacturing releases to digest. It has been apparent in recent manufacturing data that this sector of the economy is nearly in full expansion mode. However, economists still want to see improvement in the employment component of these reports, as well as a drop in prices paid. In fact, inflation is the major topic right now among economists.

The report that might garner the most attention this week is the preliminary report on first quarter GDP. The consensus estimates is for growth to have accelerated by 5.2 percent in the first quarter following a 4.1 percent increase in Q4 2003 and 8.2 percent in Q3 2003. This is nearly unprecedented growth, as growth has not exceeded four percent for three straight quarters in more than 10 years. However, the flip side to this stellar growth is the concern that the Fed will hike up interest rates sooner rather than later. Of course, the main ingredient for the Fed will be the employment report due out in a couple of weeks.

Though the economy continues to get a lot of attention, this week will continue to see a larger number of earnings releases. In fact, the Dow will see six components announce, with about 130 companies on the S&P 500 set to report. So far, first quarter earnings have been strong, like expected. However, when expectations are high, it is difficult for stocks to move higher even on strong results. Nonetheless, there have been several individual stocks that have risen sharply on strong earnings news.

The Dow components set to report this week are Verizon (VZ), McDonald’s (MCD), DuPont (DD), Boeing (BA), ExxonMobil (XOM) and Proctor & Gamble (PG). Other major companies on tap include R.J. Reynolds (RJR), Comcast (CMCSA), Halliburton (HAL), JDS Uniphase (JDSU), Time Warner (TWX) and Lockheed Martin (LMT).

This past week saw the likes of Microsoft (MSFT) announce and move higher on the news. However, it has been tough for some companies, including Amazon.com (AMZN). This online auctioneer announced strong earnings, but concerns over valuation brought the stock down on the news. If you have option positions in companies that are set to announce earnings, make sure you understand the risk. Even an announcement in a competitor can have a major impact on your position.

Jody Osborne
Senior Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
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