The bears pulled out a victory this past week, with the major market indices all declining. For the Dow ($INDU), it was the first decline in five weeks. This blue chip index gave up 1.35 percent, with the S&P 500 ($SPX) falling 1.85 percent. The Nasdaq ($COMPQ) fell 0.85 percent on the week. The week was filled with key economic releases, with the majority of news relatively positive. However, Friday’s worse than expected July employment report created selling heading into the weekend. There will be some key economic reports released this week, but not to the degree we got in the prior week. Second quarter earnings are winding down as well, though there are some key companies still set to report.
The bulls and bears have been battling it out the last month, with neither group gaining control of stocks. Now that August is upon us, it might be tough for the bulls to find the strength necessary to push the major market indices to new highs. August has been historically a very tough month for stocks and nothing points to a change in this pattern for this year. August is a month when many traders take vacations, which creates a lull in trading activity. With second quarter earnings season ending, there is little for the bulls to hang their hats on. Nonetheless, the economy will continue to garner a lot of attention, with the following reports on tap this week:
Monday: Factory Orders, Semiconductor Billings Tuesday: Chain Store Sales Snapshot, ISM Non-Mfg. Index, Challenger Report Wednesday: ABC News/Money Magazine Consumer Comfort Index Thursday: Jobless Claims, Chain Store Sales, Productivity and Costs, Wholesale Trade, Consumer Credit Friday: None
With the jobs market continuing to be a major concern, Thursday’s jobless claims report will once again have some market moving impact. Jobless claims have been below 400K for the last two weeks, with economists predicting another week below this key level. However, Friday’s employment report showed more jobs were lost in July and this continues to be a problem for those looking for a sharp economic rebound.
Second quarter earnings have come in better than expected, but some traders wonder if too much should be made of these reports. This is because earnings have been influenced by cost cutting more than increased demand. Nonetheless, most analysts are predicting strong growth the second half of the year, if for no other reason than easier comparisons. This week, earnings news will be lighter than the past few weeks, but Cisco (CSCO) is still apt to create market movement.
This networking giant is set to report on Tuesday after the bell, with analysts looking for earnings of 15-cents a share. Of course, traders will be looking to see what the company has to say about the future. Another thing to keep an eye on is how much Cisco plans on spending this next year. Capital spending has been another problem for the economy and it will take large companies like Cisco to increase spending for others to feel confident enough to follow suit.
Other large firms set to announce this week include Gillette (G), Calpine (CPN), and Prudential (PRU). For a complete list of companies set to release this week, click on http://www.optionetics.com/market/outside/resources.asp.
When last week got started, we were keeping an eye on the CBOE Market Volatility Index ($VIX). This was because the VIX had finally moved below the key 20 level. This is often a sign of a market top and last week’s trading did indeed see lower prices. However, with the decline on Friday, the VIX spiked higher, closing the week at 22.78, a 14.24 percent move on the week. This has taken the VIX close to the high end of its recent channel. This means that if the VIX breaks through this resistance level, it could continue higher, resulting in lower stock prices. However, it also could bounce back down from this level, providing a boost for the stock market.
Overall, the major market indices still look tired, despite a rest bit this past week. Since mid-March, stocks have risen sharply, with many key stocks reaching new 52-week highs. However, now that earnings season is dying down, traders might see little reason to buy stocks, resulting in further profit taking. Nonetheless, the bulls have been very resilient and have been able to keep stocks afloat despite lofty valuations and concerns about a jobless economic recovery. Regardless of your outlook, one nice thing about options trading is that we can still make a profit in any sort of market.
Jody Osborne Senior Staff Writer & Options Strategist Optionetics.com ~ Your Options Education Site Visit Jody's Forum
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