By James Hyerczyk
Commodity Trading Advisor
Based on last Wednesday’s and Friday’s reactions in the equity markets, investors are clearly focusing on central bank stimulus issues at this time. This week could prove to be just as important because Federal Reserve Chairman will be speaking about economic issues before Congress on Tuesday and Wednesday.
Last week, stocks were hit hard over a three-day span before recovering on Friday. On July 11, the Fed’s June minutes showed that monetary policymakers were open to the idea of additional economic stimulus, but that economic conditions may have to worsen first. Investors were looking to hear something more positive from the Fed which is the likely reason why the major indices soared from June 25 to July 5. As it stands, the June Fed minutes said nothing that would suggest the central bank is closer to implementing another round of stimulus.
Investors could be disappointed again this week since Chairman Bernanke is not expected to give away any of the Fed’s near-term plans. Some are speculating that monetary policy may not even be discussed that much in Bernanke’s semiannual report to Senate and House of Representatives committees. He may even take the opportunity to urge Congress to act on fiscal policy in an effort to reduce the massive budget deficits and their impact on our economy. At issue is the government’s ability to tackle the debt problem without increasing the prospects of deflation. Bernanke may even discuss the sensitive issues of increasing taxes and the impact of financial austerity on the economy.
While Bernanke’s speech is likely to be the main market driver on Tuesday and Wednesday, his testimony will be sandwiched between a slew of quarterly earnings reports this week. Of course, traders will be looking for a follow-through rally following Friday’s big gains, but this is only likely to occur if bad earnings news has already been factored into the market. Recent earnings warnings from several companies were contributing factors to the recent six day sell-off in the S&P 500.
Low volume and volatility are also issues that investors are facing currently. These two factors may make it difficult for the broader indices to rally even if good news is delivered. Since the quarterly earnings reflect “old” news, investors will be focusing on the slower growth in Europe, China and the United States that has been turning up in the recent economic reports.
This week will be a very active earnings week with many S&P 500 companies reporting including technology giants General Electric (GE), Microsoft (MSFT) and Intel (INTC). The consumer segment will be represented by Coca-Cola (KO) and Johnson & Johnson (JNJ). The key financial companies reporting include Bank America (BAC), Citigroup (C) and Goldman Sachs (GS).
With Lattice Semiconductor (LSCC) and Advanced Micro Devices (AMD) already issuing revenue warnings, expectations are for Intel (INTC) to post poor earnings. This is part of the general decline in technology company earnings because of the weaker U.S. economy and the problems in Europe and China. Intel is expected to report revenue at $13.78B and GAAP earnings of $0.52/share according to Yahoo Finance.
Technically, the chart pattern is very similar to Microsoft’s except the main trend has already turned down on the weekly chart. An uptrending Gann angle at $25.16 this week provided some support last week, but with the main trend down, another move to the bearish side of this angle this week will likely mean a test of a 50% level at $24.22 and eventually the 61.8% level at $23.02.
Resistance is at $26.80 this week. Intel will have to trade through the swing top at $27.75 in order to turn the main tend to up on the weekly chart. With the main trend down and the fundamentals weakening, rallies are likely to be sold.
Weak computer demand from consumers is expected to weigh on Microsoft with the tech giant continuing to lose business to the iPad. The slow U.S. recovery and concerns about the debt crisis in Europe are also issues the company must overcome. According to estimates compiled by Bloomberg, Microsoft’s earnings are expected to fall to 62 cents a share.
Technically, the weekly chart appears to be pointing lower.
Microsoft Corporation (MSFT) is in an uptrend on the weekly chart; however, the recent sell-off is threatening to turn this trend back to down. According to the swing chart, a trade through $28.32 will turn the main trend down.
Based on the October bottom at $24.26 to the March top at $32.95, a retracement zone has been formed at $28.61 to $27.58. This zone was tested on June 4 when the market made a bottom at $28.32 and again on July 12 when a low was reached at $28.54. One more drive through the 50% level at $28.61 is likely to mean a further decline to the Fibonacci price level at $27.58.
An uptrending Gann angle at $29.39 could turn into support, but it is more likely to act as a pivot. Friday’s close was on this angle, making it a key balance point. Simply stated, a trade below is bearish, a trade above is bullish. On the upside, near-term resistance is at $30.70 while a trade through $31.14 will reaffirm the uptrend.
The gloomy outlook for earnings, especially the technical sector, may take away some of the excitement generated by Friday’s big rally. However, enough bullish surprises could underpin the broad indices or even trigger a short-covering rally.
With so many companies reporting, however, it is likely that any good reports will be offset by bad ones. This throws the emphasis on Bernanke’s talk with Congress. Investors will be all ears waiting for the Chairman to give any hint at additional stimulus, but if he fails to come through with enough bullish chatter, the major indices may experience another round of heavy selling.