What's ahead for the stock market

Europe comes up with a $1 trillion rescue plan, but financial turmoil in Europe may continue to roil US markets. Cisco Systems, Walt Disney and Wal-Mart lead the earnings reports.

By Charley Blaine May 7, 2010 9:01PM

Charley BlaineUpdated: 10:50 p.m. ET, May 9

 

The big question investors are surely asking after this ugly week: How bad will this pullback be?

The short answer: It depends on the Europeans. More accurately, it depends on if the European Central Bank and the European Union can quickly convince investors around the world that they can get ahead of Greece's debt problem.

[Early Monday, European leaders agreed to provide a huge rescue package of nearly $1 trillion in a sweeping effort to combat the debt crisis that has engulfed Europe -- especially Greece, Portugal and Spain -- and threatened markets around the world. Asian markets rallied on the news.]

 

To be sure, the week ahead will feature some important earnings reports from the likes of Walt Disney (DIS), Cisco Systems (CSCO), Wal-Mart Stores (WMT), Kohl's (KSS), Macy's (M) and Toyota Motor (TM).

There are some important economic reports: retail sales on Thursday and industrial production next Friday. And Friday's jobs report was widely seen as a truly big piece of good news.
But this week's blow-off will be what everyone will be thinking about. Here's why:

Article continues below.

After stocks turned south rather abruptly this past week, fears grew that the pullback will move past being a market correction to something worse.

The Dow Jones industrials ($INDU) fell 5.7% for the week, their biggest weekly loss since the week of March 2, 2009, right before the 2009 market bottom set in. The Standard & Poor's 500 Index ($INX) dropped 6.3%, its biggest loss since that same week. The Nasdaq Composite Index ($COMPX) dropped nearly 8%, its biggest loss since November 2008.

Since peaking April 23, the Nasdaq has fallen 10.5%. The popular definition of a correction is a 10% pullback. The Dow is off 7.4% and the S&P 500 down 8.7%. The gains for the year that the major indexes were sporting two weeks ago are gone.

 

Markets for the week



5/7/2010

4/30/2010

% chg.

YTD chg.
Dow industrials

10,380.43

11,008.61

-5.7%

-0.5%
S&P 500

1,110.88

1,186.69

-6.4%

-0.4%
Nasdaq 

2,265.64

2,461.19

-7.9%

-0.2%
Russell 2000

653.00

716.60

-8.9%

4.4%
Crude oil 

$75.11

$86.15

-12.8%

-5.4%
(per barrel)











U.S. Dollar Index 

84.46

81.99

3.0%

8.0%
10-yr. Treasury

3.43%

3.66%

-6.4%

-10.8%
Gold

$1,210.40

$1,180.70

2.5%

10.4%
(per troy ounce)












Some of the pullback was expected. The indexes had shot higher from the March 9, 2009, lows with only a few hiccups. But the S&P 500 has struggled since hitting 1,200, and a key stock -- Apple (AAPL) -- got so rich that a sell-off became inevitable.

If you plot that reality against the European situation, you can see the risks.

The riots over planned austerity measures in Greece -- seen on televisions around the world -- made many people wonder if the Greek government could really cut its spending substantially and stick to the austerity plan.

And the European Central Bank's offhanded suggestion that it didn't even discuss Greece at its meeting this week startled many investors.

So, they sold the euro and ran to the dollar. They sold European stocks in a big way. Oil prices dropped 5.4% for the week to $75.11 a barrel, the lowest level since mid-February. The 10-year Treasury yield fell to 3.4%, the lowest level since December.

Germany's DAX Index ($DE:DAX) is down 17.4% since April 15. The Stoxx 600 Europe Index ($DE:SXXL), which tracks 600 stocks in 18 European countries, is off 18.7%. Both sell-offs are close to reaching bear market status -- a decline of 20% or more from a top.

Spain is already in a bear market. The IBEX Index ($ES:IB) is down 21.5% since April 15. 

It's not just that Greece is a fiscal mess, a country where tax evasion is apparently seen as a right, not a risk. The issue is the worry that Greece's big government deficit and sovereign debt woes will spread to Portugal, Spain and Ireland. And maybe even the United Kingdom, where there's still wrangling over who will be prime minister.

So the bottom line appears to be this: Investors seem to want some certainty -- and very soon -- that the debt problems of Greece won't swamp global credit markets. Because if the credit markets seize up again, the global economy is in a heap of trouble.

And stocks will be, too.

Stocks did pass a test Friday. The S&P 500 hit its 200-day moving average, a key support level, and bounced back. The 1,100 level was another support level, and that index held that, too.

But the index could fall to 1,050, and if it breaks below that, things could get nasty.

Complicating the global problem is another question: Will the bizarro sell-off that hit stocks Thursday afternoon cause more trouble or, worse, simply push many investors to the sidelines?

The Dow was down 998 points in the midafternoon before rebounding. What's not known is the cause of the sell-off.

 

The Securities and Exchange Commission and the Commodities Futures Trading Commission suggested they are looking closely at how different trading rules on different exchanges, which temporarily halted trading on some markets while activity in the same stocks continued on other markets, might have contributed to the problem, The New York Times said.

Earnings ahead: Disney, Cisco, Wal-Mart
There are more than 2,000 companies reporting next week. Here are the reports to watch.

Monday: Clear Channel Outdoor Advertising (CCO), Dean Foods (DF), Legg Mason (LM) and Priceline.com (PCLN)

Tuesday:Intercontinental Hotels (IHG), Toyota and Walt Disney. Toyota has insisted it will report a profit for the first quarter, despite millions spent coping with huge recalls this winter. Disney shares dropped 9.3% on the week. The guidance on its television networks and theme parks will be the key parts of the report, which comes after the close.

Wednesday: Cisco Systems, Macy's, Nissan Motor (NSANY), Whole Foods Market (WFMI). Cisco and Whole Foods both report after the close and have the potential to turn the market around. Cisco's networking and routing equipment are key building components of the Internet, and the company's been saying it sees increasing demand. Whole Foods raised its fiscal 2010 guidance in February. Investors are hoping the company will boost it again.

Thursday:  Kohl's and Wendy's/Arby's Group (WEN). Both will offer a picture of the state of consumer confidence.

Friday: J.C. Penney (JCP) and Wal-Mart. J.C. Penney is a bit of a mystery. The company reported a decline in April sales but said this past week that fiscal-first-quarter earnings will be better than expected. The news didn't help the stock. Shares fell 5.3% on the week to $27.61. Wal-Mart, expected to report 84 cents a share in earnings, up from 77 cents a year ago, was one of the more stable Dow stocks this week, despite the market slowdown. It was down 2.3% to $52.40.

A light week for economic reports
Typically, the week after the Labor Department's report on unemployment and payroll employment is light on important reports.

There are two to watch: retail sales and industrial production. Both will come on Friday.

Retail sales may disappoint. April sales from major retailers weren't especially strong. But wholesale clubs and luxury retailers were.

Industrial production will probably show a fourth monthly gain. IHS Global Insight sees a 0.8% gain. Nomura Securities sees a 0.7% gain. Friday's jobs report signaled that the report should be strong. Hours worked and manufacturing jobs both expanded in April.

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[BRIEFING.COM] The stock market capped the trading week with losses across the major averages. The S&P 500 fell 0.5% to surrender its weekly gain, while the Dow Jones Industrial Average (-0.7%) and Russell 2000 (-0.9%) underperformed. The two indices posted respective losses of 0.8% and 0.6% for the week.

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