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Stocks could surf higher on a wave of late summer momentum in the week ahead though volume should be extremely light. With earnings season over, there is a series of economic data focused on housing, consumer sentiment and manufacturing in the coming week. Also of high interest will be the weekly jobless claims report Thursday, after the last two reports showed larger-than-expected numbers of new unemployment claims. The Treasury also auctions a near record $200 billion in notes and bills, and traders will be watching the energy markets where oil bubbled to its year high in the past week and natural gas slumped to a 7-year low.
Stocks this month have defied bears, who have been prowling for a pull back. The market gained about 2 percent in the past week, even with a bout of selling early in the week. The Dow finished at 9505, up 2 percent or 184 points, its highest close since Nov. 4. The S&P rose 22 or 2.2 percent to 1026, its highest close since Oct. 6.
"Everybody wants to go short because they think the market is so overbought, but they just can't because of the momentum," said one trader. Traders are now focused on September as a possible time for the market to give back some of its gains. They argue economic news is not that good, and historically, September is the worst month for stocks. "What I've learned is nobody knows what's going to happen in the next couple of weeks," said Charlie Bobrinskoy, vice chairman and director of research at Ariel Investments.
Health care reform has been a red flag for traders, who believe if Congress makes progress toward a bill, it could hurt the stock market, and certainly the health care sector. As reform looked less likely in the past week, health care shares gained 2.9 percent and were the second best performers after energy, up 3.2 percent.
Therefore, the return of Congress in September is viewed as a potential negative catalyst. "There were certainly points in time...certainly earlier in the year, you see the pattern where you get a couple of weeks of policy action and the market would get troubled by it," said Barry Knapp, head of U.S. portfolio strategy at Barclays Capital. "Then Congress would go on break, and the markets would be relieved... That could be another minor negative as we're getting into September." Knapp said the economic data in the next week should continue to tell the same story of improvement in manufacturing and housing.
Credit Markets
Treasurys finished the week close to unchanged, despite some volatile trading. The 10-year was yielding 3.558 percent and the 2-year was at 1.081 percent. The big news for Treasurys in the coming week are the near record amount of issuance at auction.
I believe the market will back up into the auction," said John Spinello, Treasury strategist with Jefferies. There are $109 billion in 2-year, 5-year and 7-year notes auctioned Tuesday through Thursday and another $89 billion in T-bills. The Treasury market should stay under pressure. "I think the trend is in place for stocks, and I truly believe the trend is in place in bonds to lower prices and higher yields," said Spinello.
Dollar Dilemma
The dollar in the past week fell 1 percent against the euro to $1.4336 per euro [EUR= 1.4328 +0.0067 (+0.4698%)]. It was down 0.5 percent against the yen [JPY= 94.35 +0.22 (+0.2337%)].The "risk" trade, where traders buy commodities and stocks and sell the dollar, has flip flopped in the last couple of weeks. Early this week, stocks sold off on concerns that China's stock market decline meant its economy was slowing down.
Boris Schlossberg of GFT Forex said he expects the dollar to stay under pressure for now. He said there are two trends in the market right now. "Are you a deflationist or inflationist? If you are in the inflationary camp, you buy the whole risk. If you're deflationist, you buy cash, U.S. dollars and Treasury notes...and you think interest rates are going to stay stationary for pretty much the whole year," said Schlossberg. Schlossberg said one of the themes developing has been improvement in Europe, but questions abound about China as its bank regulator tightens lending. "The fear is they'll be the one that pulls everyone back down into contraction," he said. He said a German survey, the IFO, in the coming week could be a catalyst to push the euro higher, toward its year-high of $1.444. "Generally when the markets get very close to those key numbers, any further gains are really going to be capped. I don't see a massive second wave of the risk rally going on," he said.
Oil Drill
OilUS@CL.1gushed to its year high this past week, finishing at $73.89 per barrel, up 6 .2 percent for the week. Natural gas, meanwhile, plunged 13 percent in the week to $2.80 per million BTUS, a 7-year low.
Ray Carbone of Paramount Options said the trend for oil remains higher and natural gas should stay under pressure. "I think we have a pretty healthy rise in the Dow today, and oil is chugging along as it has been since the financial crisis started. We follow the Dow and the Dow, or in the case of Wednesday, we lead the Dow. They're feeding off of each other," he said.
EconoramaThis week's data includes S&P/Case Shiller housing price survey Tuesday, as well as consumer confidence and the Richmond Fed survey that day. On Wednesday, durable goods and new home sales are reported. Thursday data includes weekly jobless claims, and 2nd look at second quarter GDP. Personal income and consumer sentiment are reported Friday.
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