For the week ending July 26, 2014, the markets ended mixed due to mixed economic data and earnings reports. The crises in Ukraine and the Middle East are escalating, and the markets are starting to take notice.
The Nasdaq (up 0.39 percent) and S&P 500 (up fractionally) ended higher while the Dow (down -0.82 percent) and Russell 2000 (down -0.60 percent) dropped. The Russell 2000, considered by some to be a leading indicator, has fallen for the third week and is now down -1.6 percent for the year.
Economic news this past week was mixed, with new concerns over food quality regarding Chinese fast food giant Yum! which operates Kentucky Fried Chicken and McDonald's. Additionally, the consumer price report shows year-on-year rates are approaching the Fed's key 2 percent threshold, and new home sales plunged.
The durable goods report, while better than expected, raised concerns when May's core capital goods was revised sharply down. This resulted in economists shaving growth expectations for the second quarter and raising a red flag for business spending. GDP will be reported next week; if it is negative like last month (positive 3.1 percent expected), then the economy would have actually contracted for the first half.
Disappointing earnings from Visa and Amazon triggered selling on Friday forcing the Dow down -0.7 percent; it is now below 17,000 at 16,960 contributing to its biggest weekly loss in 6 weeks.
Russia has escalated its support of the separatist insurgents in Ukraine by increasing troops at the border and supplying more potent Tornado rocket launchers. Russia has also unleashed artillery attacks across the border into eastern Ukraine. The increased Russian involvement will likely lead to greater retaliation by Europe and the U.S..
A 12-hour cease-fire agreement took effect Saturday between Israel and Hamas. Secretary of State John Kerry failed to broker a longer truce that would lead to a peace agreement. Israel indicated that it might significantly increase its ground operation in Gaza soon after the cease-fire ended. The short lull in fighting is intended to enable civilians to evacuate and receive aid.
The bottom line: economic growth is mixed with inflation rising slightly. GDP next week will determine if second quarter growth rebounded as expected. Manufacturing remains strong, the consumer sector is still improving, and housing continues to vacillate.
The focus next week in the U.S., besides earnings, will be the advanced estimate of second quarter GDP, FOMC Meeting and Announcement, and the Employment Situation Report for July. Motor Vehicle Sales and Personal Income will determine if consumer spending remains robust.
Globally, the focus will be on the final July PMIs (due on Thursday). Germany will be releasing its Unemployment Rate on Thursday.
With growing geopolitical concerns and a large number of economic reports, we expect the markets next week will continue to be choppy with volatility increasing. If earnings is good and GDP positive, expect the S&P 500 to reach 2,000; else, we could see a significant drop.
Year-to-date the markets are up: Dow 2.3%; S&P500 7.0%; Nasdaq 6.5%.
The Markets for the past week were: DJIA down -0.8%; S&P500 flat; Nasdaq COMP up 0.4%.
Commodities (ETFs) for the past week were: Gold (GLD) down -1.76%; Silver (SLV) down -1.88%; Oil (OIH) down -1.58%; Dollar (UUP) up 1.69%; 30-yr Bonds (TYX) dropped 5 basis points to 3.24%.
The VIX this past week (a measure of market sentiment and volatility) rose slightly to 12.69% due to mixed economic reports and growing geopolitical crises.
To see what's on the calendar for next week, go to the Econoday calendar.
The economic calendar for next week is full: on Monday – Pending Home Sales, Dallas Fed Mfg Survey; on Tuesday – S&P Case-Shiller HPI, Consumer Confidence; on Wednesday – Weekly EIA Petroleum Status Report, ADP Employment Report, GDP, FOMC Meeting Announcement; on Thursday – Weekly Jobless Claims, Employment Cost Index, Chicago PMI; and Friday – Employment Situation Report, Personal Income and Outlays, PMI Manufacturing Index, ISM Mfg Index, Construction Spending, Motor Vehicle Sales.
If you're trading options, we suggest Put Credit spreads for next week at 2 standard deviations or greater. Expect the price of the SPX to fall within 1910 and 2048 (2 standard deviations).
For more information about options, see the 'Suggested by the author' links below.