Earnings and Economic Data Ahead

It’s decision time for the financial sector. Earnings will determine what the short term future will look like in the sector. If the Wells Fargo theme of shrinking margins continues a pullback or test of the move higher may be in store. The good news is the estimates have been lowered over the last two months and it will be much easier to meet or beat the revised expectations. On the other hand if they miss… it will get ugly.

Small and midcap stocks continue to lead this rally. Is the move higher due to the growth in the economy? The question of why keeps haunting me, after all you need growth to drive the results for these stocks. Small business sentiment has been negative and the NFIB Small Business index shows a negative outlook going forward? Does that influence the outcome in the sector looking forward? The topping on the chart could show some fatigue in the sectors. Watch the downside risks and adjust your stops accordingly. If the push through resistance transpires, go with the trend. If we correct, know where the exits are. Knowing and understanding the cause gives more confidence on the action to be taken.

Retail has stalled based on the chart of XRT, SPDR Retail ETF. One reason is the same store sales data released from December were flat to disappointing. Another, my opinion, is worry over the new income taxes. Everyone’s payroll taxes went up as a result of inflation adjustments to the tables as well as an end of the payroll tax cuts from three years ago. This means less money in paychecks and the fear is that it will impact the spending habits of consumers. We have to watch the outcome of this as the sector is one of the leaders, and it has an impact on market sentiment going forward.

The big surprise going forward may come from Europe. The markets continue to climb higher as confidence in the economic picture seem to improve. VGK, Vanguard European ETF broke to a new high last week along with the country ETFs. Germany (EWG), Spain (EWP), Italy (EWI), France (EWQ), Belgium (EWK) and Netherlands (EWN) all have established new highs as well. The oversold conditions following the projected fall of the euro by analyst has been part of the reason. The bigger question short term is what will the economic picture be for 2013? I wouldn’t expect much in terms of real economic growth, but more in terms of money supply being high and finding its way into the markets. Take if for what it is and protect the downside risk should the merry-go-round of free money stop.

This promises to be a interesting week for the US markets and investors. There is plenty of economic data on tap with retail sales on Tuesday. Sentiment, inventories and inflation data are all ahead to go with earnings in the financial sector. It promises to be a busy week with plenty to digest. Keep your stops in place and take what the market gives.