Should Euro Debt Worry You?

It was a heavy weak of earnings with wild after-hours trading as analysts digested the earnings reports. For example in the first ten minutes after Amazon.com (AMZN) reported its earnings on Thursday, the stock ranged from down $18 to down just $4.

Overall, over 70% of the companies have beat their earning?s estimates and just over 53% have beat on revenue. The earnings beat, so far, is the best since 2006 and was by far the best reading since the end of the bear market. Weaker revenue numbers have been a concern of many analysts and investors. The revenue has been in a gradual downtrend? since the 4th quarter of 2009.

The best news last week came from Facebook, Inc. (FB) whose earnings surprised everyone as its stock gained 22% the day after its earnings were released. In this week?s trading lesson, I took an in-depth technical look at five of the tech giants. The market has not been kind to those that missed earnings as Expedia Inc. (EXPE) lost 22% on the opening Friday.

I also reviewed one of the tech industry groups that has been leading the market higher. It has clearly been a stock picker?s market as the market-tracking ETFs have not allowed many good risk/reward entry points.

My current concern for the stock market is what I see as the longer-term bullish outlook from many analysts. It is not that I disagree with them, but it is not a positive sign for the near-term market outlook. The periodic weaker-than-expected economic news has not dampened the enthusiasm but maybe the Eurozone will again shake up the market before the summer is over. Some negative news from the Eurozone could increase the bearish sentiment enough to fuel another phase in the market?s rally.

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The recent efforts by Germany to push their austerity plans fell on deaf ears at the recent economic summit as the majority of the Eurozone, including France, believes that more attention should be paid to economic growth.

The table above demonstrates why Germany is concerned as Greece?s debt is over 160% of its GDP?with Italy, Portugal, and Ireland all over 100% of their GDP, as well. France and Spain are not far behind either. I have favored the stimulus path as the disastrous austerity push in 1936-1937 clearly postponed the economic recovery. I discussed this period in depth last fall Austerity Didn?t Work in ?37?What About Now?.

Of course, I think more could still be done, especially to save the crumbling infrastructure as I fear future disasters will make it clear that this problem needs to be addressed. The US debt level has gradually improved as the economy has become stronger. A growing economy is the fastest way to reduce debt.

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There has been some improvement in the economic data from the Eurozone as last Friday?s data on Spain?s unemployment was an encouraging sign. Even better was the purchasing managers data on the Eurozone, which moved above the key 50 level. Germany?s data was even better as after dropping below 50, it rose sharply to 52.8, and France also showed nice improvement.

The business sentiment in Germany, Belgium, and the Netherlands also perked up as Germany?s business confidence improved in each of the past three months. Italian consumer confidence hit its highest level in over a year.

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This has given some of the Eurozone stock markets a boost as they had been under pressure for the first half of the year. The % Performance chart for 2013 shows that the iShares MSCI Italy ETF (EWI) was down almost 14% for the year in early April, but now is just down 3.6%.

The ETFs that follow Germany (EWG) and France (EWQ) are now up 7.3% and 6% respectively while Spain (EWP) has just moved back into positive territory. It was? down close to 9% at the start of the month. All are trailing the 18.2% gain in the Spyder Trust (SPY).

Despite these signs of improvement, a shock from the Eurozone is still possible, and next week the Federal Reserve, European Central Bank, and the Bank of England are all meeting. Though nothing substantial is expected from the meetings, a surprise is always possible.

Several of last week?s economic numbers beat expectations as the flash Purchasing Managers Index showed nice gains, and the Durable Good Orders were also much higher due to airplane orders for Boeing (BA). The final reading on consumer sentiment from the University of Michigan was released on Friday and at 85.1 was better than expected

The monthly jobs report is out this Friday, and there is a full slate of economic data this week starting with Pending Home Sales and the Dallas Fed Manufacturing Survey on Monday.

There is more housing data on Tuesday with the S&P Case-Shiller Housing Price Index. The FOMC also starts its meeting and the Conference Board releases its latest data on Consumer Confidence.

The data on Wednesday may set the tone for the whole week as we get the advance reading on the 2nd quarter GDP, the ADP Employment Report, the Chicago Purchasing Managers Index, and the FOMC announcement.

Besides the jobless claims on Thursday, we also get the ISM Manufacturing Index, which sets the stage for Friday?s monthly jobs report. The end of the month adjustment of positions and the full slate of economic data should keep volatility fairly high.

What to Watch
The flat close in the S&P 500 and the Dow Industrials last week was due to the rally late Friday, which brought these averages back to positive territory. The market internals on the NYSE were decidedly negative on Friday. This has weakened some of the A/D indicators, and we still may see a deeper correction as we head into the end of the month. There are no strong sell signals yet, but they may develop this week.

Source: http://www.forbes.com/sites/tomaspray/2013/07/26/should-euro-debt-worry-you/

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