Credit: Shutterstock photoAs difficult as it sometimes is on a Monday morning, I try in these “Week ahead” pieces to be as positive as possible. There is enough fear in the modern world without me adding to it. When you take a step back and take a big picture view the U.S., and indeed the world, is still struggling through a recovery; an uneven, unsatisfying recovery to some for sure, but still a recovery. This week though, there are several factors that point to the potential for a sharp pullback in stocks and investors should be cautious.
First we have the OPEC news. In case you missed it, they failed to reach an agreement this weekend to even freeze production of oil. Oil prices are lower this morning as a result and if that trend continues through the week it will probably weigh on stocks. For those old enough to remember the events of 1978 when crude doubled to approach the then shocking level of $40 a barrel causing economic pain and collapsing stock markets around the world, it seems strange that the collapse of the oil producing cartel could be greeted with anything short of delirium by global markets, but times have changed.
The biggest difference is that the U.S. now produces far more oil than thirty or forty years ago, and tough times for the energy sector could easily cause problems here in banking and elsewhere. The thought of any weakness in the U.S., which has been the leader of the recovery, is pretty scary to the rest of the world, and continued falls in oil will hurt the emerging economies that export the commodity.
There is also more bad news from one of those countries as the political crisis in Brazil deepens. It is beginning to look as if the government of President Dilma Rousseff is doomed. Continued corruption scandals and a weak economy have led to massive protests and Rousseff’s days appear numbered. Once again, there was a time when that would have mattered little, but in today’s globalized economy, Brazil is certainly big enough to export its problems and uncertainty.
Those two big international stories will put pressure on stocks in the U.S. to some extent, but when combined with a couple of domestic factors, one fundamental and one technical, the outlook for this week is anything but rosy. From a fundamental perspective, we are just getting into the meat of what looks like being a very disappointing earnings season, at least by comparison to last year. Of course, around two thirds of companies will beat expectations on the bottom line. That is always the case, but investors are becoming a little wary of that pattern, and so far even those beats have frequently been accompanied by gloomy guidance for the next few months or so.
I spoke more about the technical warning signs on Friday, but suffice it to say that upward momentum will be difficult to achieve from here.
The red lines on the above 1 Year chart for the S&P 500 are all potential points of resistance on the way up and I wrote last week that if they were to be broken, it would need some good news. What we have woken up to this morning, however, is anything but good news.
Early indications are that despite all of this gathering gloom, the stock market looks set to open roughly unchanged from Friday’s close. As I said, I try not to be too negative on a Monday morning, but if that is the case, then it will be a good chance to take some profit and trim some positions. The combination of bad news and a bad chart make it likely that anything sold today will be available cheaper by the end of the week.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
