NEW YORK (TheStreet) — The major averages are flirting with critical support levels, and it remains to be seen whether bulls will swoop in to defend them.
“The major averages are at a critical inflection point as they are all flirting with their respective 50-day moving averages lines,” says Adam Sarhan, founder and CEO of Sarhan Capital. “Ideally, the bulls will show up and defend that level and send all the major averages decisively above their respective 50 DMA lines next week.”
The bulls’ decision will be dependent on various factors, but the overriding concern will be the broad outlook on the global economy: whether it’s going to grow or contract six to 18 months out.
Their decision will also be influenced by whether the Federal Reserve and other central banks help stimulate economic growth with further quantitative easing or other programs.
Every data release “is another piece of the puzzle,” says Sarhan. Any data point that supports weaker economic conditions could drive the bulls away from defending their important, 50-day moving average line of support, he says.
On the other hand, in a solid bull market uptrend condition, stocks might still rally on bearish news.
“Markets and stocks tend to look past negative data and rally when they are in a solid uptrend,” says Sarhan. From mid-December to early April, stocks were up nearly every week, even on “bad” data, he points out.
Sarhan says four domestic areas are likely to drive stocks next week: housing data (including the Standard & Poor’s Case-Shiller home price index, new-home sales and pending home sales); Wednesday’s announcement from the Fed policy meeting; gross domestic product numbers on Friday; and earnings.
One of the most highly anticipated earnings reports will, of course, be from Apple (AAPL), which now accounts for about 19% of the value of the Nasdaq 100.
Although all anecdotal evidence suggests Apple will top its already lofty estimates, Sarhan notes that focusing on only the numbers leaves out a very important part of the equation, as the stock has fallen many times in the past after reporting stronger-than-expected earnings.
Google (GOOG) is a recent example of a stock that fell after reporting solid first-quarter numbers. The stock is now down more than $50 from when Google reported last Thursday.
Sarhan says that although Apple has been an incredibly strong performer, it could be only a matter of time before the shares top out, as many stocks do. But Sarhan also notes there are countless examples of stocks topping out only to have their place taken by other stocks.
At some point, Apple buyers will be exhausted, says Richard Weeks, managing director and partner at HighTower’s VWG Wealth Management. Apple is losing steam and decoupling from the market, with shares underperforming the major averages in recent weeks and during Friday’s trading session.
“There’s some concern that the stock in the short term is outrunning the fundamentals of the business,” he says. “Apple is not a bellwether for entire tech business.”
Weeks says the market overall has had a great run, so he wouldn’t be surprised to see it pause and move sideways for a while.
It will be interesting, he says, to see whether the index options expirations that took place at the end of this week will have any influence on the markets by the middle of next week.
More than 50% of the time, there is a positive bias in the markets around the options expiration period, with a reversal back down to where things were before that period by about the second or third trading day of the following week, he notes.
Weeks will also be watching whether the U.S. 10-year Treasury’s yield will continue to decline, in order to see where the “fear-based” money could be looking. So far this month, fears about Spain and the European market corresponded with a drop in the 10-year Treasury to less than 2% from about 2.3%. Weeks notes that while the short-term news on Spain has subsided, the problems aren’t going away.
Jeff Sica, president and chief investment officer of SICA Wealth Management says he expects there to be a ” clear divergence from what I’m hoping for and what I’m expecting” next week.
“I am hoping to see positive earnings reports and more encouraging forward projections from those companies that report than what we saw this week,” he says. “I am hoping for positive outcomes in the European elections, especially in France. I am hoping for more encouraging economic reports than what we saw this week, especially employment and housing. I am also hoping for lower borrowing costs in Spain and Italy.”
But, he adds, “I expect continued lackluster earnings with little positive guidance from most companies.”
Other than Apple, Sica will also be looking at the bank and insurance companies that haven’t yet reported.
Although Sarhan expects only a nominal impact on the markets from the French elections — unless something such as riots or a major political upset occurs — Sica thinks that the mostimportant event next week is the French elections.
Sica says that if incumbent Nicolas Sarkozy is voted out and Francois Hollande becomes president, it will “clearly” break the continuity that’s been developed between German Chancellor Angela Merkel and Sarkozy, who’ve worked very closely together on European debt crisis issues.
“Although monumental challenges face the European Union, those challenges will greatly accelerate with a Sarkozy defeat,” warns Sica.
“The impact of any mildly positive earnings next week will be surpassed by resurfacing concerns as borrowing costs increase in Spain and Italy with the potential of a rotation in leadership,” he says.
— Written by Andrea Tse in New York.