By Victor Reklaitis, MarketWatch
NEW YORK (MarketWatch) -- In the week ahead, investors will
watch to see if there's more pain for small-cap stocks, often
viewed as a gauge of the stock market's appetite for risk.
They'll also see if Ukraine fears or other geopolitical worries
outweigh what could be another round of upbeat earnings reports and
encouraging economic news. That's after U.S. stocks largely ended
higher last week even after a missile downed a Malaysian Airlines
passenger jet in battle-torn eastern Ukraine.
The Russell 2000(RUT), a key benchmark for
smaller-capitalization stocks, lost 0.7% for the week, while the
big-cap S&P 500(SPX) and the Dow Jones Industrial Average(DJI)
gained 0.5% and 0.9%, respectively. The Russell is down for two
weeks in a row and off 1% for the year, but the S&P is up 7% in
2014, the Dow has risen 3.2% and the tech-heavy Nasdaq
Composite(RIXF) has tacked on 6.1% after last week's 1.6% gain.
Small caps are "threatening to become an anchor to further
gains" by the overall market, said S&P Capital IQ strategist
Sam Stovall in a note last week. Meanwhile, Colin Cieszynski of CMC
Markets described the Russell 2000's underperformance as "the
troops aren't following the generals," meaning the market is
showing a lack of breadth that might end with a broader slump.
During the past week, the iShares Russell 2000 ETF(IWM) tested a
closely watch chart level, its 200-day moving average, as shown in
the adjacent chart. This popular vehicle for betting on small caps
last spent time below that level in May, then recovered and scored
an all-time closing high on July 1 before pulling back again. (Read
more: Small caps usually suffer intra-year drops of 10% or more
http://blogs.marketwatch.com/thetell/2014/05/15/russell-2000-in-correction-territory-but-small-caps-usually-suffer-intra-year-drops-of-10-or-more/.)
Central bankers deserve some blame for the small fry's slide. A
Federal Reserve report on Tuesday sparked sharp selling in this
area of the market, as it said valuations "appear substantially
stretched" for "smaller firms in the social-media and biotechnology
industries."
While some market watchers criticized the Fed for opining on
particular parts of the stock market, David Lebovitz of J.P. Morgan
Funds said the central bank is trying to communicate that it's
focused on both the economy and the market. Fed officials are
saying "it all factors into our broad assessment of the current
state of play in the U.S.," said Lebovitz, a global markets
strategist.
Ukraine worries vs. earnings, economic data
Investors became more aware Thursday about geopolitical risks
after the downed plane in Ukraine and Israel's launch of a Gaza
ground offensive. But those worries receded Friday, and they could
fade further in the week ahead as 146 companies in the S&P 500
deliver second-quarter earnings.
"It's going to be a battle between the two playing out," said
Cieszynski, CMC's chief market strategist. He views second-quarter
earnings season as going "really, really well" so far, pointing to
big names in a mix of sectors surpassing expectations, such as
Intel Corp.(INTC), J.P. Morgan Chase & Co.(JPM) and
UnitedHealth Group Inc.(UNH)
FactSet data show 74 companies in the S&P 500 have already
posted their second-quarter earnings, and 72% have topped consensus
forecasts. In the coming week, notable companies reporting include
Netflix Inc.(NFLX), Halliburton Co.(HAL) and Chipotle Mexican Grill
Inc.(CMG) on Monday; Apple Inc.(AAPL), McDonald's Corp.(MCD) and
Verizon Communications Inc.(VZ) on Tuesday; Boeing Co.(BA),
Facebook Inc.(FB) and AT&T Inc.(T) on Wednesday; and Ford Motor
Co.(F), Visa Inc.(V) and Caterpillar Inc.(CAT) on Thursday.
"A trifecta of economic data" in the week ahead also could
"counterbalance fears brought on by geopolitical concerns," said
Kristina Hooper, U.S. investment strategist at Allianz Global
Investors. She said the trifecta consists of an inflation reading
on Tuesday, reports on home sales and prices on Tuesday and
Thursday and manufacturing-related data on Thursday and Friday.
A correction, then more gains?
The stock market has gotten overheated and needs a correction,
and that likely will happen in this year's second half as the Fed
ends "the liquidity party," said CMC's Cieszynski. After a
pullback, he expects a move higher for a couple of years.
"Once we get past that retrenchment and adjustment, you still
have a strong underlying economy that's powering corporate earnings
quite well," he said. (Read more: A correction is coming, then more
years of gains
http://blogs.marketwatch.com/thetell/2014/07/11/a-correction-for-stocks-is-coming-then-more-years-of-gains-jim-paulsen/.)
Lebovitz of J.P. Morgan Funds said stocks have "come a long way"
in the last few years and are no longer cheap, but they're not yet
expensive. "The fundamental picture at the corporate level still
looks healthy, and that causes us to think that equity markets
could continue their upward march in the U.S.," he said.
Allianz's Hooper said she "wouldn't be surprised to see some
sort of pullback" in this year's second half, but she warns
long-term investors against sitting in cash or being too quick to
sell stocks. ""What we can't stress enough with investors is not
letting investor psychology get in the way of making good decisions
and meeting long-term goals," Hooper told MarketWatch.
She suggests considering a set-it-and-forget fund with
diversified exposure to stocks, bonds and commodities -- such as a
target-date fund or an actively managed asset-allocation fund. "A
vehicle like that is a great way for investors to sleep at night,"
Hooper said, "because they don't feel the need to worry about
individual components."
More from MarketWatch:
Malaysia Airlines crash triggers risk-off reaction
Brett Arends: We're in the third biggest stock bubble in U.S.
history
Chuck Jaffe: Brokerages don't want to put your interests
first
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