Sunday, January 23, 2011

S&P 500 ends 7 weeks of consecutive gains

The S&P 500 fell this week on worst-than-expected bank earnings, ending the index's 7 weeks of consecutive gains. Meanwhile, the Dow managed to record an 8th consecutive week of gains. On Friday, the S&P 500 edged up 3.09 points or 0.25% to 1,283.35, while the Dow rose 49.04 points or 0.41% to 11,871.84. For the week, the S&P 500 fell 0.8%, while the Dow rose 0.7%. 

Last Sunday, I wrote on this blog “With the S&P 500 having risen for 7 consecutive weeks, it is susceptible to a sell-off...With the US banks having very weak earnings last year to compare their earnings season to this earnings season, it could be easy for them to post stellar results...However, one or more worse-than-expected earnings from a major bank could start a sell-off in a market that is ripe for a correction.”

In fact, that is exactly what happened. Goldman Sachs, Wells Fargo and Bank of America reported disappointing earnings this week.

US data mixed

On Wednesday the US reported housing starts that were below expectations. However, on Thursday, US initial jobless claims last week was reported to have fallen 37,000, to 404,000. It was better than markets expected, and the largest drop in initial jobless claims since February.

Euro zone troubles continue

News reports showed this week that Spain is issuing debt to nationalize its troubled regional banks, called Cajas. This blog first reported on the Cajas back in May, when they were under the spotlight as the Greek crisis erupted. Spain is expected to raise $30 billion euros in total to help its Cajas.

Chinese GDP strong, scares investors

Early in the week, China reported 4th quarter GDP growth of 9.8% and December CPI of 4.6%. The faster-than-expected growth and high inflation caused commodities to fall on concerns of further tightening measures. 

Outlook for the coming week

With the S&P 500 having ended its 7 weeks of consecutive gains, further corrections are likely ahead. With commodities prices having risen significantly since QE2 was announced on November 4th, the threat of further tightening in China will likely push commodity stocks lower. Euro zone troubles are also far from over. Thus, investors should expect North American markets to head lower in the coming week.

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