Market Perspective for August 11, 2014

The markets look to start the week on positive note, with gains overnight in Asia and a bullish opening in Europe.  Domestic stocks also opened the day with gains in early trading. This that the potential to build upon the positive momentum from Friday.

Nevertheless, the market could experience more volatility this week. On Wednesday, Japan reports its GDP number. Analysts are forecasting a 7.1 percent annualized decline in GDP in the second quarter, a result of a substantial increase in the national sales tax. Shoppers (both households and corporations) stocked up on goods in the first quarter, lowering recent demand. Markets have priced in the GDP result but there’s concern that the tax hike will slow the economy over the coming quarters. Any positive surprise will be bullish for global markets.

This week will also see the CPI report for the EU. Italy has slipped into its third recession since 2008, while deflation is a concern for debtor countries, including Spain, which has already reported a negative CPI for July. The European Central Bank hasn’t used all the powers at its disposal to create inflation, but traders have been selling the euro against the dollar as U.S. monetary policy tightens slightly. The euro looks poised to bounce this week and European shares are rallying. Any news that signals more intervention by the central bank could boost shares further.

The only major economic data in the U.S. is the retail sales for July. Analysts forecast a 0.2 percent increase.

Sectors and indexes to watch this week include industrials and small caps. Industrials bottomed right around their 200-day moving average and have begun to reverse. The sector was weak last month, so a reversal is good news for the broader market. The Russell 2000 is in a similar position, and it already begun outperform over the short-term. A continuation into this week is likely, which is bullish for stocks.

Earnings:  The vast majority of S&P 500 companies have reported earnings, with only a few big names left to report. The companies are headlined by Cisco (CSCO) and Wal-Mart (WMT). Retailers kick off their earnings report season this week with Macy’s (M), J.C. Penney (JCP) and Nordstrom (JWN) among the notable names.

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