Market Perspective for August 4, 2014

Stocks will look to rebound from one of their roughest weeks this year over the coming days. Asian shares were solid on Monday and European shares headed higher overnight as well, a sign that selling may be finished. Last week saw all the major indexes down more than 2 percent.

One piece of positive for Europe is the partial bank bailout in Portugal. Unlike the open ended bailouts in 2008, defaults are following the Cyprus model, with bondholders, shareholders, and even depositors bearing losses if need be. In this case, the plan is to split the bank in two, giving the bad assets to current bond and equity holders. The good bank, which will receive some public money, will then be sold to new investors.

An area to follow closely over the coming days is Japan and the yen. Analysts have been cutting their forecasts for second quarter growth, with estimates down to an annualized drop of 7.4 percent. This is an average figure; some economists project an annualized loss of more than 9 percent. Even though stocks can do well, the yen may again weaken as it did late last week.

The most important story, however, may not be any individual piece of data, but rather sentiment. Over the weekend there were an abundance of articles predicting a further drop in stocks following the decline at the end of July. Investors haven’t seen a big correction since 2011 and the recent low levels of volatility have created a sense of complacency. The sell-off over the past few days has created a bit of unease. Whether stocks rally this week or not may ultimately come down to market psychology. With Asia and Europe turning up, it appears the selling is done, but traders will likely test the market at least once this week as some technical levels were hit during last week’s decline. This week could be choppy, but stocks should finish in the black.

Economic Reports: A very light week for economic data. Productivity in the second quarter and the trade deficit are two of the larger numbers to be reported. Along with the trade deficit for June, wholesale inventories for June are to be announced. Both of these numbers impact second quarter GDP, so there could be some revisions by investment bank economists.

Earnings: Most of the big blue chips have reported earnings, but there are still many mid and small cap companies that have yet to release information. Retail begins reporting this week with CVS Caremark (CVS) and Office Depot (ODP). Media also reports with Disney (DIS), 21st Century Fox (FOXA), Time Warner (TWX), Viacom (VIAB), CBS, News Corp (NWS) and Liberty Media (LMCA).

Last week energy shares were hit with significant losses. This week many midcap companies report: Chesapeake Energy (CHK), Devon Energy (DVN), EOG Resources (EOG), Marathon Oil (MRO), Transocean (RIG) and coal miner Alpha Natural Resources (ANR). This week will also see First Solar (FSLR), a major solar company, report.

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