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The Search for Stabilization: Stocks Tip Higher as Earnings Kick Off

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January 12, 2016

Is a recovery brewing? Stocks indicate mild gains after the major averages clawed back to a narrowly mixed finished on Monday—a minor victory for bulls after Wall Street suffered its worst five-day start to a year ever. The tech-heavy NASDAQ Composite lagged, logging its eighth straight drop after ranking top among the major indexes with its 2015 performance.

Few Street analysts expect the market’s drivers to fade soon. Among them, assessing China’s economic health and keeping tabs on volatile oil. For now, earnings season will also dominate the show.

China’s leading stock index ended higher Tuesday but it’s still down nearly 15% for the year. That’s amid worries over how Beijing can manage stock and currency turmoil while navigating an apparent slowdown in the world’s second-largest economy.

Aluminum giant Alcoa (AA) unofficially kicked off the earnings season with its post-close report on Monday (more on it below). AA can prove an important litmus test of industrial demand, including from global customers like China. JPMorgan Chase (JPM), Wells Fargo (WFC), and other financials, along with Intel (INTC), are scheduled to deliver results this week. All told, S&P Capital IQ forecasts aggregate profits for S&P 500 members fell 5.5% in Q4 compared to a year earlier.

This week’s economic calendar (figure 2) ends with the monthly report on retail sales. It can hold potentially valuable clues for the rate-setting Federal Reserve , especially in helping to determine the pace of future interest rate hikes. The Fed lifted rates for the first time in nearly a decade in December, citing economic improvement but a tame-inflation backdrop.

We’ll also hear from the Fed this week. Its “Beige Book” collection of economic anecdotes from each of its districts hits early week. The report can help investors read between the lines when it comes to current economic conditions.

S&P 500 stock chart

FIGURE 1: COMING UP FOR AIR?

The S&P 500 (SPX), plotted here on the thinkorswim® platform, staged a mild bounce on Monday after kicking off its worst start to a trading year on record. Chart support emerged at 1922, and the SPX so far has staged a mild bounce from that point. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Crude Nearing $30. U.S.-based crude futures fell below $31 a barrel in overnight action before rebounding slightly. That follows a 5% slide in price to start the week as concerns about crumbling Chinese demand pile on to supply factors. Iranian oil is expected to return to the market after the sanction on its crude export is lifted this quarter, according to financial media reports. Iran has said it could export at least 500,000 barrels of oil as soon as the ban is repealed.  London-traded Brent also dipped below $31. In a research note, Morgan Stanley analysts said Brent could see $20 this year, a predicted move based largely on an appreciating dollar.

Alcoa Revenue Drops. Alcoa (AA) late Monday reported an 18% drop in Q4 revenue versus a year earlier, to $5.25 billion. That’s slightly less than the Thomson Reuters survey estimate. Revenue fell as raw-aluminum prices shed over 25% to about $1,500 per ton in the past year. AA shares did rise initially on the heels of the report, as its adjusted per-share earnings topped Street expectations. The company said its announced spinoff of automotive and aerospace from aluminum remains on track. The mixed report could keep shares volatile today.

LULU Had a Merry Christmas. Lululemon Athletica (LULU) assumed a different pose in a report late Monday, when the yoga-wear maker raised its Q4 sales view based on a strong holiday season. LULU officials had warned for a potential downbeat quarter when its October and November traffic slowed. The company now expects EPS for the quarter ending Jan. 31 at between $0.78 to $0.80, up from a previous forecast of $0.75 and $0.78. Revenue is expected to be between $690 million and $695 million, up from a previous range of $670 million to $685 million.

economic release calendar

FIGURE 2: ECONOMIC AGENDA.

This week’s U.S. economic report calendar. Source: Briefing.com.

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