MSFT Sets A Positive Tone – Earnings Season Cranks Up Next Week

Posted 9:30 AM ET - The market has been choppy this week ahead of major earnings announcements. Microsoft posted better-than-expected results yesterday and the stock is making a record high this morning before the open. This should set a positive tone for the tech sector. Domestic economic releases this week have been strong (retail sales, Empire Manufacturing, initial claims, Philly Fed, and the Beige Book). As long as our data points don't falter, traders will ignore the negative global undertow. China's economic numbers were also bullish earlier in the week (GDP, retail sales and industrial production). The two largest economies in the world are keeping everyone else afloat. Japan, South Korea and Europe are particularly soft. Q3 earnings guidance will tell us if global weakness/tariffs are impacting profits. A quarter-point rate cut is expected in two weeks. The market is pricing in two more rate cuts before year-end and another cut in September is “baked in”. I believe the expectations are overly optimistic. Domestic growth is strong and the market is at an all-time high. The Fed has breathing room. US/China trade negotiations are dead in the water. We will hear encouraging comments each month, but China is just yanking our chain. They will not sign a trade deal before the 2020 election. The debt ceiling won't matter. Neither party wants to weaponize it and Congress will temporarily extend the debt ceiling so that they can negotiated along with the budget in October. We should see a decent rally today, but I don't believe we will get to a new all-time high. Mega cap tech stocks will report next week and those results will determine market direction. In particular, we need to watch Q3 guidance. Swing traders should stay on the sidelines. Stocks are trading at a forward P/E of 17 and surprise favors the downside. I'm expecting good results from Apple, Intel, Amazon, Facebook and Google. These stocks have been fueling the rally and once they report we could see some profit-taking. I still believe the market has a little gas in the tank, but I also sense that this is a buying climax. That means that the drop on the backside could come very quickly. This rally is taken place on light volume and that suggests a low level conviction. Day traders should focus on the long side this morning. Gaps higher have typically been faded. If the market is able to grind higher in the first hour we will have an upward trading channel (small pullback trend day). A more likely scenario is soft, choppy trading during the first hour where the bid is tested. If the decline is small we will see a nice rebound. Use the first hour to find stocks with relative strength. In the chat room we will also be looking for post earnings plays and we will use Option Stalker to find them. Earnings season will heat up next week and the reaction will determine where we go the rest of the summer. . .

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