July 25, 2018
Posted 9:30 AM ET - Yesterday the market gapped up to a new relative high - a pattern has frequently been faded since February. Sellers tested the bid and most of the gains evaporated by the close. There was no sign of panic buying. The next 24 hours will feature earnings from major companies including Facebook and we need to see a convincing breakout. Escape velocity from prior resistance needs to be established this week or the market will retrace. Trading volume has been very low the last three weeks and that tells me that Asset Managers are under allocated. They have not participated in the last leg of this rally and they will start to panic if this breakout gains traction. Mutual fund outflows of $22 billion in June hit their highest level in two years. Investors who are on the sidelines will put in back into the market once we clear the all-time high. Light volume also has a negative side. The recent gains can easily be stripped away. I mentioned a week ago that 70% of the year-to-date gains for the S&P 500 can be attributed to a handful of stocks (Amazon, Google, Facebook, Netflix, Apple). We need to see participation from other sectors. Financials have been catching a bid as central banks prepare to tighten. Industrials are also bouncing (HON, ITW, MMM). Energy stocks should remain strong as Iranian tensions escalate. Strong consumer sentiment will fuel the retail sector. The backdrop is generally good for market rally, but we need to see broad participation (there are some signs). Of the companies that have reported, 90% have exceeded estimates. Profits are on pace to grow an incredible 21%. This morning president Trump will meet with European Trade Commissioner Juncker to discuss tariffs. The market will jump on any hint that negotiations will resume. Stocks want to move higher but a potential trade war is keeping a lid on prices. Friday's GDP is expected to grow 4.3%. That would be the best level in almost 14 years. Swing traders are long QQQ and SPY. Use QQQ $177 and SPY $278 as your stop on a closing basis. I have widened the stop because I don’t want to get stopped out today. The overnight earnings reactions were not that good. If we don't get a convincing market breakout with follow through this week, we will exit our positions. Strong profits from all sectors should offset trade war concerns. A fantastic GDP report should also excite investors. Day traders need to look for opportunities to get long today. If the SPY is above $280 favor the long side. The rubber meets the road this week and the market needs to distance itself from prior resistance. . .
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