Strong PMIs Push Market To New Highs – Let’s See If the Rally Holds

August 1, 2013

Yesterday, the market tried to push higher early in the day and the rally stalled. Traders got nervous ahead of the FOMC statement and stocks pulled back ahead of the release. The Fed reiterated that it will remain accommodative, but it plans to taper if the unemployment rate falls below 6 1/2%. Stocks surged higher on the news and they hit resistance at SPY $170. Profit taking was apparent in the last hour and we finished in negative territory.

It is difficult to say if end of month position squaring sparked selling or if resistance at SPY $170 attracted sellers. Either way, we got the surge higher I’ve been looking for and the reversal.

ADP showed that 200,000 new jobs were created in the private sector during the month of July. This bodes well for the Unemployment Report tomorrow. Consensus estimates are for 175,000 new jobs in July. This could be a case where good news is bad news. Traders might get spooked by strong employment because the Fed will start tapering in September.

PMIs in Europe and China were better than expected and we will see a nice pop on the open. It the strength holds we will make a new closing high. If not, we will know that resistance is strong.

Q3 advanced GDP came in at 1.7% and that was much better than expected. One surprise component came from government spending. It did not decrease much and I’m wondering if the effects of the sequester have yet to filter through the economy.

Corporate earnings for the S&P 500 are down .5% year-over-year. These are the worst comps we’ve seen in a long time. Earnings season did not attract buyers and corporate guidance was very guarded. Today’s numbers spark hope, but conditions in Europe and China are uncertain.

The PBOC said that it will not tolerate growth under 7% and traders will take comfort knowing there is a safety net.

I had a slightly negative bias going into the FOMC statement and I peeled back some of my bullish positions when I saw the market hit a brick wall at SPY $170. My ratio of bearish to bullish trades is 2:1. I will take a little heat this morning.

If the opening rally holds, I will exit half of my puts and get back to a neutral bias.

Don’t short this market prematurely. It has been able to rally back from every decline in the last week. We need to see selling and continuation before we get short. Bulls need to finally throw in the towel and Asset Managers need to pull bids. Once that happens we could hit a nice little air pocket and a good shorting opportunity will present itself.

Trade breakouts and breakdowns. Try to carry mix of calls and puts to reduce overnight risk.
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July 31, 2013

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