First Signs of Selling. Yesterday Provided A Macro Look At Earnings Reactions. Good News Priced In

July 25, 2013

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Yesterday, the market saw a little selling pressure. Soft flash PMI’s and a muted reaction to a slew of earnings releases sparked profit taking. Overseas markets set a negative tone this morning and it looked like we might rollover today. Buyers stepped in and the damage has been contained.

End of month/beginning of the month fund buying will help to support the market for the next few days. We still have some major releases after the close today. Amazon will set the tone for retailers.

Major economic releases will impact trading next week. ISM manufacturing/services, GDP, ADP, the FOMC and the Unemployment Report will determine if the highs are in. I believe the results will be lackluster and the market will not be able to penetrate SPY $170.

Good news is priced in and most stocks have not been able to rally after beating estimates. The bar has been lowered and the real metric is year-over-year comparisons, not “beats”. Revenues are up about 3% and profits are down .5%. These are some of the weakest comps we’ve seen in years.

Asset Managers won’t chase stocks at an all-time high when economic conditions are fragile. Corporations have not provided any clarity in their guidance and projections for Q3 are guarded. Soft conditions in Europe and China are still an issue. The sequester still has to run its course and it will weigh on Q3 activity. Most analysts are projecting 1% growth in the US this quarter.

As we get into August, I expect to see profit taking. That will push the SPY below the $167 breakout and it will flush bullish speculators out of the market. That wave of selling should take us back to the middle of the trading range (SPY $163). Earnings season will start to wind down and the economic releases will dry up. Traders will take time off and the market should fall into a tight trading pattern.

Yesterday, we saw the first signs of weakness. This was a great macro peak at earnings releases because there were so many announcements. Every sector was represented and the reaction was negative.

I have been buying horizontal breakouts after strong earnings releases. I will continue to do that, but I will be very cautious. If I don’t see the follow-through, I will get out right away. Today, I am also throwing in a mix of bearish trades.

I’m looking for stocks from weak sectors (basic materials and other cyclicals) that bounced and are rolling over after posting results. This mix provides a nice hedge. If the SPY closes below $167, I will shift completely to bearish trades.

Don’t be too anxious to short this market. I know this looks like a top and it certainly feels like one. However, we still have some decent earnings releases ahead and end of month buying needs to run its course.

The market tested the downside and the selling should be relatively contained today. Strong tech earnings (FB, BIDU, FFIV, CTXS, and VMW) are providing support. Stocks are struggling to tread water, but they should be able to for a few more days.

Trade a mix of longs/shorts and use a hit and run approach.
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