Good Earnings Generate Muted Reaction. Market Is Getting Tired. Resistance Building
The market is starting to hit resistance and the price action is sluggish. We should have a few more good days of bullish price action and then the tone will sour. End of month/beginning of the month fund buying should support the market into next week. I don’t believe we will get much higher than SPY $170.
Flash PMI’s were mixed overnight. Europe finally inched above 50 and that was better than expected. Conditions seem to have stabilized. China’s flash PMI missed expectations and it fell to its lowest level since August 2012. The reaction was fairly muted because of government statements made yesterday. Chinese officials said that a growth rate below 7% would not be tolerated. Even if activity continues to slip, traders will take comfort knowing that there is a safety net (stimulus).
This is a heavy week of earnings and half of the S&P 500 will report by the end of the week. Revenues are down year-over-year and profits are slightly better than expected (2.5% versus 1.5%). The guidance has been cautious and no one is projecting much of an economic rebound. Europe, China and emerging markets are giant question mark.
Cash flows have been strong and companies are using that money to repurchase shares. I recently read a report that suggests the number of outstanding shares has declined by 50% in the last 10 years. Less supply and constant demand translates into higher prices. Stocks can maintain current levels, but they need economic growth to push higher. Traders are getting more comfortable with higher interest rates and tapering.
I don’t see economic activity increasing in the next couple of months. Sequestration still has to run its course and analysts are projecting 1% growth in Q3. Higher gasoline prices will bite into consumer spending and retail sales (ex-autos and gasoline) were only up .1% last month. Europe is flat lining and China is slipping.
This week we can see the macro impact of earnings because we are hearing from every sector and group. Good news is priced in and the news is not sparking a rally.
Major economic releases lie ahead. GDP, ISM manufacturing/services, ADP and the Unemployment Report will be released next week. The numbers should be in line, but they won’t spark buying.
Asset Managers will not chase stocks at an all-time high when economic conditions are uncertain. Interest rates are on the rise and the reaction to tapering is overblown. I expect to see some rotation back into bonds. Profit taking will set in and bullish speculators will get flushed out. That selling pressure should push us back into the middle of the trading range.
As long as the SPY is above $167, I will continue to buy stocks that are breaking through horizontal resistance after posting excellent earnings. These moves typically last a day or two. I know that we are in the ninth-inning and I am using a hit and run strategy. I won’t start looking at bearish trades until we are below $167.
The market tested the downside is morning and I expect to see a slight rebound. Volumes have been light and the market has been trading in a tight daily range. I’m starting to see muted reactions to solid earnings. That is the first stage. In another week, I will be watching for negative reactions to good earnings. That will signal major resistance.
Stick with bullish breakouts and use a hit-and-run strategy.