Overnight News Good – Reaction Sluggish. Could Be A Sign That Resistance Is Building

July 23, 2013

The market continues to inch higher and we should have a few more days of bullish price action. China’s government said that it will not tolerate growth under 7% and that sparked a rally in Asia. Earnings in Europe have been decent and those markets are trading higher as well.

Apple will post results after the close and they should be decent. Verizon had good numbers and that bodes well for iPhones. The initial reaction could be bullish, but the rally won’t last. Investors are still wondering if Apple will find a new catalyst.

This is the busiest week for earnings season and cyclical stocks will dominate the scene. Steel prices are moving higher and Nippon steel just negotiated a price increase with Toyota. This backdrop is providing a bid for basic material stocks. Stocks are priced for good news and I don’t see much of an upside reaction.

Economic conditions are still slipping. China might have to throw the kitchen sink at the economy to keep it from slipping below 7%. The trend is strong and tonight’s flash PMI is expected to increase slightly month over month. As usual, analysts are looking for improvement in Europe. Spain’s GDP fell .1% and that was better than expected. I don’t see conditions improving much and corporate guidance for Q3 remains cautious because of Europe.

We are likely to see some end of month/beginning of the month fund buying towards the end of the week and that will buoy the market. Next week, major economic releases will come into focus. Flat results will not fuel the rally. Investors have come to grips with the idea that the Fed will taper and we need to see an increase in activity.

Asset Managers won’t chase stocks at an all-time high when economic conditions are slipping. We’ve seen an overreaction in the bond market and I would not be surprised to see interest rates pullback a little. This will spark a round of profit taking in the stock market and bullish speculators will get flushed out. That decline should bring us back into the middle of the range.

We could challenge SPY $170 this week, but that is as high as we go. I have been buying calls on stocks that have released good earnings and have broken through horizontal resistance. These moves typically produce sustained moves and that strategy has worked well. However, I am not seeing much of a reaction to overnight announcements. I am not taking any new positions today and I am exiting the handful of calls I have.

When stocks decline after posting good results, we will know that a top is forming. Watch for this red flag.

The price action today feels very sluggish. Stocks have been moving higher for weeks on extremely light volume and the market might simply need a rest. The earnings floodgate is open this week and the macro reaction will be very telling.

As long as the most recent breakout (SPY $167) holds, I will favor bullish trades. When we close below that level, I will shift to a bearish bias.

Tread cautiously and know that resistance is building.
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