The market continues to push higher, but earnings season has not been much of a catalyst. About 100 of the S&P 500 have reported and this week represents the peak of Q2. Financials and healthcare look good, the rest are soft.
The strongest companies release early in the earnings cycle and optimism typically builds. Stocks are at an all-time high and good news is priced in. I’m waiting for signs that this rally is exhausted. When companies beat earnings estimates and they decline after the news, a red flag is raised. I believe we have one more decent week of bullish price action before the tone sours.
Asset Managers will not chase stocks at an all-time high when economic conditions are uncertain. Interest rates are creeping higher and we are likely to see a round of profit taking. Bullish speculators have been buying the breakout and they are about to get flushed out. I am not looking for a massive selloff, just a pullback to the middle of the range (SPY $162 – $163).
The economic news is light this week and traders will be watching the flash PMI’s on Wednesday. China is expected to improve slightly month-over-month (48.5 to 48.7). Analysts are continually calling for improvement in Europe, but conditions are dismal. Corporations continue to cite weak demand and they are not forecasting any improvement.
Cyclical stocks have been trying to move higher, but the news does not support the move. Retailers will post mixed earnings. Retail sales (ex-autos and gasoline) increased .1%. Consumer stocks like Coca-Cola and McDonald’s have missed estimates and higher gasoline prices could impact demand. Oil producers will benefit from higher prices, but natural gas producers and refiners will suffer. I don’t believe the energy sector will move much.
Apple will release earnings after the close Tuesday and the numbers should be okay. Verizon posted decent results and that bodes well for iPhones. However, the rally will be contained/temporary. Investors are still looking for the next big product.
The market should be able to challenge SPY $170 this week, but I believe that is as high as it will get. End of month/beginning of the month fund buying will help. As we get into August, I believe resistance will build.
As long as the last breakout holds (SPY $167) I will trade from the long side. I am buying calls on stocks that posted strong results and are breaking through horizontal resistance. These patterns tend to produce sustained moves that last a couple of days.
I am also keeping an eye on earnings reactions. When stocks decline after posting strong results, take notice. This is a sign that they are fully priced.
As we get into August, I believe the market will roll over and there will be bearish opportunities post-earnings.
Trade from the bullish side; keep your size small and set targets/stops.