Wait For A Pullback To SPY $162. First Few Weeks of Earnings Season Should Be Good

July 8, 2013

Last week the market liked the employment numbers and stocks rallied on light volume. Traders took a four-day rest. The volume was light Friday and it is light this morning.

From my perspective, the news was not that encouraging. We need to create at least 250,000 new jobs just to keep up with labor force growth. Also, the quality of job growth is poor. Pay scales are way below the average and the work week is short (part-time).

ISM services and ISM manufacturing came in light. US economic activity is strong on a relative basis, but we are treading water at a meager growth rate of less than 2%. The rest of the world is struggling.

Emerging markets are slowing down, Europe is dismal and China might be preparing for austerity. If we continue on this path, the market will be worried about a recession, not tapering. We still have a couple of months before this becomes an issue.

I believe the market will pullback after the FOMC minutes Wednesday. I do not want to buy stocks at this level, but I will nibble at SPY $162. The move from Friday and today is “fluffy” and a pullback is likely.

Earnings season kicks off today. Alcoa will post sluggish results, but the release will be lined with optimism about the future. We’ve seen this the last few quarters and the reaction will be muted. Major releases start next week.

Banks will dominate the scene and the results will be good. Home loans are on the rise and write-downs are decreasing. Higher interest rates are good for profits. Financials will try to lead the charge and we could see a nice little rally the next few weeks. That move will stall as earnings season unfolds.

In general, revenues will be flat and profits will inch higher due to cost-cutting. Cash flows will be strong and stock repurchases will send a bullish message. The bar has been lowered because of pre-announcement warnings and the first few weeks of earnings should be good.

Stocks will trade in a range and I do not see a catalyst that will take us to new highs this summer. We will push higher in July and the market will be vulnerable as it gets towards the top of the range. Economic conditions will continue to be sluggish and we could see selling in August/September.

Temporary European credit concerns (Greece and Portugal) might have been resolved over the weekend and that should not plague the market.

I missed some upside by getting out last week and I’m okay with that. We caught the capitulation low and it was wise to lock in huge profits. I plan to stay in cash until we get a pullback.

The early rally this morning pushed the SPY up to my secondary target of SPY $164. We are seeing some resistance and I would not be surprised to see an afternoon decline.

The volume is light, keep your trades small. Wait for a pullback and buy calls once support is established.
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