The market posted solid gains yesterday and we are back above the 100-day moving average and horizontal support at SPY $159. A hard bottom has been established and that low will hold this summer. Asset Managers have been patient and they are buying the dip.
Stocks are up nicely in pre-open trading and it looks like we will continue to rebound today. Shorts are getting squeezed and this bounce should last a few more days. The keyword in the last sentence is “bounce”. We are not back in rally mode. The market will trade in a range this summer and we are simply drifting back into the middle of the range.
The recent decline confirms a top. Resistance at the all-time high is heavy. Economic conditions have to improve for us to break through and traders will gather information for the next couple of months.
Conditions in Europe might be bottoming. The flash PMI last week was better than expected and we will get the official number Monday. China’s number was light, but the PBOC softened its rhetoric this week. In the US, the Fed is encouraged that activity is stable during a period fiscal spending cuts. They see increased activity on the horizon.
As long as economic activity is improving, the market will embrace higher interest rates. Yields of been declining for years and that trend is reversing. The initial reaction is like taking a cold shower. Eventually, Asset Managers will get used to higher rates. The missing element is economic growth.
GDP was light this week, but all of the other economic releases (housing starts, consumer confidence, durable goods and initial claims) were good. The major news will hit next week. ISM manufacturing/services, ADP and the Unemployment Report should all come in better than feared.
The Fourth of July holiday falls right in the middle of the week and I believe most traders will lean on the ADP release Wednesday. It will set the tone for Friday’s jobs report and most people (myself included) plan to take Thursday and Friday off. We will see activity for about an hour after the jobs report and then the volumes will fall off.
The current rally should last a few more days. I am long calls and I have nice profits. My target is SPY $162 and that is where I will start scaling out. I plan to be out of all of my calls by the close Wednesday.
When the market is range bound, you have to buy weakness and sell strength. Directional moves are abbreviated and they only last a few days. Consequently, it is important to set targets.
Look for continued strength today. Bargain hunters are stepping up to the plate and shorts are covering. This bounce will start getting stretched at SPY $163 and it might get back to SPY $164.
I will not be posting market comments Friday. If you’ve been following my advice this week you have huge profits – protect them. Move your stops up to SPY $160 on a closing basis and keep ratcheting them up.