We have all of the ingredients needed for an earnings rally. Credit concerns in Europe have temporarily eased and the economic releases are “light”. The strongest companies announce early in the cycle and guidance has not been as bad as feared. The SPY has convincingly broken above $136 resistance and the 100-day moving average should lend support.
Europe is always the wild-card. Not much has changed, but Greek elections and Spain’s bank bailout are behind us. Central banks around the world are easing and that will provide a backstop.
The ECB is simply applying Band-Aids to the problem. In the next few weeks Eurocrats will disappear on vacation and credit concerns will escalate. Yields in Spain and Italy are near all-time highs and one little pop higher could change the landscape instantly.
China released major economic statistics last Friday. Worst-case scenarios were priced in and the slowdown was not as bad as feared. Home prices stabilized after declining for a number of months and that will help. Inflation is not an issue and the PBOC has been easing aggressively. China will also launch a fiscal spending program and these events will “stop the bleeding”. Their market made a 3 1/2 year low earlier this week.
Banks have been reporting solid profits and financial stocks are moving higher. Intel hit its number last night and the stock rallied. It benefited from data center business and the guidance was in line with expectations. Tech stocks have been badly beaten down and they have room to bounce. After the close, IBM, QUALCOMM and eBay will release. The results should be positive for the market.
The Fed Chairman testified before Congress and he said that they are prepared to take action if economic conditions continue to deteriorate. The probability of QE3 increased slightly for September. Central banks around the world have eased and the Fed will come under pressure to follow suit. Unfortunately, previous easing has not stimulated the economy.
The market has a small window where it can focus on earnings. Strong balance sheets and attractive valuations are the best thing the market has going for it. If it can’t rally now, we are in deep trouble. Tomorrow, Microsoft and Google will post results after the close.
The next “speed bump” will come Monday when China’s flash PMI will be released. If the SPY gets up to $138, I believe it will hit resistance. Ideally, this rally will last and $140 will be challenged. That would set up an excellent put buying opportunity.
I am short out of the money put credit spreads and those positions are performing nicely. Option expiration should have a positive influence since we are breaking out to a new 20-day high.
I have resisted temptation and I did not get short when conditions looked bleak. Now I will patiently wait for an entry point. I still believe we are a week or two away from a decline so I don’t want to get ahead of myself. If the market stalls and it closes below $136, I will buy puts. If we continue to rally and we close above $138 that will become my next entry point for shorts.
I will buy SPY puts and I will also buy VIXY calls (September expiration) when the time is right. I want to hold off as long as possible.
For now, ride the rally. Stocks should grind higher the rest of the week.
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