Market Breakout Will Force Shorts To Cover. Stocks Should Grind Higher Into Earnings

July 3, 2012
Author: Peter Stolcers, Founder of OneOption

I will not be publishing market comments or the Daily Report on Thursday, July 5th. The Live Update Table will be working and you will be able to spot the best trading candidates.

Last Friday, the market staged an impressive rally. The EU will provide direct aid to ailing banks through the EFSF. Germany has been steadfast in its opposition to direct bank bailouts. Two weeks ago, Spanish banks received direct support from the EU. Traders are hoping that the lines of division are becoming blurred and that Eurocrats will work together.

The SPY has been able to break above critical resistance at $136. That is a horizontal resistance level and it is the 100-day moving average. This move will spark short covering and the market will grind higher on light volume the rest of the day. As I have mentioned in the last week, the market tends to rally into major holidays.

The economic news is very light today, but it will crank up on Thursday. ADP will release its report and that will set the tone for Friday’s Unemployment Report. The consensus estimates call for 100,000 new jobs in June. Initial jobless claims have been creeping higher and I believe that number is high. Corporations are slow to hire during times of uncertainty and I believe they did not add staff.

In recent months, the ADP report has generated a bigger move then the Unemployment Report. The economic news will weigh on the market, but it will be offset by central bank easing.

ISM manufacturing fell below 50 yesterday and ISM services will be released Thursday. This number should also be weak.

The ECB and the BOE will meet Thursday. You’re likely to hear that LTRO3 is being considered and England will launch a round of QE ($50 billion). Some analysts believe that England will also lower bank reserve requirements and that could add another $100 billion to the money supply. Both events would be bullish.

Stocks have a tendency to rally into earnings season. It kicks off on July 10th and the strongest companies announce early in the cycle. Intel, IBM and Apple will post decent results. Once this earnings rally loses its momentum, a fantastic shorting opportunity will present itself.

Interest rates in Italy and Spain are at dangerous levels. One little nudge higher could ignite fear. Money printing and bailouts are not the solution. Eurocrats will go on vacation and credit concerns will fester. The pattern from 2010 and 2011 will repeat itself in a few weeks.

Pre-announcement warnings for Q2 are way ahead of the pace set for Q1. Earnings estimates have only been lowered by .8% (S&P $104.55) and we are set up for disappointment. Option implied volatilities are extremely low and that usually means Asset Managers are not hedged. This is also a warning sign.

I sold a few put spreads last Thursday and I intended to sell more on Friday. After the huge overnight gap on Friday, I knew I missed that opportunity in I stuck with what I had on. Given my bearish outlook, I don’t want to chase this market. I will wait patiently for the momentum to stall and then I will be ready to scale into bearish positions.

The market has broken through resistance and I hope it runs to the moon. That will simply provide me with a better entry point.

Our country might not be perfect, but there is nowhere else I would rather live.

Let freedom ring.

Happy Fourth of July!

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