A Big Weak of Economic Releases – Market Should Be Able To Hold Gains!

Last week, the market started off on a rather quiet note after a gangbuster week. Earnings continued to pour in and the economic news was light Monday and Tuesday. Bears were served up the perfect opportunity on Wednesday and they could not capitalize. The Chinese stock market had fallen 5% overnight, durable goods orders were weaker than expected and the bond auction did not go as well as expected. After trading lower the first half of the day, bulls rallied the market back to unchanged. This reversal demonstrated the strong demand for stocks and it set us up for a big move the next day. Thursday morning, the market shot higher. Initial jobless claims were worse than expected, but continuing claims decreased by 54,000. The government extended the amount of time people could collect unemployment. Some analysts attributed the improvement to expiring unemployment claims and that made the situation look better than it is. In any case, the market wants to move higher and traders are focusing on the silver lining in every news release. There will be a flood of economic releases this week. This morning, construction spending rose by more than expected and it came in at .3%. June's number was also revised higher. ISM manufacturing rose to 48.9 in July from 44.8 in June. The activity level is getting close to 50 which would represent economic expansion. The market has had a positive reaction to the news. Pending home sales, ADP employment index, factory orders, ISM services, initial jobless claims and the Unemployment Report will be released this week. I am expecting a positive reaction to the economic releases and trading activity should slow down ahead of Friday's number. In the last three weeks, initial jobless claims have shown signs of improvement and consequently, I believe Friday's Unemployment Report will be well received. More than two thirds of the companies in the S&P 500 have released earnings. By the end of the week we will have heard from more than 85% of them. Analysts had expected Q2 earnings to be down 38%. On average, profits have only fallen by 29%. More than three quarters of all companies have beaten earnings estimates. This could be the widest margin of success we have ever seen and it is fueling the rally. The surprise component of earnings season has almost played out and more focus will be placed on interest rates and economic releases. I have many concerns about this rally, but none that would convince me to step in front of this freight train. Cyclical stocks have provided very weak results/forecasts, yet they are running higher on the promise of a recovery. The early signs of improvement will come from transportation and energy. Both sectors provided weak guidance and they don't see improvement for another year. Budget deficits for the government (and for states) are running at all-time highs. Surprisingly, no one seems concerned with how all of this will be paid for. Investors are willing to finance this mess and bond auctions have gone well. Interest rates have stayed low as a result and that headwind is not blowing - yet. In today’s chart you can see the inverted head and shoulders breakout and the down trend line that was broken. This is a long term chart and these technical events are very bullish. Trading activity tends to drop off in August and we should see a continued grind higher. Bears have been declawed and they will let this rally run its course. Most of the shorts have covered and I don't expect that to be a catalyst at this level. I believe the best strategy for the next two weeks is to sell out of the money put premium on strong stocks that have produced solid earnings. If the economic recovery is for real, energy prices will spike. Production has been curbed and any uptick in demand will reduce inventories. I like selling puts in this sector. For today, the momentum is clearly higher. China released a decent PMI number (52.8) and Asia rallied. Beginning of the month fund buying will also support prices. The S&P 500 is moving through a psychological resistance level and it could easily close above 1000 today. Advancers outnumber decliners by 4 to 1 and sellers are nowhere to be found. This breakout to new relative highs has legs. Stay bullish and keep your size small.

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