Stocks Are Catching Their Breath – Watch Interest Rates This Week – Record Bond Auctions!

July 27, 2009
Author: Peter Stolcers, Founder of OneOption

The market has staged an incredible 11% run in two weeks. It has not showed signs of slowing down and it has broken through the relative highs set in June. Shorts are running for cover and Asset Managers that got caught flat footed are scrambling to place money. On a short-term basis, the market is extremely overbought and I don’t advise chasing it. I would not short this market, but I would take partial profits on long positions and I would set trailing stops. The biggest news this week will be the demand for US Treasuries. Over $200 billion in new bonds and notes will be auctioned this week and that is a record. Traders might be nervous that yields will start rising. Today’s bill auctions went well. It is the longer maturities that will be in question later this week. This morning, new home sales jumped by a whopping 11% and they were much stronger than expected. It's been almost 10 years since we have seen a move of this magnitude. Interest rates have pulled back in recent weeks and the first time home buyer credit also helped to stimulate demand. Sales have risen for the third straight month. Earnings will continue to be the primary driver this week. The releases this morning were decent, but they did not influence the market one way or the other. I don't see any major announcements after the close or before the open that will move the market. There are many cyclical stocks that will post earnings and I feel there might be some downside room. The results have been in line, but the guidance for Q3 has been very cautious and most cyclical companies don't see economic conditions rebounding. The stocks have rallied with the market and there is room for disappointment. Tomorrow, we'll also get consumer confidence and the Case-Shiller home price index. Consumer confidence should be decent and home prices should have improved slightly month over month. Durable goods orders will be released Wednesday and they have been stronger than expected. Wednesday afternoon, the Beige Book will reveal regional economic activity and it could drive the market. On Thursday, we will get the first look at Q2 GDP. Analysts expect a 1.5% decline. Earnings and interest rates will determine the direction this week. If interest rates are stable and the earnings keep beating estimates, the market is likely to hold its gains. End of month fund buying will also support prices. I will continue to look for put selling opportunities on strong stocks that have formed support. Keep your size small. image

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