Earnings Have Been Good and Bears Are Running For Cover.

July 20, 2009
Author: Peter Stolcers, Founder of OneOption

Last week, the market staged an impressive rally that broke through major resistance. It sits just below the highs from June and in one short week; power has shifted from the bears to the bulls. Great earnings from the tech and financial sectors sparked buying. The financial stocks look a bit tired and even though banks beat estimates, the stocks have not been able to add to gains. This week we will hear from many national and regional banks. Analysts believe that regional banks will get nailed on commercial real estate loans. On the other hand, tech stocks feel like they have more room to run. That sector has been strong relative to the market. After the close, we will hear from Texas Instruments, Canadian National Rail, Edwards Life-Sciences, Legg Mason and Zions Bancorp. The most intriguing release will come from CNI. CSX beat earnings estimates last week. The guidance was dismal but the stock still rallied. Truckers released poor earnings last week and those stocks slipped. Increased shipping activity would confirm an economic rebound. Tomorrow morning, AK Steel, Caterpillar, Coca-Cola, DuPont, Freeport-McMoran, Lockheed Martin, Merck, Peabody Energy, Precision Castparts, Schering-Plough, State Street and TD Ameritrade will announce earnings. The bar has been set very low and these companies are likely to beat estimates. I am still not buying into the steel story and AKS could disappoint. After such a huge run-up, the market needs time to consolidate gains. The earnings last week were quite good because corporations were able to control costs. The biggest concern is top line growth. The economic news this week is very light and all of the action will depend on earnings. By the end of the week we will have heard from all of the major groups and sectors. I plan to be relatively quiet this week. I want to see how all of the news plays out. This light volume market is very difficult to trade. After last week’s action, I believe we are in "buy the dip" territory. The tape is too strong to fight. Look for companies that release earnings and rally afterwards. These are your candidates for in the money put credit spreads. Make sure you have support between the stock price and the strike price. If that support level is breached, buy back the spread. I don't believe the market will challenge the highs from June until the downside is tested. Look for quiet trading today and a slightly positive bias heading into tomorrow's open. image

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