Nice Rally After Intel – Market Back Above Resistance – Keep Your Size Small!

Yesterday, the market staged a small rally after Goldman Sachs beat earnings estimates by a large margin. They had record revenues and while the results were impressive, most traders know that this company is in a league of its own. Other earnings from Novellus, CSX and Johnson & Johnson were "soft". After the close, Intel knocked the cover off the ball beating estimates by a large margin. They also provided encouraging guidance. This sparked a 10 point S&P rally after the close and the table was set for a higher open. European and Asian markets rallied on the news. Tech stocks have been strong relative to the market and they are the only hope for a sustained rally. This morning, the Empire Manufacturing Index fell .55 and that was much better than analysts expected. In fact, it was the best reading since April 2008. New orders are coming in as inventories have been depleted. Industrial production also came in better than expected. It fell by .4% in June when analysts expected a decline of .6%. After a relatively hot PPI number yesterday, CPI rose .7% in June. If you strip out energy, it rose .2%. The head and shoulders breakdown (daily chart) attracted many bears (me included). Now that the SPY is clearly above the neckline and the 200-day moving average held, a round of short covering will fuel the rally. Option expiration won't be much of a factor unless we test SPY 94. If that happens it will spark buy programs. From a technical perspective, another head and shoulders pattern is forming on the weekly chart. As you can see, the neckline represents a relative high. When a longer-term pattern like this establishes itself, it always carries more weight. Before that happens, the market will have to penetrate the downtrend line that dates back to last year. That alone would be bullish. We are still far from seeing that happen, but we need to keep it in the back of our minds. There are only a handful of stocks that can drive the entire market and Intel is one of them. Tech stocks are flying and many of the "dogs" that have been beaten down are jumping. I would caution getting overly excited about this move. The other companies that announced overnight are pretty flat after releasing their earnings. The biggest release between now and tomorrow's open is J.P. Morgan Chase. They have produced consistent results and I believe they will post a solid number. After Monday’s run up in financial stocks following Goldman's results, I question how much gas is left in the tank. This afternoon, the FOMC minutes will be released. If anything, they should have a slightly negative effect on the market. They said that they will not be purchasing Treasuries after the September deadline. This means interest rates will have an easier path higher and some analysts already believe the Fed is already reducing money supply. If banks are posting solid earnings, they will raise the Fed Funds rate. Tomorrow, I expect initial jobless claims to rise more than expected. Last week, they were much lower than expected and I attribute that to the holiday. It has been my experience that people postpone filing for unemployment during holidays. Earnings season is just starting to unfold and the early reaction has been positive. Intel's numbers were solid, but it was there guidance that resurrected the belief that an economic recovery is beginning. I'm not ready to buy into that yet. I feel that commodities (primarily oil) will signal an economic recovery. The railroads and dry bulk shippers will confirm the demand and those stocks will move higher. This market will chop you up. The moves are very short and swift and there is no follow-through. Keep your size small and take quick profits when possible. I believe the market will rally stall after the FOMC minutes and be flat tomorrow. Good news from JPM will be offset by higher jobless claims. I like selling out of the money put credit spreads on oil services companies. They should produce solid earnings. These stocks are above support and the market has moved through resistance.

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