Light Trading Will Kick Off Earnings Season – Keep Your Size Small.

July 7, 2008
Author: Peter Stolcers, Founder of OneOption

A month ago, the unemployment rate made its biggest spike in 22 years. Last week, traders weren’t taking any chances and they nailed the market in advance of the Unemployment Report Due to the holiday, the number was released last Thursday. The report showed that 62,000 jobs were lost and that was slightly higher than expected. We also learned that an additional 50,000 jobs were lost in April and May as those numbers were revised. Even though the Unemployment Report came in worse than expected, the market was able to recover and it finished slightly higher. Interest rates and earnings drive the market. Two weeks ago, the FOMC leaned towards raising rates. Fed officials have been encouraging banks to shore up capital and those statements tell me that rates will soon moved higher. The market has priced in a 100% likelihood that interest rates will go up by a quarter of a percent in September and a quarter of a percent in October. Last week, the ECB raised their rates by .25%. Higher interest rates will slow down growth in an already weak economy. Second quarter earnings season starts this week. The two stocks I will be watching are Marriott and General Electric. Marriott will give us an indication of consumption patterns in the tourism industry. I suspect that people are cutting back on vacations and other discretionary expenses as food and energy costs rise. As an international conglomerate, General Electric will be highly scrutinized by all analysts. They will sift through each division looking for signs of strength and weakness. After badly missing their number last quarter, I am expecting them to meet expectations. In general, I believe this earnings season will be disappointing. Inflation is biting into corporate profits and they have not been passing on higher costs to consumers. Lower profit margins and cautious guidance will spook investors. Oil continues to move higher and inflation worries will not subside anytime soon. The market has easily come down to test the double bottom made in January and March. This was deemed to be a major support level and as such, we should have seen aggressive buying before that level was tested. Last week, I did not see that and I don't believe the SPY 126 level will hold over the next few weeks. The hangover affect from a long weekend still lingers and this could be a lackluster week. The economic numbers are very light and the market will be getting its guidance from the handful of earnings releases. Oil inventories and initial jobless claims could also have a compact. For today, I expect light, choppy trading. The market is oversold and we are due for a bounce. That rally will represent a good shorting opportunity once it stalls and I don't believe the market will be able to rally through SPY 138. Before it challenges that level, it will have to get through SPY 133. Only a heavy dose of short covering can push it through that level. Keep your trading light! image

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