Market Trying To Tread Water – A 2nd Fail Would Be Bearish
Posted by Pete Stolcers on July 8
Last week the market tried to breakout to a new all-time high after a truce by Trump and Xi at the G20 meeting. Stocks floated higher on light volume and the gains have been able to hold. The market lacks a catalyst and Q2 earnings will be in focus the rest of the month.
Trade negotiations with China will resume this week. Some of the export restrictions against Huawei were lifted, but the company is still blacklisted. China has nominally increased grain purchases from the US. Both sides are still miles apart and we will not see a trade deal before the 2020 election.
China will post its trade numbers on Friday and GDP/IP Monday. Those will be important data points and traders will be watching for signs of weakness.
Friday’s jobs report was strong and the Fed will not cut rates three times this year. At most, we will see two rate cuts and that will only happen if the market declines. Domestic economic growth is strong and the market is at an all-time high. There is no reason for the Fed to take action. We will get the FOMC minutes Wednesday and Chairman Powell will testify before Congress on 7/10 and 7/11.
Central banks around the world are dovish, but they have no “bullets”. With interest rates at 0% (and negative in some countries) the best they can do is to postpone future rate hikes.
Earnings season will begin a week from today and big banks will set the tone. Stocks are trading at the upper end of their valuation range (forward P/E of 17) and good news is expected. The market bid typically stays strong during the first three weeks of the earnings cycle.
Swing traders should remain on the sidelines. The market has no momentum and the downside risk is greater than the upside reward. Three rate hikes are priced in this year and that is overly optimistic. Trade talks with China will resume, but both sides are flexing their muscles and a prolonged trade war is likely. Global economic growth continues to slip and that will impact earnings. Once we get the final push higher I believe a shorting opportunity will present itself.
Day traders need to use the breakout as a guide. If the market is above SPY $295, favor the long side. If the SPY is below $295 favor the short side. The action Monday and Tuesday will be lackluster and we will have light volume (holiday hangover). Keep your size small and your trade count low the next few days. I am expecting a fairly tight trading range.
Wednesday and Thursday will be important this week and traders will focus on the Fed.
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