Market Will Grind Higher – Stay Long – Make This Adjustment Today
Posted by Pete Stolcers on July 27
Posted 9:30 AM ET – Yesterday the market struggled to tread water after Facebook dropped more than 20% ($120B). Tech valuations were brought into question and we are seeing rotation into other sectors. Overnight earnings reactions from tech giants were soft. The trade deal with Europe will keep a bid to the market and I still expect it to grind higher.
Amazon was up after posting results and investors are breathing a little easier. Unfortunately, Intel, Electronic Arts and Twitter are down after posting. Energy will benefit from Iranian tensions, financials will benefit from a normalized yield curve, industrials will benefit from the European trade deal and retail will benefit from strong employment.
This morning we learned that preliminary Q2 GDP came in at 4.1% – the highest level in almost 15 years. This was a perfect number because Treasuries yields are staying below 3%.
Trade war concerns have kept a lid on the rally. The European deal will put pressure on China and Canada. Mexico’s new president is anxious to strike a deal with the US and they could sign one by Labor Day. He wants to improve relations with the US.
Earnings have exceeded estimates for more than 80% of the companies that have reported so far and profits are on pace to grow more than 20%. Guidance has been good and tariff warnings have been minimal (because nothing has been finalized).
China has been injecting liquidity into its banking system and it is preparing for a trade war. I believe their economy is riddled with overcapacity and inefficiency (due to subsidies). Any decline in growth could impact their credit markets. They know this and they are trying to get ahead of the curve. China’s market is down 30% from its high this year (bear market). They are likely to keep the pressure on knowing that Trump needs a deal ahead of midterm elections. China is not negotiating from a position of strength since countries with the largest trade surplus have the most to lose.
Swing traders should sell QQQ near the open and rotate into SPY. Use SPY $280 as your stop on a closing basis. We bought QQQ at $178 so the position was profitable. We are long SPY from the $278 level so our average price will be just above our stop. The trade deal with Europe was huge. This takes a lot of uncertainty out of the market. Europe accounts for more than 25% of the world’s GDP.
Day traders should buy dips as long as we are above QQQ $178 and SPY $280. The SPY is within striking distance of the all-time high and we should reach it next week.
As I mentioned in my comments yesterday, trading volume has been light during the last few weeks. This is a sign that Asset Managers have been reluctant buyers and that they are under allocated. They will start getting very anxious as the market grinds higher and any dip will be shallow and brief. Earnings season is in full bloom and the results have been fantastic.
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