Forget The Tech Wreck and Focus on These Sectors – SPY Needs To Hold $280
Posted by Pete Stolcers on July 31
Posted 9:30 AM ET – The market broke through horizontal resistance last week and it was poised to run on excellent earnings. Mega cap tech stocks were on deck and 70% of the S&P 500 rally this year can be attributed to a handful of these stocks. Unfortunately, NFLX, FB and INTC did not deliver. Although positive, Amazon and Google had muted reactions. After the close today, Apple will report.
If Apple retreats after the number it will weigh on the market. Samsung reported soft global demand for cell phones last night so this could be a problem for AAPL as well.
In general, earnings have been excellent with more than 80% of companies beating expectations. Valuations are reasonable at a forward P/E of 16. The next few days will be busy and we need to see if major indices can get back above horizontal resistance levels.
The window for a nice rally is passing. Trump has threatened to shut down the government and the closer we get to the continuing resolution deadline (September 30) more nervous investors will get. The FOMC will meet this week and they still plan to hike one more time this year (I believe they will wait until December). Republicans will try to maintain control of the House and Senate in November. The midterm elections could also weigh on the market.
Trade negotiations with China have stalled. Xi feels that he still has the upper hand and that Trump will cave heading into the November elections. Canada rejected a bid to join NAFTA meetings with Mexico who’s new president wants to improve relations with the US. Europe has agreed to move towards the zero tariff policy with the US and those negotiations will be ongoing.
China’s official PMI came in a little light (54 versus 54.9). The PBOC has been injecting liquidity in anticipation of a trade war. Europe’s GDP came in at a meager 1.4%.
Domestic economic growth has been strong. Tomorrow we will get ISM manufacturing and ADP. Both numbers should be strong.
The Fed has been aggressive and I believe they will stick to their guns this week. The statement will be consistent with one more rate hike this year. Traders will be looking for any hint that the tone has softened for 2019 when four rate hikes are expected.
Swing traders are on the sidelines. The SPY closed below $280 yesterday and we were stopped out. The backdrop is strong from a fundamental and a technical standpoint, but the political headwinds will keep a lid on the market. We have to be patient and wait for a pullback. Option buyers need momentum and we are likely dead in the water until the middle of September (unless we get a nice pullback). Credit spreader’s can sell bullish put spreads on strong stocks while we wait. Focus on stocks that have strong technical support and sell the spreads below that level. If technical support fails, buy back the spreads. Washington DC will go on holiday and the action will dry up the next few weeks.
Day traders can take advantage of sector rotation. Use the first hour range for the SPY as your guide. If we are above it favor the long side and buy financials, energy and drugs. If we are below the first hour low, favor the short side and focus on tech stocks. You can also use major technical levels onto QQQ ($178) and SPY ($280) as your guide. Day traders should also focus on post-earnings plays. This will be a busy week so strike while the iron is hot.
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