What We Need To Get A Summer Rally Going
It
was a rough week for the equity markets, as further profit warnings F
and tame economic data caused market players to question the strength of the
U.S. economy. The bulk of the profit warnings were focused around the Software
sector, which was quite a blow to the bulls who expected corporate tech spending
to be picking up by this stage of the recovery. Another negative factor was the
recent surge in the price of crude oil, which managed to close at its highest
level in over a month. On a positive note, General Electric was able to exceed
estimates on Friday and confirm forward guidance. Technology stocks were the
worst performing group, while strength was seen in commodity shares.
The
September SP 500 futures closed Friday’s session with a gain of +2.00 points,
but finished the week with a loss of -13.00 points. The Dow futures tacked on
27 points, but lost 72 points for the week. On a weekly basis, the ES continues
to hold its downtrend and also settled below its 10-week MA again, with next
support at its 40-week MA at 1105. Looking at the daily chart, the ES posted a
NR7 day with an inside doji. The YM also continues to hold its weekly
downtrend, but was able to hold its 10-week and 40-week MAs. In the small caps,
the Russell E-mini (ER2) confirmed last week’s reversal to settle right on its
10-week and 40-week MAs, and posted a daily inside market structure low off of
its 200-day MA support.
               
September
bonds (ZB) posted an inside market structure high to settle right on 100-day MA
support. The Semiconductor Index (SOX) stands ready to test its May low after
breaking its weekly uptrend line, and is forming a daily inverted
cup-and-handle. The Banking Index (BKX) continues to slide off its weekly bear
flag and broke its 10-week MA. On a daily basis, the index hit the target on
its daily head-and-shoulders and is testing the 50% Fib retracement of its
May-June up move.
Without
question, all the profit warnings suggest things are not nearly as rosy as most
would have thought just a month ago. At the same time, it’s important to
remember that we are now coming out of warnings season, so most of the bad news
should be behind us. In fact, all the warnings likely served to lower
expectations ahead of Q2 earnings, which could set the stage for a decent rally
at some point this summer.
The one
caveat here is that guidance from corporate America needs to remain strong going
forward, otherwise it’s gonna be tough to get a summer rally going. I’m not
saying that companies must raise numbers for Q3, because expectations are likely
low enough that just confirming numbers may be enough. We won’t have to wait
long to find out either, as bellwethers such as Intel, IBM, and Microsoft are
all set to report in the week ahead. For the time being, it’s probably best to
wait before jumping to conclusions over the sustainability of a recovery for
profit and economic growth. Given what companies like General Electric and SAP
all said Friday, however, the jury is still very much out. Consequently, more
of a neutral type bias is warranted when trading, until a clearer market trend
emerges.
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Please feel free to email me with any questions
you might have, and have a great trading week!