Posted by Pete Stolcers on August 3
Posted 9:30 AM ET – Yesterday the market staged an impressive reversal and it felt like the market was back on track. Unfortunately, the window for a breakout has passed and the price action the rest of the month will be “noisy”. The tug-of-war between strong earnings and tariffs will keep the market in a range. Economic growth is strong, but rising interest rates will provide a stiff headwind.
Q2 earnings season has been excellent and the guidance has been good. At a forward P/E of 16 valuations are reasonable. If the threat of a trade war with China becomes a reality, companies will lower guidance. That is when we could see a market drop.
China is looking for new ways to protect itself during a trade war. The PBOC is injecting liquidity. The Shanghai index is down 30% from its high of the year. China’s PMI was a little light in July and exports are declining.
England has its own trade war. It can’t find middle ground with the EU and Brexit could happen without a deal (ugly divorce).
On a positive note, the EU is working on a deal with the US and Mexico is anxious to finalize terms.
North Korea continues to expand nuclear production. Iran is threatening to shut down the Strait of Hormuz and they’re conducting naval exercises.
The continuing resolution deadline is September 30th and Trump is threatening a government shutdown if immigration has not been reformed.
The Unemployment Report showed that 157,000 new jobs were created during the month of July. This is slightly below expectations. Hourly wages are on pace to increase 2.7% on an annual basis and that is moderate.
Strong earnings needed to force a market breakout. That would have sparked panic buying. Unfortunately, Facebook, Netflix and Intel spoil the mood. Earnings have been excellent, but not good enough to offset trade war concerns. Politicians and traders will be on holiday the next few weeks and the summer doldrums will set in.
Swing traders need to remain sidelined. There is a lid on the market and the upside is contained. We need to wait patiently for a dip.
Day traders are in a sweet spot. Daily ranges have been excellent and sector rotation is providing lots of opportunities. Yesterday I mentioned favoring the long side if we were above SPY $280. That game plan worked out well. I also mentioned that the early selling would be contained and that we were likely to bounce on the open.
The reaction to the jobs report has been muted and we could be in for a quiet day. If the QQQ can get above resistance at $180 you can trade tech stocks and use that QQQ level as your guide. There were a lot of overnight earnings and I will focus on that action. The first half of the day should be decent, but the volume will fall off in the afternoon.
Look for choppy trading conditions and a tight range through Labor Day.
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