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Light News Cycle Favors Momentum - Earnings Season Starts Monday

Posted by Pete Stolcers on July 11

Posted 9:30 AM ET – The market continues to grind higher on dovish Fed comments. A quarter-point rate hike is expected in two weeks. It’s important to note that the headlines sound great, but the gains are marginal. Earnings season will begin next week and the market bid is typically strong the first few weeks of the cycle. Investors are ignoring the warning signs and momentum is driving the action.

We are in a light news cycle. Tomorrow China will post its trade numbers and it will post GDP and industrial production Monday. From a macro standpoint these are important numbers because it will reveal how strong/weak their economy is. From a trading standpoint it might not mean much. Soft numbers would prompt the PBOC to ease.

US/China trade negotiations are not going well in my opinion. Since the G20 meeting nothing is happened and the negotiations are taking place via phone conferences. China is bringing in a new trade team and many analysts feel that this is a sign that they will take a harder stand. I don’t believe we will see a trade deal before the 2020 election.

The ECB is dovish, but all they can do is postpone future rate hikes. They are completely out of bullets with interest rates at 0%.

The debt ceiling could be hit in three weeks. That is much earlier than expected. Politicians will be in recess and they were hoping to negotiate along with the budget in October. This could be a problem for the market and I suspect they will agree to a bandaid.

Earnings warnings have not impacted sentiment and two more companies (VSH and Sensirion) warned overnight. Stocks are trading at the upper end of their valuation range (forward P/E of 17) and good news is expected. Citigroup will start the season off Monday.

Swing traders should stay sidelined. I believe we will see a push higher the next two weeks and this will result in a buying climax. The issues mentioned above will start to weigh on investors and they will want another rate cut in September. If I see a sharp reversal off of the all-time high we will buy puts when the market trades below SPY $295. The upside rewards are smaller than the downside risks.

Day traders should watch for shorting opportunities early in the day. Gaps higher have been faded (just like yesterday). Once the selling subsides, buy stocks with relative strength. If we continue to drift lower all day and we make new low after two hours of trading, favor the short side. The trading range has been very compressed and yesterday we closed right where we opened (doji).

The rest of the week should be fairly quiet. Monday’s economic numbers from China could spark some action.
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