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Market Needs Fantastic Earnings To Move Higher - MSFT Good But Not Good Enough

Posted by Pete Stolcers on July 22

Posted 9:30 AM ET – Friday the market gapped higher on solid results from Microsoft. Stocks immediately drifted lower and S&P 500 reversed, closing on its low of the day. The market will not move higher until the bid is tested this morning – I will be looking to short. Once support is established we should bounce.

On a longer-term basis, the market is neutral. We are flirting with the all-time high and fantastic results will be needed for the market to push through resistance. At a forward P/E of 17 stocks are trading at the upper end of their valuation range. Netflix missed and it was punished. Microsoft was better than expected, but not good enough to fuel a rally. Third-quarter guidance will be critical. Typically the market bid is strong during the first three weeks of the earnings cycle. I expect to see some profit-taking in two weeks after mega cap tech stocks have reported.

The macro backdrop has not changed much. There will NOT be a trade deal with China before the 2020 election. This may not impact the market. Analysts are constantly searching for positive news and there’ll always be future meetings to “calm the seas”. If additional tariffs are imposed on China, they will subsidize prices/devalue their currency. Ultimately, consumers might not feel much of a pinch.

In any event, there is a lot of money that needs to be placed. Bond yields do not keep pace with inflation so investors are pushed into equities to maintain purchasing power. Barring a credit crisis, the market will have a decent bid around the 200-day MA.

Central banks around the world are easing as much as possible. The Fed is following suit and a quarter-point rate hike is priced in next week. Investors are expecting another rate cut in September.

Swing traders should remain sidelined. I believe that the upside reward is smaller than the downside risk. If the SPY closes below $295 we will take a short position (half). I need to see follow-through before we add the second leg.

Day traders should have a nice opportunity to get short this morning. The decline Friday rattled investors and the bid will be checked this morning. Opening gaps higher have been faded. Once support is established, look for stocks with relative strength. I don’t believe we will see a lot of follow-through selling today. We should establish a range in the first hour and we are likely to stay within it ahead of major earnings announcements. If the market drifts lower after two hours of trading and we go into negative territory (unlikely) I will favor the short side.

Trading volume should be good this week. In the chat room we will be focusing on post-earnings plays.
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