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CSX Is More Important Than NFLX - Q3 Guidance Will Determine Direction

Posted by Pete Stolcers on July 18

Posted 9:30 PM ET – Yesterday the market retreated slightly and it wiped out recent gains. A light news cycle favored momentum and stocks floated higher last week on light volume. There is no conviction and traders are waiting for earnings results. Q3 guidance will determine market direction and we will have more clarity in a week.

Netflix posted its first decline in US subscribers in years and slower than expected international growth. The stock is down 12% this morning and it shows that tech stocks are vulnerable. I view Netflix as an independent story and it doesn’t really affect the rest of the tech sector. The transportation sector is an economic barometer and CSX could be a warning sign. They posted weaker than expected results yesterday and the stock was down 12%. Microsoft will post after the close today and that will be an important release with far reaching implications.

US/China trade talks have stalled. The overnight news (Wall Street Journal) talked about companies that are shifting production out of China. This is widespread and Trump announced Tuesday that he is considering tariffs on another $300 billion worth of goods. This increase doubles the current tariffs (first three rounds combined) and it will impact personal computers, digital cameras, clothing and much more. Negotiations are happening by telephone and that indicates that both sides are miles apart.

Japan is the third-largest economy in the world and they reported that exports were down 6.7% (-5.4% expected) and imports fell 5.2% (-.2% expected). Global growth is slowing, but some analysts are taking comfort in China’s GDP/IP/retail sales earlier in the week.

The debt ceiling is approaching and neither party seems willing to weaponize it. They are focused on recess and I believe a temporary deal will be reached that extends the debt ceiling to October so that it can be negotiated with the budget.

Swing traders should be sidelined. I believe that risk is skewed to the downside. Expectations of a Fed rate cut in September are overly optimistic. Employment is strong and the market is making new all-time highs. Stocks are trading at the upper end of their valuation range and any surprise favors the downside. The rally the last two weeks feels good, but there is little conviction (low volume). If the SPY closes below $295 we will take a partial short position.

Day traders should watch for shorting opportunities early in the day. After a round of selling yesterday, the bid will be testedearly. Once support is established, buy stocks with relative strength.

The news is fairly light this week and we need a broad sampling of earnings. Q3 guidance will determine market direction the rest of the summer.
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