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The Market Will Rally In July - Possible Trouble In August [Here’s Why]

Posted by Pete Stolcers on July 1

Posted 9:30 AM ET – This week the market bounced off of the 200-day moving average and support has been confirmed for a second time in the last few weeks. End of month fund buying fueled a nice rally yesterday and the S&P 500 is challenging the downtrend that started on June 8th. Earnings season will begin in two weeks and buyers are typically engaged at this stage of the cycle. This morning ADP reported a better-than-expected jobs number in the private sector. A close today above SPY $310 would be bullish.

ADP reported that payrolls in the private sector rose 2.37 million during the month of June and that was in line with expectations. The big news came when May’s loss of 2.76 million jobs was revised to a gain of 3.06 million jobs. It’s unusual for ADP to have such revisions, but it is consistent with last month’s Bureau of Labor Statistics number. The new increase in Coronavirus cases and the related shutdowns are not reflected in this number.

Arizona, California, Florida and Texas are reversing the reopening’s and these four states represent 30.3% of the US GDP. Other states have halted the reopening and in aggregate they represent 40% of the US economy. The recovery is going to take much longer than expected and credit concerns could start to surface. To date, the government has paid out $350 billion in benefits and the paycheck protection program (PPP) was extended until August 8th – it was set to expire today. This will add another $600 per week in unemployment benefits and it will take this total up to $660 billion. There will be $130 billion left in the Phase 3 bill.

As I’ve been reporting, China’s recovery is not where we would like to see it. Consumers have not resumed their previous lifestyles and they are not spending. The Dragon Boat Festival showed that year-over-year attendance was down 49% and that spending was down 69%. China has a two month lead and this suggests that the global recovery could be very sluggish.

Today the USMCA will be enforced and we will see if the new trade deal runs smoothly. To date, China has only purchased 20% of the goods promised in the Phase 1 deal. We will see if the rhetoric sours.

ISM Manufacturing will be released 30 minutes after the open and this is a relevant piece of economic news since it is a forward-looking survey.

Earnings season is a couple of weeks away and the bid is typically strong heading into the numbers. FedEx reported solid results and the stock was up more than 10% overnight. Domestic shipping is offset global weakness. In the next month we will get a feel for the bottom-line destruction caused by the Coronavirus.

Swing traders should carefully select stocks and they should sell out of the money bullish put spreads that expire in less than three weeks. Make sure these spreads are below technical support and focus on stocks with relative strength that are breaking through horizontal resistance. My market bias is fairly neutral at this stage. I can make compelling arguments on why the market will head higher and I can make compelling arguments on why it will head lower. This is a low probability trading environment and you should keep your trades to a minimum. On a 2-3 week basis my bias is slightly positive. On a 10-12 week basis my bias is more bearish.

Day traders should tread cautiously ahead of the ISM manufacturing number. It is likely to set the tone for the day. If the market is able to grind higher and it gets above the high from Tuesday we could see a nice rally as the downward sloping trend line on a daily chart is breached to the upside. My bias is to the upside now that we have tested the 200-day moving average for a second time. Wait for market support this morning and buy stocks with relative strength. Use the 1OP indicator as your guide. I will be trading half of my normal size this morning and I will be trading 1/4 of my normal size in the afternoon. We are in pre-holiday mode and volume will wane after the first two hours of trading.

Support is at SPY $307.50 and $300. Resistance is at $310 and $315.
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