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Stocks at Technical Inflection Point as Earnings Await

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With the holiday behind us, investors eye the second-half horizon.

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Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

It's a new day, a new week, and for many, a new month. With the holiday stretch behind us and earnings dead ahead-starting with Alcoa (NYSE:AA) tonight-we'll have no shortage of news to digest as we swelter into the sweet spot of the summer.

Last Wednesday, we shared a laundry list of potential catalysts that could move the market. A few of them are listed below, with updated observations.
  • Egypt: While there was some violence in Cairo, the baton passed between governments in a relatively smooth manner, at least thus far. Power to the people.
  • Greece: Over on the Aegean Island, Greek debt inspectors are ready to release the next batch of bailout loans despite warning today of an "uncertain" economic outlook. Still, issues remain while a desensitized global audience looks the other way.
  • Deutsche Bank AG (NYSE:DB), Barclays (NYSE:BCS) and Credit Suisse Group AG (NYSE:CS) ratings were cut by Moody's; given the putrid price action into that news, it was more or less a non-event after the fact.
  • Crude popped through par ($100) on Middle East tension concerns. While crude at $50 is more economically problematic than crude at $150, in my view, Texas Tea remains elevated, trading north of $103.
  • Brazil was quietly down 26% this year, or 32% in USD terms, or back at 2009 levels. It's still there, virtually in the same spot; wax-off.
  • There were high level defections in Portugal in front of €10 billion of bonds due in September, reminiscent in some ways of what we said in September 2008. The president is now considering a snap election in an attempt to identify a solution to the political crisis; the situation remains fluid.
  • Shibor concerns continue to abate as the Chinese overnight lending rate dropped from 3.38% to 3.26%, per the chart below.
  • For the first time in history, the SPY (NYSEARCA:SPY) opened and closed in the bottom half of its intra-day range for four straight days (Thursday to Tuesday). Typically, when a stock, market, or market of stocks opens strong and fades lower into the close, it's a sign of distribution.
Indeed, when we awoke last Wednesday, global markets were getting crushed and the stateside tape, sitting directly under our technical Danger Zone (updated below) had every excuse to trade lower-but didn't.


We offered at the time that we might be learning a lot just by watching-the reaction to news is always more important than the news itself-but some offered the thin holiday ranks skewed the traditional dynamic, if in fact the dynamic is still traditional. Still, rallies on lighter volume are typically viewed with suspicion; particularly if sell-offs occur on heavier volume.

All things considered, the next leg of the US equity market will rely on the fundamental metric, which arrives in the form of earnings. Historically, the bigger the rally into earnings, the higher the bar becomes for companies to clear those hurdles, which is what we refer to when we discuss "field position."

The S&P (INDEXSP:.INX) has rallied 5.5% since the June swoon low at S&P 1560 on June 24, for what it's worth and so it's said-right smack dab back into the middle of the June range. Due to the upward slope of the November trend line, my trading parameters are in constant flux and updated in real-time on the Buzz & Banter (click here for a free two-week trial).

Random Thoughts:
  • S&P 1600-1650 is the near-term zone; Mr. Valentine has set the price.
  • Last Friday, the ECB communicated that they would remain "extraordinarily easy" for an extended period (and discussed dropping the deposit rate below zero) and the Chinese government said they would suspend the release of industry-specific data for the monthly manufacturing PMI (flashback to the suspension of US M3!). I'm sure they had no idea it was a holiday session in the US.
  • The jobs data? Better, if you believe the top line. The U6 unemployment-likely a truer gauge-rose to 14.3%, or one in roughly every seven people in the US are out of work.
  • Discipline must always trump conviction.
  • Gold $1180 is the level that must hold to the downside.
  • Bloomberg is reporting that John Paulson's PFR Gold Fund fell 23% in June and is down 65% year-to-date. The bigger question, I suppose, is whether he has been selling.
  • We have inflation in things we need, deflation in things we want, thus the question is posed: Do we need gold?
  • The Internet is the most deflationary invention of all time, which is great if you're a consumer but not so much if you're a manufacturer.
  • A sideways market above support is called basing; a sideways market under resistance is called churning.
  • We took our daughter Ruby on the water for the first time over the holiday; she's a natural!


  • Good luck this week, and I'll see YOU over on the Buzz!
R.P.

Twitter: @todd_harrison

Follow Todd and over 30 professional traders as they share their ideas in real-time with a FREE 14 day trial to Buzz & Banter.
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Position in SPY.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

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