- Rally makes it four straight.
- End of QE2, end of Q2, Chicago PMI all credited with the rally, but unlike some of the conclusions drawn, we don’t think it is a new breakout.
- Jobless claims put in an even dozen over 400K.
- Chicago PMI jumps over 60, a nice turn in the data.
- Still playing this as a long in the tooth relief rally as Q2 ends
- Stocks can still rally Friday but expect some afternoon selling if they do ahead of July 4 holiday.

MARKET SUMMARY

Four strong price days and now we see if July starts like May and June.

I am traveling today, so this report will be a bit abbreviated. The market did what we anticipated it would, and that was to continue its relief rally for the fourth day. There was a lot of enthusiasm on the financial stations with respect to this move. There were a few reasons to give credit to the move that would seem to indicate things are coming up roses all over the place. Number one was the end of Quantitative Easing II. They were saying this may provide investors some hope given that the federal government may be backing out and letting the markets do its thing. We will see about that. The Chicago PMI was also talked about quite a bit. It came in much better than expected at 61.1 versus the 54 expected and 56.6 in May. That was a very good read. It somewhat offset the disappointing jobless claims that came in at 428K versus the 420K expected.

Futures were up all morning. They started higher and continued higher as the session got underway. The market rallied nicely. It had an afternoon fade, but we expected that. A little double bottom and then a rally back up to close at session highs. That kept the SP500 right at the 1319-1320 level that represents some resistance. There were good moves across the board. NASDAQ, +1.2%; SP500, +1%; Dow, +1.25%; SP600, +1.1%; SOX, +2.5%. We are watching the SOX because it was the leader to the downside and it had been lagging on this move. Now it put in a decent move. That does not mean we will all of a sudden have wonderful times ahead (a new breakout, in other words). This is just getting the indices back up to that resistance I have talked about in the form of the early April, early March, and even the February peak. It is on the way, and we will see if it can continue. Four strong days right up to the end of the quarter.

Let us look at what happened on prior ends of the month. May had a nice rally off of the lows. We had a pullback all month and then a week-long rally only to turn over in June. We had a four-day rally right up to the end of the month. Again, back in April we had a week and a half rally and then a pullback to start May. That ultimately led to selling for the entire month outside of the last week of a bounce. That is what we were playing moving forward this entire week. We were looking for this rally to occur and it has. We were taking gain off the table as per our plan. We did not do any buying because a fourth day into a nice rally is not the best time to pick up new positions. We were taking some gain, closing some laggards, and preparing a bit in case the start of July looks something like the start of June. Definitely a lot of buying at the end of the month ongoing, and it was due to the end of the quarter. If it does occur, we will have to see how strong the selling will be.

I do think there will be a pullback after this relief rally because we are still in the same economic position overall. Nothing has changed other than Greece saying they agree to austerity in order to get some money. The US is still having economic troubles even though we had a good Chicago PMI. The conditions are still the same, and I do not expect any change. Therefore I am looking for the relief rally to fail and maybe go another rotation in the pattern, or it could even break down if the economy will not make a substantial recovery anytime soon.

FRIDAY

There are a couple of big economic reports. There is the Michigan Sentiment finale for June and the ISM, the national manufacturing index. That is being revised higher from what I understand. The ISM was expected to come in at 51.1, but I hear they are coming in at 55 or so. We will see what the consensus is in the morning and how it performs. That could be an important report for the economy as the Chicago PMI was on Thursday. There are not just economic reports, but we also have a new quarter. We are starting Q3 with July. As noted before, we have had some unfriendly starts to the month over the past three months. We have been playing a little cautiously. I am not totally going into turtle mode, but I want to play for a rebound versus a big rally and breakout. We have put money to work when it has been warranted, but we have not loaded the boat. We have been able to bank some nice gain and have more limited exposure as the month starts.

On Friday we probably will not be buying a lot of new positions unless we have a downside move. I have said that could happen, and I am partially anticipating it. If that happens, we have downside plays we can make to take advantage. After all, the market has rallied close to where we anticipated it would with resistance. If it turns over and starts to sell, we would want to take advantage of the downside as well. We have plays to do that. We have to adjust up the buy a bit given the nice run on Thursday, but it is totally doable if the market wants to roll over. That is where we would buy.

If we get more upside, that is great. We will continue to do what we have been doing, taking some gain off the table, but we still do not necessarily want to buy into the upside. We would have more than four days of gain, and that is not a good risk/reward position. We would take more gain on a continued move upside, and then look for selling on Friday afternoon ahead of the three-day holiday weekend with July 4th on Monday. That would be a typical response if we do not get a first-of-the-month selloff and they decide to wait until the afternoon.

Do not get ready to start buying if things open up higher on Monday unless you are looking to play the downside. Then we would also use any other gain to take more profits off the table and look for some downside in the afternoon. That may just be some pre-holiday profit taking, or it may turn into something more when we come back from the holiday. We could have another selloff similar to what we had in early May and early June. That gives us some opportunity to play some downside and also gives us the opportunity to pick up better upside positions when the selling has run its course.

I will see you on Friday, and we will find out just what the PMI says for the nation. We will also see whether fund managers want to sell on Friday or if they will just take a few profits and leave early, leaving the heavy work for next week. It might be the latter. I do not know how many people will be in on Friday, but a lot of people are very nervous about having a four-day rally into the teeth of this selling. They are concerned about leaving positions on the table over the weekend.