- Market surges for fifth straight session, providing the fireworks for the Fourth of July
- Modest gains early until ISM supercharges the session, and sellers dared not enter the fray.
- Investors realize that few earnings warnings mean a solid earnings season, and they spend the week playing catch-up.
- SP500 rallies to test the February peak, SOX testing its range.
- Bonds sell and gold fades, both expected if the economy strengthens, but why is the dollar still selling if times are getting better?
- ISM posts a solid rebound on the headline, but key components are still very disconcerting. China’s PMI declined again.
- Michigan Sentiment declines more than expected.
- Cyclical stocks making the best moves.
- Building gains ahead of earnings that are, as of this week, expected to rise again.
- Indices at a key point: test the rally and continue or fail at this resistance?

MARKET SUMMARY

Another strong session pushes SP500 to the February peak.

Much of the country is under a fireworks ban given the drought conditions. The market decided it would provide the fireworks for the Fourth of July celebration, rallying for five straight sessions to the upside. It was an even week of huge gains, with each session gaining over 1% or close to it. A double bottom off the 200 day EMA and above the March peak on the SP500 helped create the move, and it was fed by economic data all week. It was technically set make the move, and the data kept helping it along.

Early in the week Japanese production surged at the highest rate since 1953. Of course, it was at such a slow rate that it was bound to jump back. It could have posted almost any amount of gain and beat its highs over the past 40-50 years. There was some good data. The Chicago PMI came in better than expected. The ISM numbers on Friday came in much better than expected at 55.3 versus 51.1 expected. Very good news for the manufacturing sector that had been starting to contract in some regions of the country. It is a chicken or the egg scenario. The national number tends to lag the regionals rather than lead them. As I will discuss soon, some of the internals of that number were not very good. The market still took it as a positive, so you have to go with what the market says.

We also had the end of QE II along with the end of Q2. That no doubt played a role in the bounce as there was window dressing done after a big selloff. Earnings are also just around the corner and there have been very few warnings. That means we will have good earnings, and all of a sudden investors woke up. They realized that even though the economic numbers were not so good, the earnings are going to be good due to the lack of warnings. They started building some gains back in the stocks ahead of the actual numbers.

You could say that investors were somewhat playing catch-up with the realization that there were basically no earnings warnings and they better get into the stocks while prices are cheap before they surged to the upside. Are they going to be considered cheap now that we have had five days of rallying that pushed the SP500 right up to its February peak? As you recall, that was our high side on the estimates of how far this rally would run. I did not anticipate that there would be the catalyst of better economic data that would push it. Certainly if the data had not been this solid, the oversold bounce probably would have run out of gas somewhere around the early-March peak. But it got some extra juice and it made the run up to that February peak.

The SOX did not run to its February peak, but it rallied back up to a key level at the bottom support range of its former trading range. That puts it in an important area just as SP500 is at an important area (at a much higher level). Remember that the SOX led the move to the downside with an ugly three-week drop. It did not start to rally back with the rest of the market. It was not looking as strong. It was moving, but its moves were very modest. Not until Thursday and Friday did it get some power behind that rally, at least in terms of price gains. Thus it is now at a critical (but much lower) level than the SP500. What does this mean? Lagging to the upside and it was leading to the downside. In an inverse way it is leading again or it could be. If it fails here and turns over, it could be trouble for the rest of the market. Thus, even though the SOX is lower and does not seem to be leading this bounce, it is kind of leading the bounce in terms of not participating. Again, if it rolls over it could really be an anchor chain for the rest of the market.

Looking at the intraday action on Friday, the market was really going nowhere early. Futures were flat to lower, and then they started to move a bit higher but really were not making any new headway. That was something I kind of anticipated. Stocks had rallied well for four days, and a little weakness on Friday ahead of a three-day weekend was not too surprising. I thought there might be a little more upside we would use to sell with some afternoon selling. After all, stocks would have been up for five straight days. Ahead of a three-day weekend, you would think that some of the short-term players would start taking some profits. It never really happed. It looked like it would happen until that ISM report a half hour into the session that supercharged the upside.

You can see the blast higher on SP500 as that news came out. It went from 1322 up to almost 1330 in a five-minute bar. A tremendous surge and it did not stop. It kept moving higher the rest of the session. Sellers never wanted to get in front of the upside juggernaut. That was surprising given a three-day weekend and a five-day rally. One of the concerns is that volume was tepid. But, of course, it was ahead of a three-day weekend and it is summer. Volume will be tepid in that case. It was tepid all the way up the entire week. I cannot get too upset about the volume. Remember, this is just a relief rally, right? At least that is what we are calling it until it can prove otherwise. This is where it will prove otherwise or not.

That makes this a very important upcoming week. Will the market test (after five days you would expect it to), regroup, and then make a run at that February peak and late-May peak. Or is this the top? Does it roll over here and fall having built in earnings data and having built in a bit better economic data although still in a downtrend of bad news? That will be the important test ahead this week. We will be ready for it. We were ready for the upside even though I did not really believe in it. It has done better than I expected, but it is still within our expectations. We were able to profit nicely, taking a lot of nice gain ahead of the Fourth of July weekend on this rally. Even though I really do not think it will continue to a new breakout, we certainly utilized it to make some great money.

Outstanding 1%+ gains on the day. NASDAQ, +1.5%; SP500, +1.4%; Dow, +1.3%; SP600, +1.6%; SOX, +2.1%; NASDAQ 100, +1.5%. Interesting that NASDAQ 100 had been lagging the overall NASDAQ, meaning the large cap techs were lagging on the way up. They kind of picked up their pace on Friday. It will be interesting to see if they can continue this or if they start to slide back.

Enjoy yourself on July Fourth. The week starts back up on Tuesday with factory orders. Wednesday we have services. Thursday brings the initial jobless claims, which are always important. Then there is the warm up for the jobs report, the ADP employment change. On Friday we have the nonfarm payrolls. They are expected to rise, but just not that great of a move. I think they will have the data. The government may want to kick it back. It typically does not like to do that on the jobs report because it is such a big report. As of now, it looks like it is a go for Friday. The market will be playing up to that. There may be some profit-taking ahead of that result. After all, the market has been up sharply.

What happens before then? We have July. Is it going to be a situation where we have the rally into the end of the quarter and then a reversal? It certainly did not do it on July 1st. Then again, there was some good news that catalyzed the move to the upside and managed to keep stocks in positive territory and definitely in rally mode. Next week I think there should be some more heavy lifting done. This weak, thin trade ahead of the overall weekend really did not tell much of the story in my opinion. It was easy for the buyers to keep things moving to the upside. It may be a light week again next week with the holiday weekend, but we may still get a better indication of what will happen.

What could happen? We could get the old rollover I have been talking about. After all, there is that potential head and shoulders pattern. It is at the February peak, and that would mark the high of the relief rally if it is going to roll over. There could be some kind of reversal signal where it breaks through and then closes down with a doji. That would be very instructive and interesting indeed. It could happen on the NASDAQ as well since it also has the potential for that pattern as it rallies up towards its February peak. Not as much on the small caps. They have broken through a potential shoulder area, and we will see if they reverse. It did not look like there was any reversal in their system on Friday.

This is definitely a crossroads. Will the indices break through, or are they just going to test and then make the break? Or is it the rollover time? I have been planning on a rollover. We have been playing that game plan, and we took a lot of gain off of the table on the way up. Remember, I did not really think this move was going to happen. I thought it would be truncated, but I played it anyway. The market said it was time to play, and we did; we got in as much as we could. We had to miss some plays. You could not buy into all the plays that were moving higher because they did not all give good entry points. Some of them we missed, but a lot of them just jumped away. Nonetheless, we bought in through this area and made great money to the upside.

Now we will just watch. If it wants to test with a modest test that will not take us out of our positions we are using smart stop points it will break back to the upside. As it does so, we will have an opportunity to buy new upside plays. We will get a test and some stocks that are not too extended right now could take the torch and lead the next rally to the upside. That would be fantastic for those that want to play upside.

It could turn over if we get a false breakout where it surges up and shows a doji and reverses something like it did in late April. Maybe it does that on Tuesday or Wednesday, and then we can make money to the downside. We moved the buy points on a lot of our downside plays to take advantage of that. If we can get them to reverse and the selling starts, I will not shy away from playing the downside. After all, that is something I thought could happen. The rise in the Chicago PMI and in the ISM, while they may ostensibly look to change the flow of bad economic data, you can see by the internals that was not necessarily the case. There is still a lot of weakness inside the ISM. I could see it come right back down next month if the other indices do not pick up the pace and support it. We could have a rollover.

What will we do? We will do what the market says to do, and we will make money just as we did on this rally. I did not really have any conviction in this rally (no one did, mind you) until late Thursday and on Friday. Now all of a sudden there is a lot of excitement, but we have problems here. We have the VIX falling sharply lower, and we have that run up to resistance on light volume. There are problems with it. I will be watching to see what it does. We will take advantage either way, and that is the point.

It is still in a well-defined trading range. Does it have reason to breakout? Maybe earnings will provide that reason. Stocks rallied sharply for five days, kind of on the realization that earnings were suddenly going to be better than they had thought. But let’s face it, without the warnings all of a sudden the light did come on for us, too, this week. We might just see some earnings surprises. The market seemed to pick up on that, and that is what it was doing.

The question is whether the earnings will be enough to augment this move and justify more buying. If they do, it will break out and there will be a move higher. We will catch it on the test of the breakout. If it continues higher, we will pick up stocks there. We will either have a test that then breaks out maybe when earnings start coming out. You take a few days of a test, then good earnings come out and, boom, you get a breakout. Great. We can play that to the upside. We could also get a rollover. Earnings may not come in that well, or maybe the sellers just show up as they did in June and slaughter the market. We will just play that to the downside.

We have already taken a lot of gain to the upside. We can get rid of the upside that is not holding on and play some downside again, or we have the breakout. Maybe it just continues to breakout and then we play the test. If we get a breakout we can play that test. If we get a test first and then the breakout, we can play the rally off of the test. We will just see what the market is going to do. It is at an inflection point again. We made money on the last move. Whatever move it wants to make next, we will make money on that as well. We will just stick to our plan.

I have been out seeing this great country, talking to business people and talking to workers and employees. I still feel good about things, but they need to be able to do what they do best. That is to invent, come up with better ideas, and then hire the people to help them. With all the uncertainty and the problems with Obamacare, they do not want to hire anybody. They are still not getting any money, and that is a big problem. People want to do what they have always done in the US, but they are being stymied by the federal government. Hopefully our leaders will get the message and do the right things. Then this can be a July Fourth we look back on as a time when the country corrected course, did the right thing, and I got back on track to being the best nation in the world.