Last week the stock market held support and shrugged off the announcement that President Trump is preparing to issue full tariffs on all Chinese imports into the US. That’s not going to happen though until September so stock market traders and robots are focused on what is happening now and that is an earnings rally that none of them can afford to miss out on.
I say that, because if you are running a hedge fund or managing other peoples’ money you simply cannot afford to miss out on a stock market rally, because if you do your investors will take your money away and give it to someone else.
Especially in a market like this that has not seen a drop of 20% for over two years now.
In my view though we are actually in a long drawn out stage three topping process and so the rally must be treated as such.
And it’s a narrow rally, which gives us a clue to when it may come to an end.
The DOW, S&P 500, and NYSE are all below their earlier highs.
It is the Nasdaq that has made a new high and is leading thanks to big moves in the 20 or so big cap stock leaders. People focus on “FANGS,” but there are several other key stocks that are driving things such as MSFT and ATVI.
ATVI has been a key gainer all year.
FB of course is leading having made a new high last week.
And yet the internals of the market are not confirming the rally as you can see with the percentage of stocks above their 200-day moving average for the S&P 500.
So when will this rally end?
A key thing will be to watch how individual stocks react after they announce earnings over the next few weeks.
If they sell the news that will be a sign that the market itself will drop once the earnings rally runs out of steam.
But a key potential pivot point in the market is likely to be in two weeks between July 23rd and July 26th.
The reason why is that MSFT reports on the 19th, Google on 23rd, FB on the 25th, and AMZN on the 26th.
So since those stocks are providing most of the fuel for the rally a simple buy the rumor sell the news play could be in effect, which would make a market top around that time likely.
That in fact is what happened in July of 2015. That was the last key top that resulted in a 20% drop in the Nasdaq and the top came on the day that Facebook reported earnings.
And if you go back to 2007 the final top in the market that year came in October when five big cap tech stocks were all that was left driving the market higher.
We have to analyze the market situation every week and I don’t see a sign that the market is going to make a key top this week, but the week after next may become very interesting.
We are likely to see at least a pullback into the Fall. If it is not the FINAL top coming this summer (everyone is bullish predicting more highs this Fall as there is not a single bear anywhere in the markets that I know of now anywhere) then we’ll have to be on guard for it to come in October, but the risks are growing.
Personally I want to get up to a 20% short position in my main account in individual stocks and am looking to add to my short positions as this month goes on. I’ll be looking at individual stocks and how they react to their earnings though before shorting as I don’t like taking new trading positions on stocks right before they announce earnings.
On Monday the Federal Reserve chairman is set to give his second of two annual testimonies about the state of the economy and interest rate policy to Congress. The Fed released a policy statement on Friday ahead of this testimony that suggests that they are still looking to increase interest rates up to two times this year, despite the flattening yield curve.
Expectations are that Powell will talk things up even though there is now a debate inside the Fed over the yield curve. Gold and precious metals appear to be dipping into his testimony and there could be a relief rally afterwards this week.