S&P 500: Target 1190 - Redux

Jul.18.11 | About: SPDR S&P (SPY)
I wrote the 1190 article a couple of days ago, basically calling for an unstable support at S&P 1310 and waiting to see how the market would react to news of Q2 Earnings and Europe. We were at S&P 1318. Should the liquidity environment deteriorate, like in 2007-2008 and 2010, I was looking at S&P 1190 as a probable level. The pudding was to be in the reaction to the news, even though it may take a while to bake.
How has the market reacted since? First and foremost, the European countries CDS spreads, after exploding over the past week, have stayed at crisis levels. This suggests that the market is not fooled despite the headlines news of “successful” European banks stress tests. My benchmark banking stock, Barclays (NYSE:BCS), went down yesterday. In the U.S., JPMorgan (NYSE:JPM) barely held its pre-earnings level – even though it looked pretty good - and Citigroup (NYSE:C) lost 1.6% on its positive release. Bank of America (NYSE:BAC) had nothing to show for, also closing near the low of the day. The question is, who is not only holding European Sovereign debt, but also the CDS-- and at what price. Deja-vu, anyone?
Indeed, despite the Italian fast tracked austerity and bigger than expected vote, and good earnings releases from Alcoa (NYSE:AA), JP Morgan (JPM), and Google (NASDAQ:GOOG), the market yawned. The Euro/Dollar tried to rally. It did not, really, closing below Wednesday’s close, at 1.412 on the September futures – smack in the middle of the 1.40-1.42 range. And the S&P has been stuck in the 1310-1315 range, which has actually proven more stable than I thought.
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Click to enlarge

This lack of Joy should be obvious to anybody who does his / her homework – Joy as in The Ode to Joy, the European Anthem. So what’s the next step?
My personal gut feel is that if GOOG, JPM and BCS, among others, can’t lift the market up, we have to be concerned about overall liquidity. I repeat – the news is important, but the reaction to the news is what counts. So far, the reaction has been less than positive, bordering on negative. True, some stocks have reacted extremely well to positive surprises - GOOG, Valmont (NYSE:VMI), Genuine Parts (NYSE:GPC). But so far, they are not the norm.
Now, this article was written on Friday evening. It is usually silly to come to a conclusion on a Friday evening, for two reasons. One, there is nothing you can do until Monday. Two, a lot can happen until then. Three, this was option expiration.
As of now, my pointers are down, including my Dow Model. So I ask myself the other question -- what if the trend reverses to the upside? Despite the extreme Earnings Yield premium, from a momentum standpoint, I don’t see much upside. It would take a bank and / or a European CDS rally to change my mind, short term - and a lot of positive surprises. The next resistance looks like 1330-- but to be clear, as of this weekend, I think we’ll see S&P 1280 before 1350.

Disclosure: I am long BCS, SDS, TOL, NLC, IMAX, EXTR, MYE, MXWL.

Additional disclosure: I am short AXP and the Euro/Dollar September futures, with a stop at 1.43.