3 Reasons Why The Market Will Likely Sell Off This Week

Jul.16.12 | About: SPDR S&P (SPY)

The market refuses to go down. While the S&P 500 and its tracking exchange traded fund (SPDR S&P 500 Trust ETF: SPY) has rallied over 20% since the lows of last year, and stocks such as Apple Inc. (NASDAQ:AAPL) are up over 30% this year, most leading cyclical sectors such as energy, the industrials, and the financials sold-off hard in April and May.

Indeed, while the S&P 500 has sold-off around 4% since mid-April, market leaders, such as Apple, General Electric Company (NYSE:GE), Caterpillar Inc. (NYSE:CAT), Exxon Mobil Corporation (NYSE:XOM), and Citigroup Inc. (NYSE:C), are well off these stocks' highs for the year.

Still, the recent rally has been impressive.


The first reason the recent rally won't likely continue this week is because guidance will likely be below expectations for the third quarter and the remainder of 2012. The economic data in the U.S., Europe, and most emerging markets, has been deteriorating for some time. Cummins Inc.'s (NYSE:CMI) recent decision to take the company's growth forecast from 10 percent to zero, analyst warnings that year-over-year PC sales growth is likely be anemic, and recent stories that companies such as apple may see a significant slowdown in smartphone sales suggest that growth has slowed faster than most traders and investors had expected.

Cummins is the largest maker of diesel engines over 200 horse power in the world, and the company's warning over weakening demand in the global transport markets and increasingly negative forex effects suggests companies that are heavily leveraged overseas, such as Intel, will have trouble raising near-term guidance.

The second reason the market is likely to sell-off next week is that the S&P 500 will face strong resistance at around 1370. The S&P 500 bounced strongly off resistance at around 1320; still the index was unable to break through resistance at the 1370 level in early June or July. The market rallied hard on the news of German parliament's approval of the Emergency Stability Fund framework setup to recapitalize the European banking system; German approval was widely expected, and volume has continued to be very light during most of the recent rally.

The third reason equities will likely be pressured next week is because of the dollar. Even though the S&P 500 finished the week strong with a nearly 2% move on Friday, oil and other leading commodities are basically flat since early July.


The dollar index appeared to be topping out around the 84 level in mid-May, but the dollar has now held its early-June support levels, and is less than 1.5% of its late 2010 highs. Euro is obviously still the most important currency than the dollar, and with companies such as Intel getting nearly 70% of these companies' earnings overseas, a dollar breakout would likely put additional pressure on the major indexes.

To conclude, while the S&P 500 has rallied hard since early June, the fundamentals will likely have to substantively improve to break previous resistance. With earnings guidance likely to be moderately to significantly disappointing, the dollar still strengthening, and Europe's economic and fiscal woes still pressuring the growth outlook, traders and investors are likely to wait to initiate longer-term positions.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.