A recovery week for the markets, taking the averages back up into their trading ranges, but well short of the recent highs. SPX, COMPQ both finished the week above their 50MA, while RUT is still below this, and INDU closed the week below the 200MA. Weakness in industrials, energy and materials are weighing on INDU (oil, strong dollar, global growth concerns).
The major economic news this week was the initial Q2 GDP estimate at 2.3%, and a revised Q1 estimate of 0.6% (rather than -0.2% from the initial estimate). The US economy is still moving forward. This week there was finally some good news from the manufacturing sector. Durables goods orders ticked up; the manufacturing PMI increased slightly; and the Richmond manufacturing index increased. The Credit Managers Index also noted a broad improvement in the manufacturing sector in it latest monthly survey. The Markit Services PMI also improved in July; this improvement was also echoed in the Credit Managers Index. Consumer confidence took a significant dip in the latest CB report.
Facset now estimates Q2 earnings for the SPX will be -1.3% compared to the -4.6% estimate at the end of Q1. Nine sectors now have higher projected growth rates. Energy and Utilities are showing lower projections, and Energy is dragging the whole index lower. Overall earnings beats are doing better than historical, while revenue beats are lower, similar to last week. 12 month earnings projections, which are highly correlated to market performance, continue to increase.
ESU15 moved up from a low of 2064 to finish the week at 2099. Momentum is positive, and volume has been supportive of the move up. However, Friday's close hinted at some weakness, and RSI(5) may now be turning over. The upcoming week could see it move either way. There is a nice analysis by Urban Carmel indicating that SPX may have reached a ~1 month bottom this week. Also an interesting analysis showing that while SPX has been stuck in a trading range this year, the majority of that time has been spent in the upper half of the range, suggesting hidden strength. Given that the range is still clearly in play, I am staying below the 200 MA for short strikes.
RUT is suffering from particular weakness. Last week it touched the 200 MA, the first time since January. It took a dip down to 1205 on Tuesday before moving back up to close the week on a positive note, but not by enough to erase the loss from Last Friday. The 200MA is in an area of strong support, and the dip down to 1205 was quite a shocker. By the end of the week momentum had returned to positive, and MACD is starting to point back up, so we might expect RUT to continue to move higher, all else being equal. However, it is obviously in a downtrend, and must get past the 50MA at 1256 and then upper channel resistance at 1260. I'm inclined to push short strikes down to 1200 in the next couple of weeks; the weekly 50MA support is at 1205, which is where RUT stopped on Tuesday.
AAPL does not seem to be getting any love since its earnings report. It has been drifting down, and it flirted with the 122 support level all last week before finally dropping below it on Friday to close at 121.3. Momentum us negative, but it is now oversold on RSI(5). There doesn't seem to be any news to explain this weakness, aside from post-earnings blues. I don't expect the weakness to last much longer, especially if it can regain 122 early next week. Just in case I have moved my short strikes down to 118 to stay out of the way.
The last bout of weakness hit GILD pretty hard, sending it down to almost close at 110 on Monday. However, on Tuesday GILD came through with another stellar earnings report, and raised guidance for the year on the back of strength in the HCV franchise. It closed above the 50MA, and also above the short-term down channel upper resistance. While momentum is solidly positive, last week's close was weak. I expect the 50MA to provide support now that earnings are out, but I will look at short strikes at 110 and below until GILD moves above 118-120.
GOOGL had a quiet week and avoided the market gymnastics. It has found solid support at 650. Momentum is neutral and RSI(5) has moved down as a consequence, while volume is clearly showing the support that the stock currently enjoys.
So LNKD, which had been doing so well lately in the face of market weakness, issued their earnings report on Thursday evening and suffered a beating on Friday, losing ~10%. The report itself appears to have been solid, with an earnings and revenue beat, but guidance was more tepid than the market was expecting. No mercy for these mo-mo stocks under this circumstance. LNKD stopped at 203 on Friday, which is where previous support has held. We'll have to wait until next week to see if it receives more punishment.
July is now done. Lots of trades. The remaining EW and RUT spreads / iron condors either all expired OTM, or I closed a couple of days early to get the capital out and into something else. The June results are now up on the 2015 results page. All is going swimmingly.
For August I am concentrating on ESU15 and AAPL. I have an open GOOGL spread as a leftover from last month. I will open a GILD spread if the premium and strike combination is sufficiently attractive. August, particularly early in the month, has a habit of being volatile, so I'm in no rush to open a lot of spreads. ESU15, in particular, is easier to manage through periods of volatility. I have 3 EW1 put spreads open with strikes up to 2040. I don't anticipate a problem with these before Friday expiration. I also have an EW1 call spread with 2130 short strike. Depending on market action this week, I may need to move this, probably by converting to a put spread and rolling down/out. I will keep an eye on AAPL, and I will move the 115/120 spread down and out if price continues to erode towards 120. The new EW2 spreads are at more conservative put strikes - only up to 2020. I've also got an open AAPL spread for 8/14 expiration with a short strike of 118 - not taking any chances. Overall the August spreads are nicely profitable: currently we are looking at ~9% if all goes to plan.
- A review of the current market situation. The author is of the view we are in a secular bull market. Sentiment can hardly be described as overly bullish, and money managers are at Lehman levels of cash. The CPI is just above 2%, and not showing any trending, meaning it does nothing to reinforce or detract from the Fed's desire to raise interest rates. Recent economic indicators are positive (homes, employment, Chicago fed survey of manufacturing). Earnings are looking OK. Not clear when the carnage in energy will end. Technically expect SPX, COMPQ, RUT to stay within the trading range until the trend changes. Stay away from market skeptics, who have been systematically wrong for years. https://seekingalpha.com/article/3356955-market-update-current-view-of-the-secular-bull-market-amidst-the-backdrop-of-fear-in-the-markets-a-view-of-the-past-present-and-future
- Useless, but entertaining, market timing indicators. http://dividendreference.com/articles/2015/1000557/random-stock-market-indicators/
- Trading promiscuity. Lack of commitment to a trading approach leads to a lack of expertise and confidence. Stick to what you are most comfortable with, and follow the plan. http://traderfeed.blogspot.tw/2015/07/the-problem-with-promiscuity-in-trading.html
- We are now back to a situation where total employed is exceeding previous 2007 highs. Full time positions are gaining strength while part-time positions appear to have reached stability. Rate of full time job growth is consistent with mid-2000s and late 1990s. Low paying jobs (retail, leisure) have increased in number faster than high paying (finance, info), but growth rate of tech, finance are continuing to increase, while leisure, retail are saturating. Implication is that wage growth should improve. https://seekingalpha.com/article/3357225-employment-partying-like-its-1973
- The cause of the 2007 housing crash: private lending i.e. banks, and investment companies. http://www.ritholtz.com/blog/2011/11/examining-the-big-lie-how-the-facts-of-the-economic-crisis-stack-up/
- Economic and market review for the week. CB LEI is up, driven mainly by housing. Overall the earnings season is leaving a positive impression behind, with energy, industrials, materials and utilities showing weakness. All other sectors are relatively strong. Transports decline is causing concern, but may be a correction from previous strength. A concise summary of the current market situation: "We're in the middle of the summer doldrums. Half of the trading desks are either on a full-blown vacation or working a series of half-weeks. The news is generally positive, which is keeping a bid in the markets. But the expensive levels continues to put a sell-order in at resistance points. Barring a sudden change in the economic back-drop, I'd expect this to continue until the end of August" http://community.xe.com/blog/xe-market-analysis/us-equity-and-economic-review-transports-still-concerning-edition
- Borrowing money is like a drug; lots of European and Asian countries appear to be hooked. http://www.investing.com/analysis/global-economy-needs-restraining-order-(excerpt)-259655
- Signs of investment froth are everywhere! https://seekingalpha.com/article/3362795-when-will-we-ever-learn
- Asset purchases by central banks destroy price discovery, and distort asset prices. Once the purchases stop, prices can drop substantially since there is little belief that the prices are representative of the assets in the new environment. This does not seem to have happened in the US bond market, at least yet. Sounds reasonable, except if the asset purchases actually work to stimulate economic growth. https://seekingalpha.com/article/3362815-when-authorities-own-the-market-the-system-breaks-down-heres-why
- Analysis of the cause of weakness in the industrials sector. By and large the weakness stems from spillover from the energy sector, coupled with weakness in the China market. The question is will weakness in this sector now affect the remaining stronger market sectors. https://seekingalpha.com/article/3363395-industrials-how-market-illness-spreads
- Lance Roberts with an analysis of the current rally. Markets are oversold. Rally needs to consistently stay above 2085, otherwise 200MA will be support. SPX has tried 3 times to break to new highs and failed. Long term MACD has a sell signal. (Momentum and breadth are lacking). In previous large downturns, MACD and RSI have been leading indicators for market corrections. Take precautions now. http://www.investing.com/analysis/is-this-a-sellable-rally-259778
- An update on Credit spreads from Scott Grannis. HY energy spreads have increased lately, as a result of continued trouble in the energy sector. General high yield spreads and corporate grade spreads have not increased as much, although they have increased. This indicates that contagion from the energy sector is contained. Swap spreads show no increase indicating that the credit markets are not under stress during this episode of energy sector trouble. 2 year swap spreads are a good leading indicator of high-yield spreads. No sign of contagion based on the swap spread. http://scottgrannis.blogspot.tw/2015/07/credit-spread-update.html
- Low oil prices are here to stay. http://www.investing.com/analysis/low-oil-prices-are-here-to-stay:-4-key-signs-259913
- US investors shouldn't worry about the China stock market melt-down. https://seekingalpha.com/article/3367345-chinas-stock-market-plunges-again-but-not-to-worry
- Earnings season half-time report. Earnings are coming in better than Q1 end projections, but revenues are actually lower than projections. Health care and Tech are the best sectors, energy and utilities are worst. Projections for Q3 should start to improve as the oil price reductions started in Q2 of last year. Energy projections should improve significantly as a result. http://www.investing.com/analysis/q2-earnings-season-halftime-report-259922
- Some bearish market signals from Cullen Roche. Margin debt, durable goods, strong dollar. http://www.pragcap.com/three-bearish-charts/
- 3 bullish market signals from Cullen Roche. Initial unemployment claims, cash levels, housing. http://www.pragcap.com/three-bullish-charts/
- Are SPX earnings topping? http://www.investing.com/analysis/weekly-earnings-update:-is-the-sp-500-in-the-process-of-topping--260173
- A really nice technical analysis of the markets by Urban Carmel. Always high quality analysis, and actionable advice. The thrust this week is there is reasonable evidence from breadth that a 1 month low may have been formed. Several indicators are now close to their bottom ranges, and should the market go lower it is likely that a more durable bottom will be in place, ending the sideways market that has held this year. http://fat-pitch.blogspot.tw/2015/08/weekly-market-summary.html
Additional disclosure: I have open spreads as listed in the article, and you can bet your bottom dollar I will be opening more next week