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Options Pro Report- Al Abaroa- U.S. Economy

U.S. Economy:  The first month of the third quarter has now officially closed. Looking back at the month, it gave us the better part of a 7% rally. That is a nice start to the quarter, especially when benchmarking it against Q2 performance. Corporate earnings gave the bulls enough optimism to ignore the past 4 months of blatantly weak economic data. In the July 10 Wire I penned, “We are in a fundamental trading range in which positive earnings may carry us a few more rounds and push the S&P up to test the 50 DMA. This, to me, may be an opportunity to fade rallies.” Indeed, earnings have carried us a few more rounds and even pushed the market above the 50 DMA. In my opinion, the S&P 500 is approaching major crossroads. This past week, we had two Fed Governors express their concern over the economic outlook. This comes at a time when the market could be facing a historically challenging period in the months ahead. The GDP data release was littered with downward revisions and showed evidence of a consumer left behind. Yet, the market still marches on. The E-mini S&P monthly close showed a bullish outside bar up, suggestive of additional room to run. Bulls will want to see a confirmation with a close above the 200 DMA. While the overall downtrend is still intact, last month’s price action has cast a shadow of doubt on near-term bearish direction. If this coming Monday’s ISM data pleasantly surprises, like the Chicago PMI data did this past Friday, the 200 DMA may prove to be weak along the lines of resistance. I think the present attitude of the market is that inline or better than expected forecasts will overrule the slow down concerns. Furthermore, should economic data disappoint, the rumored Quantitative Easing 2.0 upgrade may patch holes. While I’d like to remain bearish, the shadow of doubt will remain until the S&P can trade below the 50 DMA. Those with short exposure should monitor the 200 DMA and the event risk of this coming week. Let’s not forget about the monthly Employment data which may influence policy for the following Tuesday’s FOMC meeting.

Here are some of the reports to watch for this week: Monday brings ISM Manufacturing Index (54), Construction Spending (-0.5%); Tuesday, Motor Vehicle Sales (8.8M),  ICSC-Goldman Store Sales, Personal Income and Outlays (0.1%), Redbook, Factory Orders (0.5%), Pending Home Sales Index; Wednesday, MBA Purchases Applications, Challenger Job-Cut Report, ISM Non-Manufacturing Index (53); Thursday, Chain Store Sales, Monster Employment Index, Jobless Claims (455K), Money Supply; Friday, Employment Situation (-70K), Consumer Credit ($-5.0B).

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