Market Outlook Monday July 29

Happy Monday and welcome back to a fresh five-set match.  With another plethora of corporate earnings reports ahead and a busy week on the economic data front, both bulls and bears alike will have plenty of data to digest.  In terms of economic data this week, the following three reports are what I will have my focus around: GDP on Wednesday, PMI and ISM Manufacturing Indices on Thursday, and on Friday the big one – the July employment report.

As it relates to price action around the major US stock indices, Friday again ushered-in a bullish tone when a ‘miracle’ rally during the second half of the day pushed stocks into the green.  As I discussed in Friday morning’s note, as long as stocks act this way the trend follower is best to stay the trend until a clearly visible bearish reversal appears.  At the end of the day, the fact is that all the indicators in the world don’t help the portfolio if price action, the only thing that pays, churns in the opposite direction.  Of course this is a question of time-frames, but strictly from a near-term trend following point of view, it’s difficult to argue against a market where every dip continues to get bought, that is, until this changes.

To put this in perspective, and while stocks did not make a new year to date high on Friday, I drew both the Russell 2000 and the S&P 500 on the chart below.  Note how both indices for the past two days re-tested a ten day low, from which they blasted higher both days.  Not until the S&P 500 breaks 1,670 on a daily closing basis (which can happen fast) does this market favor the bears.

spx and rut

If we take a little closer look under the hood, on Friday the Russell 2000, i.e. small caps lagged the broader market after exerting relative strength in recent days.  On the other hand, and just to make things a smidgen more confusing, the transports led higher on the day, after two days of under-performing.  In other words, the machines and whatever few staff that was manning trading desks on Friday, snapped laggards, and from where I sit, as long as this game continues the market has a hard-to-fight underlying bid.

Commodities on the other hand, after a strong bounce for most of July, slipped again last week.  At some point this will matter to equity markets as the economic growth story simply doesn’t get much support from a commodity index that is lower by roughly 10% year to date.

djp commodity index

Last but not least, especially because I mentioned the stock on Friday (here: Apple Inc (AAPL) spent another day consolidating above the $430 area and its 50 and 100 day simple moving averages, which at the margin is bullish.

aapl daily


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