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, traders will have plenty to digest. In terms of economic reports this week, I will be focusing on GDP and PMI on Wednesday, the ISM Manufacturing Index on Thursday, and on Friday, the big one — the July employment report.
Friday again ushered in a bullish tone in U.S. stocks 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, I drew both the Russell 2000 and S&P 500 on the chart above. They did not make new year-to-date highs on Friday. But note how, for the past two trading days, both indices re-tested a 10-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.
If we take a little closer look under the hood, the small-cap Russell 2000 index lagged the broader market Friday after exerting relative strength in recent days. On the other hand, and just to make things a bit more confusing, the transports led the way higher on the day, after two days of underperformance. In other words, the machines and whatever staff was left manning the trading desks on Friday snapped up laggards. From where I sit, as long as this game continues, the market has a hard-to-deny underlying bid.
Commodities, on the other hand, as evidenced by the iPath DJ-UBS Commodity Index Total Return ETN (DJP), slipped again last week after a strong bounce for most of July. 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 down roughly 10% year to date.
Last but not least, especially because I mentioned the stock on Friday, Apple (AAPL) spent another day consolidating above the $430 area and its 50-day and 100-day simple moving averages, which at the margin, is bullish.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.