Market’s Summer Romance May Come to a Swift End

by Serge Berger | July 26, 2013 2:25 am

Serge Berger is the head trader and investment strategist for The Steady Trader[1]. Sign up for his free Weekly Market Outlook Video here[2].

“The summer wind, came blowing in — from across the sea
It lingered there, so warm and fair — to walk with me
All summer long, we sang a song — and strolled on golden sand
Two sweethearts, and the summer wind”

— “Summer Wind,” Frank Sinatra

Earlier in the week I wrote a piece for a vastly European audience referencing the above song by the great Frank Sinatra. My point was that I thought the song captured investors’ current summer romance with the stock market.

The news flow “across the sea,” back and forth between the U.S. and Europe, played a game of equilibrium to keep the stock market afloat. One day it’s good earnings reports from a large U.S. conglomerate, the next day improving economic data out of Europe layers another bid under the market.

The song culminates with an abrupt end to the romance. As for the markets, I can’t help but liken this latest summer rally to a game of musical chairs. When and where the catalyst for a mean-reversion move to the downside in stocks arrives, no one knows. What we do know is that when the music stops, those that chased stocks higher simply because they were mandated to do so will likely bleed the most, while those with more patient attitudes will get better entry levels to buy stocks. Patience, as they say, is a virtue.

As a general rule, I personally do not trade much, if at all, on summer Fridays and Mondays, as the thinner volume can often lead to fake or choppy moves and a less-than-true read on the tape. Thus, I am inclined to wish all of you valued readers a relaxing summer weekend, but will first walk you through two charts.

After one day of fun (Wednesday), the market settled right back into its reliable pattern where any intra-day dip gets snapped up by the bulls and leads to plenty of green on the screen. I did note, however, that while not as pronounced on Wednesday, it was the third day in a row where many stocks trying at new breakout attempts failed to do so.

RUT Chart
Click to Enlarge

At the end of the day, the Russell 2000 small-cap index made up all of Wednesday’s losses, and in fact recorded a bullish outside day on the daily chart. As long as this is the type of reaction we see to even the slightest weakness, the ball remains in the bulls’ court.

The bears, on the other hand, will point to the negative divergences between momentum indicators, such as the stochastics (making lower highs) versus the stock indices (making higher highs), that continue building on daily and weekly charts.

Risk happens fast, and that to me is the foremost concern as we push ourselves through these last muggy days of July.

Tbond Chart
Click to Enlarge

Last but not least, let’s look at 10-year Treasury bond yields (yes, they do matter for stocks). On the long-term chart, note that a mean-reversion move higher in rates doesn’t reach its target until at least the 3% area.

In other words, while rates have accelerated higher from 1.6% to 2.6% in just a couple of months, plenty of upside remains, which at some point, for a few weeks at least, is likely to spook the broader stock market into retreat.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[3].

For a list of this week’s economic reports due out, click here[4].

  1. The Steady Trader:
  2. free Weekly Market Outlook Video here:
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