This past week the markets jumped at the start and then traded sideways...
DRIVING OUR UNITED STATES OIL FUN (USO) CALLS TO A SWEET FIVE-DAY THIRTEEN PERCENT OPEN GAIN!
The good news is the USO is still looking bullish and will likely exceed our profit target this week for an even greater profit. Meanwhile our other two open plays are mostly treading water waiting for the markets next bout of volatility to drive them past their profit points.
Where that volatility will come from and which way is this market will move this week is the big question right now. To help find out and to zero in on where our profits are this week let's take a good look at...
WHICH WAY THIS MARKET IS HEADED
The charts show the markets bouncing hard off of oversold levels from two weeks ago--the SP-500 jumped 2.37% last week scoring its second-straight weekly gain and best two-week percentage performance since November. The energy, financial and materials sectors led Friday's gains, while the health-care sector led to the downside.
The Nasdaq rose a slight 0.11% Friday to 2309.80--its seventh-straight positive close and marking the measure's longest winning streak since a 12-day run last July. The Nasdaq is up 2.95% on the week with almost all the gains coming last Tuesday.
So what happened this past Tuesday to launch the markets above their 200 day moving averages and into positive territory? In a word it’s the Euro. After the break under 119 the euro found traction in the form of numerous upgrades for European economic estimates and a couple of successful debt sales. The U.S. market rally owes its strength to the sudden rise in the euro and the corresponding decline in the dollar.
Analysts said most of the Euro rally was fueled by short covering, but the fact that Spain was able to unload $3.7 billion in 10-year bonds on Thursday didn't hurt. Demand was almost twice the amount on offer--an impressive showing. The country was also able to successfully sell almost $592 million in 30-year bonds.
The Euro rose 2.3% to $1.2388 against the greenback as traders unwound bearish bets. Hedge funds and other speculators reduced short positions in the EUR/USD pair trade to 62,360 contracts on June 15 compared to 111,945 just a week earlier – an eye-popping 44% drop.
The improved outlook for global growth even overcame bad news from the NAHB Housing Market Index. The index fell to 17 for June compared to the revised May level of 22--a sobering 22.7% drop--four times higher than expected. The decline was directly related to the end of the housing tax credit qualification period on April 30th and begs the question of how strong the US economy would be without constant stimulus to pump up the numbers.
The cycle high for this NAHM Housing Index was 72 versus this most recent reading of 17--an incredible drop and one that will take years to retrace. This is an extremely bearish level for housing and can also be seen in the mortgage applications index which has sunk to 167 from well over 500 during the boom. New home sales are going to continue to decline until the economy recovers and home buyers work through the 5-7 million foreclosures now on the market.
The overall economy is still weak but there are bright spots--the Semiconductor Index rallied more than 5% to a six-week high on comments from Best Buy and an improved global demand outlook. Best Buy said PC sales and especially laptops, netbooks and other mobile devices were selling strongly. Smart phones were also in high demand. This implied blessing of all things chip related along with a bullish report out of Taiwan helped power the SOX toward the top of its two month range.
Taiwan Semiconductor--the world's largest contract chipmaker--predicted chip sales would rise +7% annually from 2011 through 2016. Strong demand from China plus the new wave of electronic devices like the iPad were cited as the main drivers. Plus there is a wave of new devices coming in the near future as the age of portable electronics hits its stride. Chipmaker United Microelectronics (UMC) said that chip demand would exceed supply in the third quarter and they have seen no impact to demand from the Eurozone problems.
Apple reported sales of the new iPhone 4 are so strong that the company suffered a systems failure and could not process orders on Tuesday. The new phone does not officially go on sale until June 24th but Apple started taking reservations this past week with all the iPhones available sold out on the first day--another indication of the strength of the mobile electronics market.
In addition to increasing chip and electronics sales major credit card issuers reported improved results in May. The rate of payments that were 30 days or more past due declined for all six of the biggest card companies. Citigroup said delinquencies fell to 8.42% from 9.02% in April. All the other issuers said the declines were similar except for American Express whose delinquencies fell to 3.1% from 3.3%. AXP typically has fewer problems because of their higher credit standards. It looks like the worst credit risks have been charged off over the last two years and those that are left are paying their bills.
One of the best gauges of market sentiment is how traders react to news and even here we have a bullish indicator. This past week initial jobless claims rose 12,000 to 470,000 and the 4-week moving average is climbing. There is a case to be made that unemployment will rise through the end of the year and the fact that the market was able to rise in the face of that news is a bullish sign.
It will be interesting to see if that bullishness can be maintained as the economic data released over the next few days expected to be weak. We've got two reports on housing and one on durable goods. However even if the data does come in soft it could be offset somewhat by the Fed's FOMC meeting on Wednesday. The FOMC is expected to maintain its exceptionally low interest-rate policy amid persistently high unemployment and almost non-existent inflation.
We won't get the real flood of earnings until July but this coming week will provide some insights as to what to expect. We've got five S&P 500 companies reporting results on Tuesday, including Adobe Systems, Jabil Circuit, Red Hat in the tech sector and Carnival Cruise lines and drug store chain Walgreen.
On Wednesday, home-improvement retailer Bed Bath & Beyond reports quarterly results, along with Nike and payroll company Paychex Inc.
Business software giant Oracle and home builder Lennar report on Thursday. Credit card company Discover Financial Services and tax preparer H&R Block Inc. also report on Thursday. Those companies are diverse enough to provide a good read on how earnings are likely to play out this quarter.
Last quarter year-over-year comps were pretty easy to beat but that is going to get tougher as we move forward--traders are going to want to see some real growth and not just more cost cutting. Forward guidance will also be critical and what we've seen so far has been pretty cautious.
So we've got a rebounding market, persistently high unemployment, a slowing housing sector, bullish investor sentiment and several earnings reports this coming week--the question is...
HOW DO WE MAKE MONEY ON IT?
In a market like this one that has made a big move higher but is now trading sideways the key is to pick individual stocks that hold immediate potential to out-perform the larger indices--and that's exactly what we've got this week.
What is interesting is that in spite of the markets generally good performance this past week there seem to be very few charts with really compelling bullish set-ups. Many stocks have risen--but most of them simply jumped to their larger downtrend lines and stalled--not exactly confidence inspiring.
What we do have however are two charts with extremely compelling bearish set-ups. The first is a specially drug company that has just traced a classic bearish uptrending pennant--then broke below the bottom trendline Friday for what looks to be a super set-up using some very inexpensive options--with some very big profit potential.
Our next play is on a retail conglomerate that is having trouble getting out of its own way--and the chart shows it. The stock rose slightly with the rest of the market early last week and then tumbled lower on Friday--a day when the rest of the market was moving higher. This is a very bearish sign and one we'll be taking advantage of with the right puts first thing Monday morning.
We've got a market stalling sideways with two plays ready to make us money on the downside--so let's get to it...
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