MomentumOptionsTrading.com Weekly Wrap for 7/4/11

11:15pm (EST)

 1.  Market Summary 

2.  Yum! Brands (YUM) is Looking Yummy           

3.  Fastenal (FAST) Hits All-Time Highs                    

4.  Earnings 

5.  Weekly Wrap Portfolio Update 

6.  Week Ahead

 

(To view the charts, please log into the Members Area and go to the Weekly Wrap Premium section)

 

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1.  Market Summary 

 Our last headline on Friday was “Another Perfect Strom”, and as it turned out, it was the perfect title.

June was an incredible month for us although the market was flat but the volatility was insane.  Turns out, the charts have been right on cue and what seemed like disaster was averted when the bulls held support and had the mother of all rallies.    

 We “grinded” it out and made some sweet calls in June but what it all boils down to is that we are back at the top of a trading range that has been ongoing since February and we either break out or the market fades.  We have been on the bulls back since October 2010 and called for a rally until April 2011.  Check One.

We said there would be a pullback in late February into March and another dip in May that would last into June.  Check two.

Our year-end targets for 2011 remain on track.  Check 2- and-a-half.

So is check 3 now, or is check 3 later?

We said last week the technical picture remained mixed but who would have thought the bulls would have their best week in 2 years after an 8-week shellacking?

The Dow jumped 168 points, or 1.4%, and closed at 12,582.  We said the blue-chips would make a run to 12-6 and you can’t get much closer than that, folks.  The chart we from last week showed the Dow trapped between its 100 and 200-day moving averages (MA’s) and the index was right at support (black line, orange circle).  As you can see, the index is right at resistance (blue line) and is looking to break out.  Resistance is now 12,800-12,850 but if cleared we will easily see 13,000.  Short-term support is at 12,350 and then 12,000.  The Dow started the week at 11,934 and added 648 points for an impressive 5.4% gain.  For the year, the Dow is up 8.7%.  

The S&P surged 19 points, or 1.4%, to settle at 1,339.  The index was holding on to the slimmest of gains for the year but closed above the 1,333 level, which represents a double from the March 2009 low, for the first time in more than a month.  The index was also bouncing between its 100 and 200-day MA’s and was facing a breakdown at 1,250 (black line, orange circle).  The S&P’s next area of resistance will be 1,350 (blue line) and if cleared 1,375-1,400 will come into play.  Support is at 1,300 then 1,275.  The S&P 500 started Monday at 1,268 and added 71 points for the week, or 5.6%.  YTD, the index is up 6.5%.

The Nasdaq soared 43 points, or 1.5%, to finish at 2,816.  The index was able to take back the 2,800 level after bouncing off strong support at 2,600 and its 200-day MA (black line, orange circle).  Tech has made a nice run back to resistance (blue line) and is looking to challenge its 52-week high of 2,887.  If cleared, pencil-in 3,000.  Near-term support is at 2,700 then 2,650.  The Nasdaq was at 2,653 to start the week and zoomed 163 points, or 6.1%.  For 2011, the index is up 6.2%.

The Russell 200 advanced 13 points and finished at 840 after retaking the 800 level on Monday (black line, orange circle).  The index faces resistance at 850 (blue line), but if cleared, could make a run at its 52-week high of 868. 

The S&P Volatility Index (VIX, 15.87, down 0.65) fell back below 20, a key level we have been outlining for weeks following last week’s big rally.  We mentioned a reading under 20 indicates calmness and confidence while a print above 30 indicates fear and panic.  The VIX fell nearly 25% for the week, its largest drop since August 2007, and could trade down to 13-14 (black line) on a continued rally.  Retail investors have been pulling money out of the market for months and if they decide to get back in at new highs, the bulls could be off to the races.

As we look out into July, this week could be non-eventful as Wall Street awaits the start of 2Q earnings season.  Greece, which made progress last week by agreeing to new austerity measures, will be yesterday’s news so that cloud has been lifted for the moment.  QE2 has come to an end but we are sure the Fed will use whatever bullets it has left to keep the economy afloat which should continue to help the market.

If the market can get better-than expected earnings then we should be able to hit new highs in July.  However, if companies come up short on Wall Street’s expectations then the market faces a retreat and we remain stuck in a trading range with pressure to the downside.  In mid-February, we said the Dow would test 13,000 when the index was at 12,300; the S&P would hit 1,375-1,400 when it was at 1,340; and the Nasdaq would test 3,000 when Tech was at 2,800.  However, in the same breath we also said to look for a pullback into March before the bulls pushed new highs until the end of April.

We then called for May’s pullback and here we are again.  While we expect the market to hit our aforementioned short-term targets, our 2011 year-end targets of Dow 14,000; S&P 1,500; and Nasdaq 3,400 – which we outlined on January 19, could come into play.  However, we doubt the bulls have enough steam to push these targets halfway thru the year which is why we think we get a pop to new highs and then fade sometime in mid-July.  Then again, bull markets often leave those on the sidelines in the dust so we wouldn’t rule anything out.     

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2.  Yum! Brands (YUM) is Looking Yummy

After a strong manufacturing report last week, stocks look to continue gains this week.  Remember, July is historically an up month but it is sometimes a good idea to look at which sectors have been outperforming and are thus favored by investors.  Restaurant stocks were one of the strongest groups over the past year and are showing great relative strength right now.  If the market continues to show some strength, then this group will likely continue to push new highs.  Thus, what better stock to look at than Yum Brands (YUM, $56.75, up $1.51), the world’s largest restaurant chain?

The Louisville, Kentucky-based company operates approximately 38,000 restaurants in 110 countries and territories under the KFC, Pizza Hut, Taco Bell, Long John Silver’s, and A&W All-American Food Restaurants brands.  In the 1st quarter, KFC, Pizza Hut, and Taco Bell each brought in over $600 million in sales, with KFC having about $906 million in sales.

KFC, or Kentucky Fried Chicken, is the world’s most popular chicken restaurant chain, known for its famous fried chicken prepared with a blend of 11 different herbs and spices and cooked to the finest quality.  There are more than 15,000 KFC stores in 109 countries and territories around the world serving some 12 million customers each day.

The chain re-launched Kentucky Grilled Chicken (KGC) after its highly successful introduction in 2009, in which KGC quickly became a customer favorite, providing a non-fried option with fewer calories, less fat, and less sodium than Original Recipe.  KGC is now also offering 20% larger white meat chicken breasts marinated for juiciness, slow grilled, and seasoned with a secret blend of herbs and spices.

KFC has become the largest and fastest growing restaurant chain in mainland China today, with over 3,300 restaurants in more than 700 cities.  The $3.4 billion franchise was the first quick-service restaurant chain to enter China in 1987.  To gain acceptance, it adapted its menu and culture to fit into the Chinese lifestyle.  Besides chicken, a KFC meal could include Sichuan spicy sauce and rice, egg soup, a “dragon twister” (KFC’s take on a traditional Beijing duck wrap), and soybean milk.  The restaurants hired Chinese management to help in customer service.  As a result, it managed to gain a loyal following.

Pizza Hut and Taco Bell are the company’s two other most popular chains.  Pizza Hut is the #1 pizza chain in the United States based on number of restaurants.  The chain has done very well in China with over 500 restaurants in 130 cities.  It is the number one casual dining brand in mainland China.  Taco Bell, the popular Mexican chain, has over 5,400 stores in the United States.  It accounts for more than 60% of total U.S. earnings.  However, its image was hurt by a lawsuit related to the content and quality of its beef products.  The lawsuit was later withdrawn, but sales in the month of April plummeted.  This negativity might impact 2nd quarter earnings.

Long John Silver’s serves seafood while A&W All-American Food Restaurants serves a typical fast-food menu of hamburgers, hot dogs, and fries.  A&W All-American Food Restaurants is famous for its frosty root beer.

A new consumer survey has given poor marks for Taco Bell and KFC, both appearing near the bottom of the list in its respective group.  Customers to Taco Bell don’t necessarily think it offers a great deal for the money.  No more than 11% of respondents found the food to be excellent, while 15% to 19% found food to be fair, poor, or very poor.  This could be the first sign of weakness.

The rising cost of food may also hurt profit margins.  Management expects food cost to increase 7% in China and 6% in the U.S. this year.  Margins are projected to shrink from 26% to above 20%.  But the company is hoping that Chinese growth will make up the difference.  Yum Brands’ 3,900 restaurants in China earned more revenue last year than all of its 19,000 restaurants in the U.S.  In 2010, the company opened more than 500 new restaurants in mainland China and is planning to open 475 new stores in 2011.  China’s population of fast-food consumers is expected to grow to around 650 million by 2020. 

On average, 15 analysts as recorded by Yahoo Finance give the stock a moderate buy, with a mean target of $57.47, a median target of $57.00, a high target of $63.00, and a low target of $50.00.  Below is a summary of their recommendations.

 

Current Month

Last Month

Two Months Ago

Three Months Ago

Strong Buy

4

4

4

4

Buy

6

6

6

6

Hold

11

11

10

10

Underperform

0

0

0

0

Sell

0

0

0

0

The company raised its dividend from 0.96 (1.70%) to 1.00 (1.80%), a sign that it is doing well or management sees growth ahead.  Current ratio is 1.07, which could be a sign of current weakness.  However, return on equity is very strong at 80.65%.  During the 1st quarter, the company repurchased $142 million worth of stock.  Stock buybacks generally means that the company thinks shares are undervalued.

Plus, if oil continues to fall, the company will benefit from more consumer spending and lower transportation costs.  Also food prices will come down, because it takes less to transport the food.  However, the price of oil will be dictated by the Middle East situation, the war in Libya, Chinese demand, and the U.S. dollar.  The dollar is slowly rising, so that may keep oil down.  Chinese demand seems to be slowing, but Chinese manufacturing is still robust.  And the war in Libya seems to be weakening, despite Gaddafi’s threats.

The company reports 2nd quarter earnings on July 13th after the close.  Consensus estimates are for earnings of $0.61 on $2.70 billion in revenue.  For the 3rd quarter, analysts estimate earnings of $0.84 on $3.03 billion.  As shown in the graph on the left, earnings haven’t been in a steadily increasing line quarter-ove- quarter.  But as shown in the chart on the right, the company experienced nine straight years of EPS growth.  Thus, it is almost impossible to predict earnings based on the graph.  But based on the above information and assuming that Chinese growth overcomes domestic weakness, it will meet or beat earnings expectations.

The table below shows the revenues for the last four quarters with the difference from the previous quarter.

Quarters

1st 2011

4th 2010

3rd 2010

2nd 2010

Total Revenue

$2.425 billion

$3.562 billion

$2.862 billion

$2.574 billion

Difference

-$1.14 billion

$0.7 billion

$0.288 billion

$0.274 billion

Analysts expect revenues in the 2nd and 3rd quarters of 2011 to grow by $280 million and $330 million respectively from the previous quarters.  That is in-line with revenue growth for the previous year, although 3rd quarter revenue seems a little high.  Thus, the company may disappoint on 3rd quarter revenue guidance, but it likely will meet 2nd quarter revenue estimates, again assuming strong Chinese growth.

As the chart shows, the stock is near support and will most likely bounce back up to resistance.  Although the Stochastic %K and %D and W%R are in or near overbought territory, history says that when all the technicals were at similar levels, as indicated by the purple lines, the stock rose.  However, if the stock does break support, the 200-day moving average will be the next support level.



   

Using a current resistance price of $58, a slope of 4.6 cents per day, and an assumption that it takes 45 days to migrate from support to resistance, the stock should reach $60.07 in 45 days. 

We will keep the stock on our Daily Watch List and the August 60 (YUM110820C00060000, 0.50, up 0.30) calls might be worth a look if a run up to $60 is in the cards.

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3.  Fastenal (FAST) Hits All-Time Highs

Another supposedly safe sector to invest in is the capital goods sector and one of our favorites is Fastenal (FAST, $36.65, up $0.66).  The company operates more than 2,500 industrial and construction supply stores and markets its products and services throughout the United States, Canada, Mexico, Puerto Rico, Singapore, China, and The Netherlands.  Revenue increased 17.57%, year-over-year and analysts see earnings rising 30% this year.    

On average, 8 analysts as recorded by Yahoo Finance give the stock a moderate buy, with a mean target of $35.56, a median target of $35.50, a high target of $38.50, and a low target of $31.50.  Below is a summary of their recommendations.

 

Current Month

Last Month

Two Months Ago

Three Months Ago

Strong Buy

4

4

4

4

Buy

1

1

1

0

Hold

6

6

6

6

Underperform

0

1

1

2

Sell

0

0

0

0

The company reports earnings on July 12th before the open.  Consensus estimates are for it to earn $0.30.  For the 3rd quarter, analysts estimate earnings of $0.32. 

The table below shows the earnings for the last four quarters with the difference from the previous quarter.

Quarters

1st 2011

4th 2010

3rd 2010

2nd 2010

Earnings

0.27

0.22

0.26

0.24

Difference

0.05

-0.04

0.02

0.03

Analysts expect earnings in the 2nd and 3rd quarters of 2011 to grow by $0.03 and $0.02 respectively from the previous quarters.  That is in-line with earnings growth for the previous year.  Thus, the company is likely to meet 2nd and 3rd quarter earnings estimates.

As the chart below shows, the stock is nearing resistance in its upward channel and will most likely bounce back up to support.  When all the technicals were at similar levels, as indicated by the purple lines, the stock fell on average $2 over a 30-day span from its last high before resuming its long-term uptrend.  About 20 days after it issued a split on May 20th, the stock started a robust uptrend that broke through its previous resistance (indicated as a green line).  The stock will likely reach its resistance line in a few days at $38 and then pull back to $34 but if earnings are a big surprise, the stock could continue to set new highs.


   

Using the assumption that it pulls back to $34 then bounces back up, we might be looking to get the August 37.50 (FAST110820C00037500, 0.95, up 0.15) calls for a little cheaper price before playing a possible breakout.


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 4.  Earnings 

 The companies in BOLD, we are looking at as possible trades and we may list call or put options on them in our Daily Newsletter.  If they become official recommendations, we sent out Trade Alerts or include them in our 9am and 1pm updates that come out during the week (Quotes are as of Friday’s close, 7/1/11). 

 TUESDAY

 Art’s Way Manufacturing (ARTW, $9.20, up $0.15), Cavico (CAVO, $0.46, down $0.29), Griffin Land & Nurseries (GRIF, $33.09, up $0.60), Lawson Software (LWSN, $11.24, up $0.02), National American University Holdings (NAUH, $9.39, down $0.02), Searchmedia Holdings (IDI, $1.92, up $0.02), Waccamaw Bankshares (WBNK, $0.80, down $0.05)

 WEDNESDAY

 Birks and Mayors (BMJ, $1.45, up $0.05), Funtalk China Holdings (FTLK, $6.70, up $0.04), Life Partners Holdings (LPHI, $3.51, up $0.08), Ocz Technology Group (OCZ, $8.18, up $0.18), Omega Navigation Enterprises (ONAV, $0.42, down $0.02), Syms (SYMS, $11.44, up $0.66), Unify (UNFY, $1.92, up $0.06)

 THURSDAY

 Ameron International  (AMN, $66.27, up $0.59), Bassett Furniture Industries (BSET, $8.20, up $0.32), Bridgford Foods (BRID, $10.65, down $0.08), BSD Medical (BSDM, $4.30, up $0.21), Chase (CCF, $16.42, down $0.34), China Natural Resources (CHNR, $10.16, up $0.51), Helen Of Troy (HELE, $34.99, up $0.46), Hi Tech Pharmacal (HITK, $29.03, up $0.10), International Speedway (ISCA, $30.24, up $1.83), Penford (PENX, $5.31, up $0.01), Rocky Mountain Chocolate Factory (RMCF, $9.90, up $0.02), Semileds  (LEDS, $6.55, up $0.10), Ultimate Software Group (ULTI, $54.43, flat), WD 40 (WDFC, $40.06, up $1.02)    

 FRIDAY

 B&H Ocean Carriers (BHO, $4.50, up $0.55), Emerson Radio (MSN, $1.95, down $0.07), Greenbrier Companies (GBX, $20.66, up $0.90), Miller Energy Resources (MILL, $6.40, flat), PriceSmart (PSMT, $52.51, up $1.28), Providence And Worcester Railroad (PWX, $14.88, up $0.70), Pure Cycle (PCYO, $3.05, down $0.02)  

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5.  Weekly Wrap Covered Call Portfolio Update (Closing prices as of 7/1/11) 

 

WEEKLY WRAP CLOSED TRADES for 2011:  DNDN +9%, PCX +13%, SGEN +26%, TIVO +34%, REDF +11%. 

 

 Patriot Coal (PCX, $22.70, up $0.44)

 July 21 calls (PCX110716C00021000, $1.95, up $0.35)

 Original Entry Price:  $20.60 (6/23/11)

Lowered Price from Selling Options: $19.65

Exit Target: $22+

Return: 16%

Stop Target: None

Action:  Shares made a strong move above prior support/ resistance (black line, green circles) just above $22 and the next area of resistance is at $24 (red line).  If cleared, Patriot could challenge $26.  However, we will more than likely get called away on these options following last week’s 7% surge. 

We recommended buying the stock at $20.60 on 6/23/11 and for every 100 shares to sell the July 21 calls for 95 cents.  This lowered the cost basis to $19.65.  

If shares are called away by mid-July at $21 the trades makes 7% in 3 weeks.


Symantec (SYMC, $19.83, up $0.11) 

July 19 calls (SYMC110716C00019000, $0.90, up $0.10)

Original Entry Price:  $18.77 (6/8/11)

 Lowered Price from Selling Options: $18.17

 Exit Target: $20+

Return: 9%

 Stop Target: None

Action:  We were looking for a close above $19.65 (black line) last week and we got there on Thursday.  This area should hold as short-term support (green circles). The 52-week high is $20.50 and these options will probably be called away from us after the stock jumped a buck for the week.  We are expecting shares to run up to $22+ by mid-October and we also have a current ongoing for our Daily publication using October calls.


We recommended buying the stock at $18.77 on 6/8/11 and for every 100 shares to sell the July 19 calls for 60 cents.  This lowered the cost basis to $18.17. 

 If shares are called away by mid-July at $19 the trades makes 5% in 5 weeks.

 Rare Element Resources (REE, $10.93, down $0.16)

 July 12 calls (REE110716C00012000, $0.20, down $0.05)

 Original Entry Price:  $12.38 (5/31/11)

 Lowered Price from Selling Options: $11.23

Exit Target: $10+

 Return: -3%

 Stop Target: None

Action:  Shares traded over $11 for much of last week after the rebound off support (black line, red circles).  There is a good chance the stock is at or above $12 which is resistance (green line, blue circle) in 10 days so we may be out of this trade as well when the options expire.

We recommended buying the stock at $12.38 on 5/31/11 and for every 100 shares to sell the July 12 calls for $1.15.  This lowered the cost basis to $11.23.  

If shares are called away by mid-July at $12 the trades makes 7% in 6 weeks.

 Vivus (VVUS, $8.08, down $0.06)

 August 9 calls (VVUS110820C00009000, $0.28, up $0.02)

 Original Entry Price:  $7.93 (5/11/11)

 Lowered Price from Selling Options: $7.13 

 Exit Target: $10+

 Return: 13%

 Stop Target: None

 Action:  Vivus is forming a nice trading range (black and red lines) as we wait for its drugs to gain FDA approval.  Vivus may have a winner with Qnexa on two fronts which is what most analysts are forgetting.  The drug has completed Phase 3 trials for obesity and is still awaiting approval from the FDA.  Qnexa has also completed Phase 2 clinical trials and is hoping to get approval to treat diabetes and obstructive sleep apnea as well.  

 

We recommended buying the stock at $7.93 on 5/11/11 and for every 100 shares to sell the June 8 calls for 50 cents.  This lowered the cost basis to $7.43. 

 On 7/1/11 we recommended selling the August 9 call option for $0.30 which lowered the cost basis to $7.13.  If shares are called away by mid-August the trade makes 26%.

 AKS Steel Holding (AKS, $15.98, up $0.22)

 August 16 calls (AKS110820C00016000, $0.90, up $0.10) 

 Original Entry Price:  $15.93 (5/2/11)   

 Lowered Price from Selling Options: $14.58

 Exit Target: $20+

 Return: 10%

 Stop Target: None

 Action:  AKS made a strong move to resistance at $16 (red line, green circle) after holding the $14 level (black line) which was strong support.  We sold the August 16’s on strength and shares are looking good for a possible move up to our target of $17-$18 (orange line).

 

We recommended buying the stock at $15.93 on 5/2/11 and for every 100 shares to sell the May 16 calls for 50 cents.  This lowered the cost basis to $15.43. 

On 7/1/11 we recommended selling the August 16 call option for $0.85 which lowered the cost basis to $14.58.  If shares are called away by mid-August the trade makes 10%.

 American Capital (ACAS, $9.99, up $0.06)

August 10 calls (ACAS110820C00010000, $0.50, flat)

Original Entry Price:  $9.73 (4/19/11)   

 Lowered Price from Selling Options: $8.68

 Exit Target: $15+

 Return: 15%

 Stop Target: None

 Action:  Short-term support is at $9 (black line, green circles) but shares have been in an uptrend as they look to test the 52-week high of $10.85 and resistance (red line).  We were waiting for American Capital to get near $10 before writing another call and we did so last Friday.

We recommended buying the stock at $9.73 on 4/19/11 and for every 100 shares to sell the June 10 call for 50 cents.  This lowered the cost basis to $9.23. 

On 7/1/11 we recommended selling the August 10 call option for $0.55 which lowered the cost basis to $8.68.  If shares are called away by mid-August the trade makes 15%.  

Cisco Systems (CSCO, $15.86, up $0.25)

 Original Entry Price:  $17.14 (3/17/11)   

Lowered Price from Selling Options: $16.58

Exit Target: $20+

Return: -4%

Stop Target: None

Action:  Cisco did a nice job of holding support at $15 (green line) and now faces resistance at $16 (black line, red circle).  We are watching the August 16 calls (CSCO110820C00016000, $0.55, up $0.10) but want to get a little more premium before selling them to ensure we at least break even if called away which is at $16.58.  However, shares have been beaten down and some fresh money could be going to work in this high quality blue-chip name.

 

We recommended buying the stock at $17.14 on 3/17/11 and for every 100 shares to sell the May 18 call for 56 cents.  This lowered the cost basis to $16.58. 

 Spreadtrum Communications (SPRD, $17.44, up $1.68)  

 Entry Price:  $23.45 (2/7/11)

Lowered Price from Selling Options: $21.48

Exit Target: $30

Return: -19%

Stop Target: None

 Action:  Spreadtrum went on a wild ride last week after a research firm questioned the company’s books.  We were going to establish another position when shares fell below $10 but there was too much uncertainty.  You can’t see it on the chart but the stock traded to a low of $8.59 last Tuesday before the monster rebound.  Support is still strong at $12 (black line, green circles) while resistance at $18 (red line, blue circles) will be the next challenge).

Because of the volatility and with the company’s books being questioned, we don’t think it’s wise to add to positions like we were going to do.  Instead, let’s see how the story shakes out and if we can get back above $20 we will look to sell another call. 

Shares opened at $23.43 on 2/7/11 and the March calls could have been sold for 95 cents.  This lowered the cost basis to $22.48.

 On 4/11/11 we recommended selling the May 22.50 call option for $1.00 which lowered the cost basis to $21.48.

 DryShips (DRYS, $4.31, up $0.12)

January 2012 7.50 call (DRYS120121C00007500, $0.10, flat)   

 Entry Price:  $5.25 (1/03/11)  

Lowered Price from Selling Options: $4.60

Exit Target: $8

Return: -6%

Stop Target: None

 Action:  DryShips zoomed 9% for the week and broke thru resistance at $4 (red line, green circles) which was prior support.  If shares can hold this level then look for a run back to $4.50-ish (black line, orange circles) which is the next are of resistance.  

DryShips opened at $5.37 on 1/3/11 and shares were at $5.25 shortly after the bell.  The January call options could have been sold for 65 cents which lowered the cost basis to $4.60.  

 If shares are over $7.50 by January 2012, the stock will be “called away” and the trade will make over 60%.


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 6.  Week Ahead

Economic news is somewhat light this week with Monday’s holiday so we will start Tuesday off with factory orders for May due out 30 minutes after the open. 

For Wednesday, the Challenger Job Cuts and the ADP Employment Change reports are due out before the bell along with the regularly scheduled weekly report on mortgage applications from the (MBA) Mortgage Index.  Once trading gets underway, the ISM services index for June will be released,

Thursday’s employment data takes center stage once again, featuring ADP’s private-sector payrolls report for June, as well as the Labor Department’s usual update on weekly jobless claims.  Crude inventories will be released a day late due to the holiday shortened week.

Friday will be a big day as the Labor Department will give us the latest update on nonfarm payrolls for June along with May’s wholesale inventories.

The following week 2Q earnings come into play…