9:00am (EST)
When a company reports higher earnings for its first quarter (over its previous year’s quarter), chances are almost five to one it will also have increased earnings in its second quarter –
“Wow”…
That one word sums up Wednesday’s action by the bulls.
The market had an incredible rally yesterday after two weeks of taking it on the chin as the buying spree added nearly 3% to the major indexes.
The move higher was impressive considering the Dow, Nasdaq, and the S&P 500 took out key resistance levels. The problem though is that this is not a normal week – there is no “major” news behind these price swings, and volume is still below normal. Companies reporting “odd” earnings quarters are coming to a close, and Wall Street won’t get a glimpse of 2Q earnings until next week.
The Dow finished above the 10,000 level for the first time…in a week, and the talking heads were going bananas. Folks, the Dow was above 10,000 just last Monday and dropped 268 points the next day.
Wednesday’s gain of 275 points, or 2.8%, got the index to 10,018 so let’s see if it holds before saying we are in a bull market again. Our previous levels of support were Dow 9,800 and 10,200 on the way down so we are simply back near the top of this trading range. A break above 10,400 might have us jumping on the band wagon but the world’s economy didn’t do a 360 overnight.
The S&P 500 also surged higher, adding 32 points, or 3.1% to close at 1,060. We have to admit, we didn’t like to see the 1,040 level taken out and then the 1,050 bar was cleared. More on this in a minute.
The Nasdaq soared 65 points, or 3.1%, to finish at 2,159 by the closing bell and busted through our 2,150 level, as well.
In mid-June, the market did the exact same thing on the way down and we mentioned sometimes trading ranges can get “stretched”. The Dow looked poised to fall below 10,000 then ran to a high of 10,627 a week later. Folks, this is volatility and these “head fakes” are hurting a lot of people. We got a lot of emails asking us if we had fallen out of our rocker…
We stayed calm, but still, calling a market bottom (or top) isn’t easy. When the Dow was headed below 10,000 and made a quick run back to 10,600 there were a lot of people jumping on board because they thought they were going to miss a rally. Two weeks later (last Thursday), the Dow hit a low of 9,596.
Our latest targets have been Dow 9,800 and then 9,500 on the recent downturn. Perhaps we were 96 points off from calling a “bottom” but it just doesn’t feel like this was THE low for the year. If so, then we will have plenty of time to ride the gravy train higher.
We mentioned 2,050 for the Nasdaq as the last line of support, and we tested 2,061 last Thursday. Our next target is the 1,900s, but did we really miss calling a bottom on the Nasdaq by 11 points? Maybe, but we doubt it.
We started to lock in some profits last week by closing “half” positions on some of our put option trades, and we are letting a few of them ride. The ones we are pushing are down and will depend on if we get another market correction for them to turn around. It’s just the nature of the game. However, what we don’t want to do is panic, and that is what the market wants you do to.
This has been one of the hardest markets to trade, but we are adapting, and we still think we haven’t set the lows for the year. Our portfolio is still showing decent gains for the year but trading in this type of environment takes nerves of steel.
All we are saying is to be careful, and we have explained what this week means. With no news, and sporadic volume, the market is making crazy, wild swings. If 2Q earnings start to roll in next week, and companies are smashing estimates AND raising guidance, then we might turn bullish again. We already know the quarter will be solid for most companies (opening statement) but Wall Street will be dissecting every word uttered about guidance and what their outlooks are.
There are still too many headwinds for us to say “all clear,” but we know the market can change on a dime. It did in May after a year-long plus of rallying, and we had an incredible streak of profitable put trades. We still hold put options so if this is a new bull market then we could get trapped.
One day doesn’t make a “trend” but the work the bulls put in yesterday was worth noting. The real test will start next week but in the meantime expect more sharp moves in the market.
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