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Danny Riley

Last week ended with several positives, from the housing markets to the Fed keeping its quantitative easing program going. This will more than likely be the tone when Bernanke testifies before the House of Representatives on Wednesday and the Senate on Thursday.

It seems like everything is rolling in the right direction for the stock market right now -- retail sales, consumer credit, the job market and the industrials are all doing well. In spite of the strong dollar, bills are on 52-week highs.

Second quarter earnings just the beginning
Despite the second quarter earning estimates compiled by Thomson Reuters showing 2.6% growth, we think there will be an upside surprise during this earning season (+3.5%). With continued support from the Fed stimulus, revenue should improve, thus pushing corporate profits higher, and further improve as the economy improves. Most expect the lion’s share of the earnings growth to come in the second half of the year, with the last two quarters expected to account for more than 70% of this year’s growth. What we know is that analysts tend to keep the estimates on the low side. Last Friday, JPMorgan’s earnings showed the bank had good capital numbers and good credit card numbers, which means the consumer is spending.

The Great Unwind Flip-Flop
One of the hardest things to do when trading is to decipher information and react. Even when most Fed governors were saying “taper,” there were some who flip-flopped right afterward. The S&P sold off for two reasons: the change in the tone of the Fed statements and a very overbought stock market.
During the flip-flop the MIM™ imbalances went from big buys to nonstop sells.  Those broader market sell imbalances started moving back to the buy side about 10 days ago and were capped off with a $1.8 billion buy imbalance on last Friday’s close and new highs.

Bulls & bears
I have always been a bull market guy, but the 2007 credit crisis changed how I look at the S&P long term. It  always will be about one's ability to switch gears. There has never been a time in history when things can change so quickly. It was not just the retail guy who sold; so did many of the big institutions. Right now the only side of the trade that is working are the bond sales. After the smoke has cleared there is a very high level of bullishness and it can be seen in the long-term average of 39% bulls and 30% bears. As of Friday's close, bullish sentiment is 49% bulls and 18% bears (American Association of Individual Investors).  

Moral of the story: Shuffle your feet -- buy with the prevailing trend, sell with the countertrend, and don't ever fall in love with your position.

ES 09-13 30 Min 7 15 2013

The S&P futures have closed higher 12 out of the last 13 days, up 121.2 handles.
The S&P futures have closed higher 7 out of the last 7 days, up 80.2 handles.
The S&P is up 148% since making its March 2009 low.
The S&P closed up  2.96% last week and is up 17.81% YTD.

Last but not least, 132 companies are trading at 52-week highs, almost three times the average at four S&P 500 peaks between 1990 and 2007.

Tuesday, June 25 +15.2
Wednesday, June 26 +14.1
Thursday, June 27 +11.1
Friday, June 28 -7.3
Monday, July 1 +7.4
Tuesday, July 2 +.50
Wednesday, July 3 +1.9
Friday, July 5 +18.2
Monday, July 8 +8.2
Tuesday, July 9 +10.1
Wednesday, July 10 +3.0
Thursday, July 11 + 21.5
Friday, July 12 +.20

Total =  +121 handles

Our view: Between today and Thursday there will be 18 separate economic numbers, three T-bill auctions, one Fed governor speaking, Bernanke testifying before both houses of Congress, earnings kicking into full gear and on Friday the July options expiration. The summer may mean lower volumes (only 1.1 million minis traded Friday) but it doesn't mean the S&P won't be moving.

In Asia,  all 11 markets closed higher. In Europe 11 out of 12 markets are trading higher.  Let’s say it like it is: the shorts are getting faced again. All the money pouring out of bonds is going into the stock market. Everyone keeps talking about a pullback to buy in, but if you don't have your stock list ready, you're out. This week there are some very big names reporting: Citigroup, Tesla, Coca-Cola, Goldman, J&J, Yahoo,  BofA, American Express, Mattel, IBM, INTL, Morgan Stanley, United Healthcare, Google, Microsoft, AMD, and Chipotle.

Our view is that the S&P has gone a long way in a short time with no pullbacks. While we think S&P 1700 is on tap, we also think there could be a few down days this week. There is going to be a lot to digest this week and there are not going to be a lot of people trading. This means “whipsaw.” We lean to selling the early rally and buying weakness. According to the Ned Davis stats, the Monday before the July expiration has been up 16 / down 13 of the last 29 occasions.

As always, keep an eye on the 10-handle rule, and please use stops when trading futures; live to trade another day.

  • It’s 8 a.m. and the ESU is trading 1673.25, up 3 handles; crude is down 77 cents at 105.15; and the euro is down 50 pips at 1.3013.    
  • In Asia, 11 out of 11 markets closed higher (Shanghai Comp. +0.98%, Hang Seng +0.12% , Nikkei+0.23% ).
  • In Europe, 10 out of 12 markets are trading higher (DAX +0.19%, FTSE +0.42%).
  • Today’s headline: “U.S. Stock-Index Futures Little Changed Before Sales Data”
  • Total volume: (LOW) 1.14 mil ESU and 6.4k SPU
  • Economic calendar: Retail sales, Empire State mfg. survey, business inventories
  • Fair value: S&P 1674.59 (-1.09), NASDAQ 3072.72 (-4.97)
  • MrTopStep Closing Print Video: https://mr-topstep.com/index.php/multimedia/video/latest/closing-print-7-12-2013
  • Ned Davis Expiration Study for July - https://mr-topstep.com/index.php/equities/3687-expiration-study-for-july

Danny Riley is a 34-year veteran of the trading floor. He has helped run one of the largest S&P desks on the floor of the CME Group since 1985.

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DISCLAIMER: The information and data in the above report were obtained from sources considered reliable. Opinions, market data, and recommendations are subject to change at any time. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any commodities or securities.