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Why the rally in stocks is in trouble: trader

Alan Valdes
Alan Valdes

By Alan Valdes, director of floor operations at Silverbear Capital

We had a typical summer Monday here on Wall Street. Volume was a little under 242 million for the Dow (^DJI, DIA). We used to have that in the first hour of trading. The index settled up a measly 14.79 to close at 21,409. The S&P 500 (^GSPC, SPY) finished the day essentially flat at 2439, up +0.77. The Nasdaq (^IXIC, QQQ) fell marginally down -18.10. All had less than stellar volume.

The semiconductor stocks took a little hit yesterday, helping to push the Nasdaq down at the end of the trading day. But, surprisingly, it was Bitcoin that really crashed the party in the tech stocks (XLK), falling -15%—its biggest drop since 2015. It seems traders are still nervous after watching rival Ethereum crash last Wednesday (which sent its price plunging from $296.00 to 10 cents before recovering it’s losses).

It was the Italian banks that came to the rescue. The Italian government decided to shut down Popolare di Vicenza and Veneto Banca, two regional banks that have been under close scrutiny for quite some time for bad loans. The move lifted the STOXX Europe 600 Bank index by 0.9%, a move that cost Italian taxpayers $19.3 billion. It’s a positive start, but according to the latest EU stress test for banks in Italy, they have about $401 billion in bad loans outstanding. Although, I wouldn’t be popping the cork on any champagne bottles just yet. It was enough for the US banks to follow suit, with the SPDR S&P Bank ETF (KBE), trading up 0.6%.

After the fifth straight week of losses, the worst since 2016, US crude (CLQ17.NYM) closed at $42.38 a barrel, up 0.86%. The black gold is set to close out the first half of the year down 20%, with the US looking at a possible jump in production of 10 million to 10.5 million barrels per day by the end of the year. Don’t look for much of a jump in the price of oil the rest of the year.

Although starting up slowly, we will get a ton of government data the rest of the week. Today, Fed Chair Janet Yellen speaks from London. Consumer confidence numbers came in at 118.9 in June, beating analysts’ expectations of 116. Also, the Case-Shiller Home Price Index grew just 5.7% (year over year) in April, missing analysts’ expectations.

What most traders will be focusing on will be the health care bill out of Washington. Besides the fact that the health sector is up 16.7% for the year, a passage for this bill could possibly open the way for tax cuts. This is something the market needs desperately to keep the Trump rally goings—something that is now going to be delayed until after the Fourth of July weekend—perhaps much later.

In closing, just a thought: In the last 10 days, the 20-year government bond ETF (TLT), set a record for receiving more capital inflows then all the domestic equity funds combined. At this rate, no real capital growth will be received for at least a decade or more. And the VIX (^VIX) is below 10 again. Just a thought.