Earnings Need To Push the Market Higher

If the SPY can’t close above $380 this week it is a bearish sign.

PRE-OPEN MARKET COMMENTS MONDAY – The market has bounced off of the low of the year and there is some optimism as earnings season kicks into high gear this week. SPY $380 is a resistance level that we need to convincingly close above this week. If we are unable to, the earnings excitement will wane after the tech giants report and the FOMC rate hike next week will weigh on buyers.

The news over the weekend was weak. European flash PMIs were weaker than expected and they are solidly in contraction territory.  The BOE had to defend the gilt and the BOJ has had to defend the Yen. When the largest economies in the world have to defend their bonds/currencies it is a sign of trouble. China’s GDP increased 3.9% and retail sales were up a dismal 2.5%. Less than a year ago both were typically in the high single digits. The Hang Seng Tech Index was down 10% overnight.

This is a big week for earnings announcements. MSFT and GOOG report Tuesday after the close. META reports Wednesday after the close. AAPL and AMZN will report Thursday after the close. So far the blended earnings rate (companies that have been posted) increased of 1.5% in EPS vs the 2.5% that was expected at the end of Q2.

There is a ton of cash on the sidelines waiting to be deployed and the next two weeks are historically the most bullish weeks of the year. This pattern exists because the market bounces from deeply oversold conditions in September/October. Once mega cap tech stocks report, the air will be let out of the balloon. If the market can’t get off the deck in the next two weeks, it will be a warning sign.

The global backdrop is bearish and job growth in the US is keeping buyers somewhat engaged. When our economy starts to show signs of strain, the tone will sour quickly. I feel that any bounce will be short-lived and until I see bona fide buying on heavy volume, I will view these moves as great shorting opportunities when they stall.

We can expect some excitement into tech earnings this week. There is no need to chase this gap up. Our best case scenario is a drift higher with mixed overlapping candles that stalls in the first 30 minutes. That would set up an excellent shorting opportunity. If the gains on the open are easily given up (stacked red candles) we will have a gap reversal and a bearish trend day. If we get a “gap and go” let it run. There will be a dip to buy later in the day and we will have confidence going long if the pullbacks are minor and if the rally takes place on heavy volume.

Support is the low from Friday and resistance is $380.