Friends, I feel like I've been talking about the same points over and over for weeks. Did anything change last week? Nope. I hope that none of our readers were surprised that consumer sentiment dropped. I'll say it again. The consumer will continue to "under perform". Confidence will wane as unemployment marches higher. As you know this is going to put pressure on the housing market, keep foreclosures high, have a negative impact on the retailers, etc. All in all it's become a vicious circle.
Recent forecasts for lackluster demand and a little fear that the government will tighten regulations for oil traders has fueled a serious sell-off in oil. This is good news for the consumer since the decline is finally starting to show up in gasoline prices. Unfortunately it's wreaking a little havoc on our long-term energy plays. Oil will eventually bounce. The economy will eventually recover. The challenge is no one really knows when. Estimates have been pushed out from the second half of 2009 to somewhere in 2010.
There has been new talk of a "double-dip" recession, which really shouldn't surprise anyone. Historically there's normally another dip. The same goes for the stock market. After the "bottom" is in stocks tend to dip back and retest it or at least pull back within 10% of the low. For the S&P 500 to get within 10% of the closing March low we're talking the 750-740 zone. I seriously doubt the market will get that low but it would line up with the November 2008 dip. We've talked about a market correction before. Now that we're finally seeing a correction people act surprised. The S&P 500 has broken its trend of higher lows and it has broken support at 880 confirming the H&S pattern. Yet that doesn't mean we're going straight down from here.
This week will bring a parade of earnings news and markets will react to the headline names. Stocks could bounce on some better than expected news but I would expect any bounce to produce a lower high. Investors have been searching for a new catalyst to buy stocks for weeks and haven't found one. Another round of economic or earnings news that is just "less bad" is not going to cut it.
Should we fear the market sell-off? Not at all. We've been talking for weeks how there is trillions of dollars of money on the sidelines looking for an entry point. Professional money managers have been waiting for a chance to get back into the market. Remember the market is a discounting mechanism that looks out six to twelve months and the economy should be improving about six to twelve months from now. I believe we're going to have an opportunity to launch new bullish positions somewhere in the 850-800 zone. Personally I'm betting on a dip toward the 810-800 region.
Chart of the S&P 500:
A lot of eyes will be on China this week as the country reports its second quarter GDP numbers around July 16th. Now whether you trust the Chinese government's numbers is beside the point but it will influence investor sentiment. The market's main focus will not necessarily be on the earnings results but any guidance from management as they talk about the third and fourth quarters.
As LEAPS traders we want to be ready and waiting should the market correction show up. The market isn't going to drop to 800 in a week. It will take a while to occur so we need to be patient when it comes to launching new positions. A third quarter correction would set up for a traditional fourth-quarter rally. We can use this time to search for new opportunities so send me your investment ideas as we look past earnings season.
~ James Brown