Stocks continued to climb on Monday. The better than expected nonfarm payroll number on Friday produced a short squeeze. The echoes of that bullish surprise helped lift European stocks today and that helped keep the rebound alive in the U.S. markets. Stocks are also reacting to strength in the euro. This is pushing the dollar lower, which in turn is fueling strength in commodities. Most believe the euro strength is just a short squeeze. Being short the euro was (still is) an extremely crowded trade.
After last week's parade of economic data this week looks pretty barren. We're still in the midst of Q2 earnings season but the results are going to be more company specific instead of market moving.
The S&P 500 rallied straight to round-number resistance at the 1400 level and stalled on Monday. The index danced under this area all day long but couldn't break through. On a short-term basis I would expect a dip tomorrow. Yet the intermediate trend is still a bullish one of higher lows and higher highs. A close over 1400 would likely signal a run towards the next resistance level at 1420.
Daily chart of the S&P 500 index:
The NASDAQ suddenly looks bullish after underperforming its peers in recent days. Today's close over short-term resistance near 2975 is positive but the real level to watch is the 3,000 mark. The rally stalled at the 3,000 level today but a close over it could inspire the bulls to make a stronger push higher. Honestly I would be cautious until we saw the NASDAQ composite close over 3,025.
Daily chart of the NASDAQ Composite index:
The small cap Russell 2000 index outperformed the S&P 500 and the Dow Industrials today. Yet Monday's rally seemed to stall under resistance near the 800 level and the four-week trend of lower highs. A close over the 800-805 area would definitely be a bullish signal for the market but there is still resistance at 820. It looks like support is the 780 and 765 level.
Daily chart of the Russell 2000 index
Last week was very busy for the economic calendar. This week the calendar looks bare. None of these report listed below are market movers. Investor focus will remain on Europe. Meanwhile Q2 earnings will continue to pour in but the reaction will most likely be stock specific.
Economic and Event Calendar
- Monday, August 06 -
- Tuesday, August 07 -
- Wednesday, August 08 -
Q2 productivity and Unit Labor costs
- Thursday, August 09 -
Weekly Initial Jobless Claims
June Trade Balance
June Wholesale Inventory data
- Friday, August 10 -
The Week Ahead:
I have mentioned earnings season a couple of times now. That's because it's the only show in town at the moment. Investors seem to be ignoring the problems in Europe, which has produced a short squeeze in the euro. This is temporary but no one knows how many days it might last. The euro could reverse tomorrow or it could rally for days. Spanish 10-year bond yields are back under the 7% level for now and that's a good sign. Yet Spain is still feeling the pressure. This reprieve may not last very long. Germany and Italy are still at odds on how to solve the Eurozone's problems and tempers are starting to heat up.
Meanwhile here at home there will still be hundreds of companies reporting earnings. Thus far the Q2 earnings results have been positive with about two thirds of the S&P 500 companies that have reported have beat Wall Street's estimates. Yet over half of the companies reporting have missed the revenue estimate. That means they are beating estimates by cost cutting, not new business. That is not a sign of a healthy economy. I'm not saying cost cutting is bad but there is only so many costs you can cut to drive earnings. I am hearing some chatter about how the market's earnings cycle might be nearing a top.
The same issues I discussed two weeks ago remain. The calendar could be a challenge with August being the third worst month and September the worst month of the year. The issues in Europe remain unsolved and so far they continue to kick the can down the road. It's a game EU officials have perfected over the last couple of years. The situation in Iran remains a potential tinderbox, ready to explode. Meanwhile the situation in Syria is escalating and the Syrian government is said to be on the verge of collapse. The global powers are worried about who will try to make a play for Syria's chemical weapons. The U.S. is worried Al-Qaeda will get them. Russia is worried the Chechen terrorists might get them. Israel is worried Hezbollah will try and grab them.
Here at home we are quickly approaching the U.S. debt ceiling issue again, which is due to run out in September. That's just in time for it to be an even bigger political hot potato with the elections in November. You may remember last year when officials failed to raise the debt ceiling in time and it sparked a multi-week sell-off in the U.S. markets.