Looks like traders, including yours truly, were caught catawampus in a pair of Nike shorts (ouch!), either not long enough or short, both equities and the Euro, coming into the week, even as some of the short-term signals were turning positive: 1) the commodity sell-off as a positive for margins and consumer purchasing power; 2) the French proposal to rollover some Greek debt, though we believe is weak and full of holes, the policymakers are at least moving in the right direction and Sarkozy is one of the few global politicos showing leadership; 3) the Asian markets, most notably, the Shanghai, have stabilized; 4) the S&P500 was able to make a higher high and higher low last week.
The S&P500 close today above the June 21 close of 1295.52, though on low volume, will now make traders think twice that this is only a bounce or just Q-end window dressing. They may try and sell it down tomorrow as the perception of a quarter-end tape painting bid subsides. This will be the test and a bounce and trade above the short-term intraday high of 1298.61 could bring in enough firepower to take the S&P up to the 50-day moving average, which is around 1317, into earnings season.
The way the equity market is trading we have a sense, for what it’s worth, the market is sold out – that is, very few sellers x/traders getting short – and is becoming immune to Greek tear gas and other macro swans, at least short-term. Bears need a new catalyst to take the market lower, which could come if earnings disappoint. Until then, we’re taking the over.
Wall Street is a very powerful industry and doesn’t get paid if markets trade “slide-ways” and that is one reality bears must live with. The negative events that could spoil this short-term scenario is the obvious rejection of the Greece austerity package, Euro debt contagion, and/or disorderly sell-off in Treasuries as QE2 goes into drydock. These are not low impact events and need to be closely monitored, especially after the weak Treasury auctions of the past few days.
The first stage of any equity rebound, however, should coincide with a bond sell-off as without the Fed’s QE2 purchases or robust credit expansion, the markets have now become a zero-sum allocation game. We don’t know for certain where the market is headed, but we’ve mapped the bullish case for the next few weeks and are now watching to see if they follow. Stay tuned!
P.S. Apple is leading the market rally and came within $1.40 of recapturing its 50-day moving average.
(click here if charts are not observable)