Wednesday, July 7, 2010

Be Skeptical of This Rally

Although we have all enjoyed the 3.69% move higher in the S&P 500 the past two days, we need to stay skeptical of the move. Reasons to be cautious:

1. Its the week after a holiday- typically the market trends higher on holiday weeks.
2. Rally is on normal to below normal volume. When there are moves of this magnitude, you want to see them on large volume- this shows that people are coming off the sidelines to get back into the market.
3. Next week begins 2nd quarter earnings reports. Traders will usually cover their shorts and not want to short the market ahead of earnings.
4. What has changed since last Friday? Nothing- housing data and unemployment has not changed or shown any signs of turning around.

As stated, next week begins 2nd quarter earnings, and the outlooks of the companies are whats going to drive this market up or down. My estimates are that any companies directly relying on the consumer, especially the service sector (ie M, TGT, WMT, etc), are going to be very cautious for the second half of the year.

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