Posted June 30, 2013 9:59
This past month, the market went through a 7% correction peak to trough. The reason for the correction was fear of tapering by the Federal Reserve and also a credit crunch from China. This caused a lot of fear in the market, which gave many investors the perfect buying opportunity to add more to their long positions. The 1560 level on the S&P 500 proved to be a short-term bottom for the market. But, I don’t believe that the market is going to go back to all time highs quite so soon. One of the biggest headwinds for the market are earnings. It seems to me that the financial earnings will be strong, but besides that, everything else is up for grabs. Don’t forget the jobs report is coming out on July 5th; the market needs a number in the 175-190k range to allow this rally to continue.
Looking at the month of July, I would look for continued volatility. This next jobs number, if too strong, will lead to increased fear that the Federal Reserve will taper in September. If the number is too weak then the market should sell off on global growth fears. But, if the jobs number is in the 175-190k range (“Goldilocks” zone), then I believe that the S&P 500 can test the prior resistance level of 1650.
Looking ahead to earnings, I believe that financial stocks such as Citibank, Bank of America, and JP Morgan will beat on their earnings. I am worried about tech stocks; I believe that their revenues could miss, just as they have over the last couple of quarters. This could lead to downward pressure on shares and allow the S&P 500 to re-test the 1560 level, and see whether or not the June lows hold. If the June lows don’t hold then the market will probably test the 200 day moving average around 1515-1520 (based on current values).
The way that I would play a bullish thesis in the market is to buy call options of the S&P 500 and the financials such as C and JPM. If you are bearish, I believe that the emerging markets (EEM) will continue to fall and buying puts expiring in either July or August would be a smart play. If the market does fall to the 200 day moving average, I believe that that will be the low of the summer, but, if the market breaks the 200 day moving average, then that could lead to a much steeper correction.