Rose-Colored Glasses and the S&P

It's important to remember that in the new world order, the credit crisis has lasting effects. The other thing not to forget about is “false starts.” The Pit Bull taught me a long time ago that there have been major bear markets where the markets sold off hard and then bounced, and then sold off even harder. We know the structural integrity of the markets has changed, but that does not mean they can't rally. The current atmosphere for the S&P is that as long as there are no major new problems in Europe and with the growing expectation of some type of stimulus program, the markets will keep going up. In turn, China will be forced to act and bolster its slow growth. As we come to the end of what most consider a weak second-quarter earnings season, projections for next quarter are even softer. This and several other negative factors make it hard to have a long-term bullish stance. With 85% of the S&P 500 reporting earnings, only 40% beat revenue expectations and just over 50% exceeded net profit expectations. What makes this picture even worse is that 50% of the companies in the S&P have lowered their estimates for the thirrd quarter while only 21% have raised. In addition to the better news out of the ECB and the Fed, there has been an increase in M&A activity. This has also helped support the markets on the upside. After the better job numbers, many traders are starting to look for further positive economic signs. What traders on the floor have learned is that the markets tend to go through phases of good and bad news; once the news is out of the way, the markets short-cover. Thomas Lee, chief markets strategist at JPMorgan, said, “We realize that investors remain concerned the downturn recently could be a precursor to a potential ‘slide into recession.' But, again, we think investors need to appreciate the powerful dynamic that improving construction (replacing manufacturing as the U.S. driver) coupled with lower oil represents to the U.S. economy.” We think a good portion of the shorts have covered and that many of the bears have turned bullish. While the current rally seems to have some decent support behind it, we think it's important to remember all the big ups and downs over the last few years and how once the S&P sucked the public into getting long, it reversed. With that in mind, we want to make sure not to put on those old rose-colored glasses. As always, please make sure to use protective stops while trading the S&P. Our view: We have some numbers to get past this morning, but providing that goes OK we think the S&P has a shot at taking out the high and trading up to the 1410 level. With buy stops sitting just above the 1402.70 level up to 1405.80 and larger buy stops above 1408.60 up to 1412, we lean to buying weakness. Yes, you can sell the early rally, but we think with how slow it is to just follow the trend. China is going to have to lower rates at some point. As always, keep an eye on the 10-handle rule and please use stops. For today: It's 6:00 a.m. and the ESU is up .25 handles at 1398.50, crude is up 30 cents at 93.65 and the EC is trading 1.2315, down 45. In Asia 8 out of 11 markets closed higher (Hang Seng +1.02%, Shanghai Comp +0.61%). In Europe 8 out of 12 markets are trading higher; CAC and DAX both down modestly. Today's headline: “China Data Point to Slowdown, Need for Easing.” Economic calendar: International trade, jobless claims, wholesale trade, 30-yr bond auction and earnings from Advance Auto Parts, Kohl's and Nordstrom. VOLUME LOW: 1.22mil ESU and 5.1k SPU traded SPREADS: 34 SPU/Z spreads traded FAIR VALUE: S&P -1.00, Nasdaq +2.00 MrTopStep Closing Print Video: http://www.mrtopstep.com/videos/?id=24044 Wednesday's S&P 500 futures wrap-up: Tuesday's late-day back and fill failed to take out the LOD made on the opening which signaled to us that some small profits were taken at the 1400 area. The overnight Globex session did not produce any follow-through selling last night or during the European markets this morning. Germany sold 10yr paper with no problem this morning but the US struggles this evening, US 10y yield currently 21BPS higher than Germany -Ransquawk. Posted yesterday, Tuesday by Jimmy (09:43:29): shorts are well set into the auction today, if it is decent then we should get some short covering… might aid bonds and see a little softening in ES, auction is in little over 2 hours its only in 3y paper though. The real weakness in 10s comes ahead of issuance from Germany and the US tomorrow. There has also been chatter on asset allocation trades out of bonds and into equities, that effect is still ongoing. From HSBC / China data: We expect CPI to drop to around 1.7% y-o-y in July from 2.2% y-o-y in June, recording the lowest reading in January 2010. Food prices are likely to see moderation as the y-o-y decline of pork prices is likely to offset the rise of other food prices (partially due to bad weather). Non-food prices are likely to remain muted against the still weak demand. PPI is likely to see a sharp fall in annual terms as prices for producer goods continue to fall sequentially. This fast fall in the inflation rate provides room for one more rate cut likely to be delivered in Q3. Wednesday's S&P 500 trade started with 234k ESU and 1.6k SPU traded on Globex, trading range 1390.50 – 1397.50 / Tuesday's range 1395.70 – 1403.30, settled 1397.00 up 7.1 handles. The RTH's opened five handles lower at 1392.00 – 1392.50 and marked the low for the second day in a row on the opening. The bulls first job was to convert Tuesday's LOD/opening at 1396 area and that they did as the European markets came to a close. The Russell 2000 had firmed after the open lending early support and at 10:30CT the 1400 area was being tested. From 10:35 to 13:39 almost 31k ESU traded at the 1400.20 high. Crude and the bonds were positive through the mid morning, but the bonds turned red on the stops being run above 1396 and the VIX trading a new low of 15.76 down .23. EUBIE (11:22:57): Top BBands 1399.50 / & Now a 2 XTOP potential Min charts – at 11:50 1396 area was trading and a pop back up to 1400 area followed as the Treasury sold $24B in 10-year notes at 1.68%. Bid-to-cover ratio of 2.49; indirect bidders take 40.6%. Direct bidders take 5.2% and was rated a “D” by Santelli. Jimmy (12:17:54): Bond auction very weak, surprising considering how the yield improved over the last week, just lack of demand from safe-haven bidders due to the comparatively low yields on offer. Chatter spread that GS put out $20.00 beans and $9.00 corn forecast – just possible prices…corn is up 18% this month and prices at the pump have been ripping nearly .40 cents higher over the last weekish. Another rejection at 1400 area lead to another retest of 1396 area by 1:20 and you'll never guess what happened next? Of course, Tuesday's LOD/opening held again, taking the spoos up to 1399 by 2:20. The closing imbalance showed the broader market with only $150M to the buy side and 1398.70 traded on the cash close.