The markets are moving higher again and all is well on Wall Street… At least that is what the headlines are stating. You and I both know the reality of Wall Street is what stocks are doing now. And for now they are heading higher again. The major indexes have made a solid move to the upside after the mini sell off in June. The S&P 500 index did manage to close at the 1652 resistance level and is poised to move higher based on the current sentiment. The Volatility Index is back below 15 and investors are upbeat about the current prospects from earnings for Q2. Thus, all is well and the uptrend is re-establishing itself. Then why do I feel like I am always waiting for the other shoe to drop and turn the whole thing negative? There are no solid reasons, but there are plenty of issues facing the market every day from somewhere.
The Federal Reserve is still occupying the number one spot for me and others relative to interest rates, money supply and overall leverage on the market. The constant rattling about cutting the current QE stimulus from $85 billion is what started the move lower in May. Interest rates have been on the rise every since the chatter started. The yield on the ten year bond has moved up exactly 1% to 2.63% and some estimates have it hitting 3.25% by the end of the year. That is an issue and it will play out in stocks depending on how fast the move is to the upside. For now the rise has stalled and is catching it’s breath from the 20 basis point spike last Friday. The minutes from the Fed today will give more insight into their thinking and maybe offer some clarity to investors going forward. However, the last three releases have ended with stocks selling.
Earnings are starting for Q2 and the expectations are low. That is probably a set up to make investors feel better when they beat lowered guidance. This is a longer term concern from my view than what transpires from last quarter. The fact that earnings continue to slow and the economy fails to accelerate at all on the growth side is the key concern. It is looking forward into Q3 and Q4 that could be where investors start to react. For now all seems to be on pace to be enough to keep the rally going. Banks are the key on Friday with Wells Fargo and JP Morgan setting the tone. This is the one sector where expectations are elevated. If they disappoint that could be a bad sign for stocks.
China reported slower exports in June and the slide continues for the country. The global markets have been much worse on the data front of late and that is taking a toll on the charts. Japan remains the one bright spot that we continue to own, but is has stalled as well after the bounce off the June low. Another short opportunity is building in some of these countries. I have added them to my watch list to trade the downside if and when it unfolds.
The dollar has pushed back tot he previous highs as the challenges around the globe continue. The yen continues to decline as efforts by Japan to jump start growth is in play. The euro fell further on the comments that Draghi wants to cut rates again and that leaves the buck as the stronger choice in the world… leadership by default. The higher dollar is impacting oil prices as crude has now moved above $105. The stronger dollar does influence prices around the globe and that is something to watch as well. The long dollar and short euro/yen trade continues to do well.
Overall the markets are giving solid returns in specific sectors as money rotates to where it is treated the best the fastest. Proceed with caution and take what the market gives. This is still short term market as the longer term view remain cloudy at best.