Market Comment - July 2

(Marco Bonelli) It would be nice to convincingly call for the major averages to reach new highs...

...and how difficult could it be for the Dow Jones to rally another 3.9%, for the SPX another 4.6%, for the NDX another 7% (and only 3.7% until the index breaks back into the uptrend from 2009) and the Russell 2000 another 6.3%?


Stocks, commodities and the Euro rallied hard while US bonds didn't decline as much as market participants might have thought, which doesn't suggest a full-force asset allocation shift out of bonds into equities. Nevertheless, industrials, technology and energy, some of the most beaten industry sectors since the beginning of the correction in May, lifted stocks to a solid June performance, although the quarter remained moderately in the negative.

The market remains in a make-believe stage and any kind of event gets used to call for a turnaround and a recovery in the upcoming future. The fact that the risk for the market lies more in the global and domestic economic slowdown with direct implication for earnings than in any extreme event or crisis spinning out of control (if that were to happen, it would come on top of the fundamental picture!), still gets underestimated and even ignored. Although trading volumes this week will be rather slow due to the 4th of July holiday, the labor report on Friday will give another impression of the state of the economy. Next week, the Q2 earnings reporting season starts and the possibility cannot be ignored that the usual pattern (low expectations - earnings beating - positive surprise - stocks rally - mixed outlook) might not occur this time. Some earnings might beat sharply lower expectations, other might come even lower and the outlook for Q3 and Q4 could be disappointing across the board. AA will kick it off on Monday, July 9.

Although a continued rally would run against deteriorating fundamentals, maybe the market simply needs a wake-up call as it lethargically traded in the last two weeks of June with no convincing volume, leadership, market breadth and investors uncomfortably sitting on their hands, scared to make bets in any direction. Maybe investors need to be forced to place some bets and maybe sentiment needs a spa-treatment with a few positive trading days, which could even be supported by slightly better than expected economic numbers (for a change), strengthening the believe that the break-through at the European Summit last week really was the trigger for all trends to stabilize and improve. In this exercise, 1370.50 (May 2011 high), 1363.50 (June 2012 high) and the 100day MA at 1359.70 will be closely watched for the SPX with bullish market players closely eying the high from beginning of April at 1422.38.

Unless we see a miraculous turn in fundamentals, any kind of rally won't be convincing, will remain on shaky ground and as a result will likely be rather short-lived.


Trade well.


(Marco Bonelli is the Managing Director of International for CL King & Associates in New York. The opinions expressed are his own.)