Sunday, July 12, 2015

Buying The Dip

Market Summary
A volatile week saw Greece's banks remain shut after the country voted in a referendum to reject previous bailout terms, raising chances of a "Grexit" from the European Union. The updated Greek plan is by no means a done deal. Greece's parliament still needs to throw its weight behind the proposals and trust with creditors needs to be rebuilt. But investors saw the latest news as reason to be upbeat. China was Wall Street's other main preoccupation, with plunges in the Chinese stock market on Tuesday and Wednesday pressuring US stocks as well on worries of a deeper slowdown in the world's second biggest economy. Similar to Greece, the view of China improved by the week's end after rescue measures undertaken by the Chinese government sparked a strong rally in Shanghai.

The stock market swung violently at times only to finish flat. U.S. stocks best day in two months Friday pushed the S&P 500 back into positive territory for the year. The DOW Jones Industrial Average is the only major index still under water year-to-date. For the week, the Dow and the S&P ended flat while the Nasdaq ended down 0.23 percent in its third straight weekly decline. Equities were pressured earlier this week by a slowdown in China, weak commodity prices and uncertainty over the Greek debt crisis.




Investment Analysis
According to the Stock Trader’s Almanac, the average price tendency is for a summer sell-off that usually begins in mid-July and lasts until mid-October. Part of the reason is perhaps due to the fact that July starts the worst four months of the year for NASDAQ and also falls in the middle of the worst six months for DJIA and S&P 500. Mid-July is also when we typically kick off earnings season, where a strong early month rally can fade, as active traders may have “bought the rumor” or bought ahead on anticipation of good earnings expectations and then turn around and “sell the fact” once the news hits the street. Investors start focusing on second-quarter earnings next week as the pace of company reporting picks up. Companies in the S&P 500 are forecast to report that earnings shrank by 4.5 percent on average. While that would be the first contraction in earnings in almost six years, a big drop in energy company earnings following the collapse in the oil price last year distorts the figures.

Ari Wald (Oppenheimer Asset Management) has an interesting take on the “feel” of the market versus the objective reality. While Wald maintains an overall bullish bent, he notes that identifying winners and losers has been more important this year given the trendless nature of the S&P 500. High dispersion and flat indices make for a frustrated investor class, despite our proximity to the all-time highs. If the alternative is a bearish view, he believes a bullish S&P 500 outlook remains warranted. However, reality is probably somewhere in the middle as stock-level trends vary considerably. At last week’s low, the S&P 500 was down 3.6% from its all-time high, but the market environment feels worse than this is because the dispersion of performance has widened sharply. For instance, the spread between the best (Health Care, +24%) and worst (Energy, -24%) performing S&P 500 sectors over the last 52 weeks is the widest since February 2010. This is a reason we continue to place greater emphasis on our sector and stock calls than our market one. Per the Stock Trader’s Almanac, July is a good month to get long natural gas ahead of its best five months, August through December. Mild winter weather and ample supplies have led to a glut in natural gas in recent years resulting in losses for this trade in seven of the last nine years. Approach this trade with caution.





By Gregory Clay
Investment Strategist
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gregoryclay@theoptionplayer.com


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