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
gregoryclay@theoptionplayer.com
P.S. click on http://www.theoptionplayer.com/ to sign up for a free trading newsletter
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