Great Rally. What’s Next? – 07/12/2013

Stocks ended Thursday at 1675. That is the highest close in history… but just a notch short of the intraday high of 1687 set back two months ago.

After the recent strong rally, I sense that the broader market will go sideways to slightly higher for the next week or two. However, each individual stock will start to be weighed by the merits of their earnings announcements. And the bellwethers of each group will set the tone for their industry peers.

Even though, the market may go flat, there will be big winners and losers this earnings season. Those stocks that enjoyed big earnings surprises with their last quarterly report, then saw upward estimate revisions, are statistically biased towards repeating that feat in the next quarter.

Best,

Steve Reitmeister (aka Reity…pronounced “Righty”)

Executive Vice President

Zacks Investment Research

Churn Baby, Churn!

We have gotten to the “churning” phase for the stock market. That is where bullish and bearish sentiment are fairly well balanced. And the market often ends the day close to breakeven

Now that doesn’t mean that it’s all calm and harmonious. Far from it.

Rather, the churning phase sees great intraday volatility as bulls and bears wrestle for the upper hand. Also there is heavy sector rotation with big winners and losers. (Often they trade places the very next day).

What is an investor to do about this?

If you are confident in your bullish or bearish view, then make sure your portfolio reflects that sentiment. If you are unsure of the final outcome, then have a more defensive portfolio with some shorts in the mix to protect against downside. Then wait for a clear catalyst to show you where the next leg of the market will be.

Best,

Steve Reitmeister (aka Reity… pronounced “Righty”)
Executive VP, Zacks Investment Research

Sideways ‘Til Earnings Catalysts

Kevin Cook here for Steve for a few days as he travels…

The market reaction to Friday’s disappointing jobs report was likely even more of a letdown for bears who were no doubt hoping for acceleration to the downside. Instead, most of the damage was quickly priced-in at the open, based on the futures drop below S&P 1,380 on Friday, and the rest of Monday’s session was filled with bargain hunting and short-covering. I think the long weekend gave money managers plenty of time to calmly evaluate the data and their current positions.

As Zacks Director of Research Sheraz Mian asked Monday morning, “Was Friday’s jobs miss a weather-related payback, or a recurrence of a fundamental weakness along the lines of what we encountered around this time in 2011 and 2010? I would say it’s all weather, with the boost from the warm winter months getting reversed in March, but the overall positive trend line remaining in place.”

Damage has nevertheless been done to the bull camp above S&P 1,400. So, unless the bears get a stronger, scarier catalyst in their favor, we are now officially in a big, sideways trading environment. This is the market that Steve suggested was most probable as Europe regained the headlines, and that I thought we’d see until we got more evidence from earnings season about the economy.

We’ll most likely mark time for a few weeks in a 50-point range between 1,400 and 1,350. Incidentally, the Dow touched and closed below its 50-day moving average (at 12,980) for the first time since December, so the March swing low at 12,735 is close and being closely-watched.

Bottom Line: Bull market is still intact, but it needs some time to sort out winners and losers for the next leg higher.

Best,

Kevin Cook
Senior Stock Strategist, Zacks Investment Research