Great Rally! Now What? - 7/5/11

oldpigwang

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Last week we had a clean sweep of 5 straight days in positive territory as the Dow fattened up by 648 points. What was the cause? Soft economic data from May and early June significantly lowered investor expectations. Then we got a slate of economic data that was above the now lowered view and the result was stocks zooming to within 2% of the previous highs.

What's next? For starters, don't expect a repeat from last week. Stocks will probably go sideways to slightly higher until the monthly jobs data comes out Wednesday {ADP} and Friday (government #s). If they are as pitiful as last month, then we should see a modest pullback. But not too much of one as investors don't want to be on the sidelines if we are about to unveil a good earnings season. And that is the next hurdle to clear.

So as we get into mid-July it will be all about 2nd quarter earnings season. If we see a repeat of the strong earnings like this past April or January, then we will take out the high of Dow 12,800 on the way to 13,000+. However, if companies have lackluster earnings, or even worse, poor guidance for the future, then this rally is over and time to get your shorts on.

Certainly anything is possible, but life is more interesting when you guess what will happen. So my guess is that it will be a mediocre jobs report and mediocre earnings. Stocks press up to around the old highs (maybe even touch 13,000) before retreating. Unfortunately there is too much of the usually pessimistic summer left. And economic data is not that strong. That adds up to more volatility. Would love to be wrong and see stocks zooming above 13,000.

Plenty of time to see what's in the tea leaves before committing to the next set of trades. For now I am 100% long and ready to change when need be.