According to information gathered from FactSet, of the 89% of S&P 500 companies having reported earnings so far, 66.7% have surpassed profit expectations, above the average of 63% since 1994.
However, only 46.4% have beaten revenue expectations, well under the average of 62% since 2002. It is my belief that when sales revenue continues to be reported as less than spectacular, with earnings data coming in above estimates, something doesn’t add up.
U.S. ECONOMIC NEWS
Correspondingly, when the number of Americans filing new claims for unemployment insurance falls to its lowest weekly level in more than five years, it’s a fantastic signal that the job market may be improving, but still not at the speed and breadth needed to jumpstart the U.S. economy.
Last month’s string of weak economic numbers were, in my view, a disappointment to say the least, but they were to be expected as the sequestration has been making a very prominent appearance in regards to the day-to-day life of millions of Americans.
VOLATILTY AHEAD
This week will bring a new batch of prominent economic reports and with options expiration at week’s end. I would expect a fair amount of whipsawing volatility. The Dow and the S&P 500 continue to carry on setting another string of record closing highs and it is anyone’s guess how far they will rally before we see a significant pullback. The market’s strong performance thus far this year has, in my opinion, increased the probabilities of equities rallying throughout the year, but I’m ever so cautious about the fundamentals.
MARKET DRIVERS
I feel the market is primarily driven by good fundamentals from corporate earnings and due to sales revenue being unimpressive in our consumer based economy. Despite the fact retail sales released on Monday was better-than-expected, showing a meager 0.1% gain, overall GDP growth forecasts for the remainder of 2013 remain tepid at best.
NOTHING GOES UP OR DOWN FOREVER
With earnings season wrapping up, it is my contention that we could see a pullback heading into the end of the month and into June. Keep this in mind; the S&P has put on over a 105 point rally since the mid-April lows. It is my belief that nothing goes up or down forever. With corporate earnings releases off the board, the market goes back to most likely letting economic data from home and abroad and commentary from Fed officials help drive the market.
THE TRADE
I am looking at buying the July E Mini S&P 1580 put and selling the 1500 put for a purchase price of 9 points or a $450.00 risk, plus all commissions and fees. The maximum you could collect on the trade is $4,000, if both strikes finish in the money at the time of expiration, minus all applicable commissions and fees and purchase price.
EXPIRY
Speaking of expiration, July E-mini S&P option expiration doesn’t go off the board until mid-July here, so the trade is not squeezed for time. However, I am looking for a pullback back to at least the 1600 level, if not further. I look to carry this trade at the latest up until and possibly through the June FOMC meeting, June 18 & 19th.
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