Overnight selling pressure in Asia and Europe has U.S. investors looking for a weaker opening. With no major economic reports today, investors will be focusing on earnings. After the stock market close today, Alcoa is expected to kick-off earnings season with a second-quarter report showing a 19 cents per share gain.
Recently analysts lowered earnings expectations for the second quarter because of European sovereign debt problems and weaker than expected U.S. economic data, this sets up the market for many favorable earnings surprises.
Besides the cautious approach by investors ahead of the Alcoa news, U.S. markets are reacting to the sell-off in the Japanese stock market. Japanese equities broke after the nation’s ruling party lost more seats than expected in Sunday’s upper-house elections.
This new round of political uncertainty could mean more economic woes for the country. Traders are worried that a drop in equity prices could increase the chance of a double-dip recession. In addition, some investors feel the economy will be threatened by the possibility of deflation once government stimulus fades and if global demand declines.
Last week U.S. equity markets finished with a strong performance indicating that investors may be fed up with the bad news and tired of the low yields being offered by an investment in Treasuries.
Sure this rally may have been short-covering, but something had to have stopped the decline from getting worse earlier in the week. Cheap prices and those who believe that the economy is not as bad as some may think despite the recent bumps in the road were probably waiting for this recent correction with both hands.
This week however, bullish traders will be asked to put their money where their mouth is because it is earnings season. Low ball guesses by analysts are expected to continue to make it appear that companies are beating the street, but the real key will be in the outlook for future earnings. My guess is the outlook numbers will be optimistic because no one wants to be the first to price in the possibility of a double-dip recession. Furthermore, I believe that companies will publicly continue to preach better earnings, but will these earnings come because of job cuts and cost cutting or will they come from increased sales. This will be the key as to whether this rally can sustain itself.
Technically, the September E-mini S&P 500 is trading inside of a retracement zone. A breakdown under the lower end of this zone at 1066.00 could trigger selling pressure. On the upside, this futures contract will have to break through 1081.00 to trigger buy stops and an acceleration to the upside.
Although the Treasuries finished last week’s trading session lower, there is still no sign of a change in trend. Not until the trend in the T-Notes and T-Bonds turns down on the weekly or monthly chart will I firmly believe that investors have turned completely bullish on stocks.
September Treasuries are trading better this morning with the biggest gain in the T-Bond market. Money is moving ahead of today’s earnings report as stock markets weakened overnight. Interest rates on the 10-Year T-Note should linger close to 3 percent if the Treasury wants to see good demand for its key instrument. The overnight gain in T-Bonds could be traders spreading long positions against T-Notes.
Weaker demand for risky assets along with the stronger Dollar are putting pressure on August Gold and September Crude Oil. The inability to retrace to $1225.70 in gold could be a sign of strong selling pressure which could drive this market to $1158.30 over the near-term. Gold has lost much of its luster the past few weeks because of an easing of tensions in the Euro Zone and the unwinding of long gold/short Euro spreads.
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