Strong Earnings Reports Help Boost Stocks

I apologize for not updating my blog yesterday. I was out of the office at a conference and did not get a chance. Fortunately, it was a pretty quiet day. The biggest news was Goldman Sach's (GS) earnings report, which I covered for RealMoney.com. I will post my comments from the conference call later.

This morning, the stock market is getting a big lift from the likes of Intel (INTC), whose better than expected earnings report is helping to boost sentiment among investors. The semi index (SOX) is up +4.5% on the news, which included strong gross margins for the company, and also and upside revenue forecast for next quarter, which is nice to see in this environment of uncertainty.

I wrote recently that I felt the market was oversold, had found support near SPX 870-875, and that sentiment had become too bearish. Those were the ingredients for the market to rally in the short-term, which it has done. On the chart below, you can see that the S&P 500 has rallied above its 50-day average. That puts the market in a pretty strong position, if it can hold above these levels.

There has also been a big bounce in the 10-year yield (below), which got down almost to the 3.25% level before bottoming. At 3.25%, the bond market was saying that the worries had again tilted to the side of economic weakness, as investors questioned the recovery. But this bounce over the last few days has brought yields back to 3.55%, and I think is an indication that investors are more upbeat about the recovery again.


I don't think that anyone should be too worried about inflation yet. I am still amazed that this seems to be all people can focus on. Maybe they just aren't paying attention to the data that is coming in. To wit, today the CPI for June showed that on a year/year basis, it fell -1.4%. That's not a sign of inflation.

In Europe, the CPI for 16 eurozone countries fell on an annual basis for the first time on record (according to the WSJ). Last, capacity utilization this morning came in at 68%. That means there is an incredible amount of slack in the economy, and I wouldn't start to worry about inflation until utilization at least got back above 80%.

The last chart below shows the long decline in the volatility index (VIX), which I have been writing about. Today, it actually broke below the 25 level, indicating investors are not predicting a sharp rise in volatility and market selloffs in the near future. This flies in the face of those who are predicting an imminent collapse in the market, although I suppose things could turn on a dime, but it would take a major change in the news coming out right now.


Trading comment: I am taking some partial profits on a few trades I made earlier in the week (NFLX, WYNN). I have not abandoned my summer rangebound thesis, and will probably look to add back to the hedges I recently sold if we continue to move higher. But this prescription for trading more actively has certainly helped my accounts this year.

long NFLX, WYNN