Emotion dictates this trading day

In a battle between technical trading and emotional trading, the latter "However.." underlined yesterday seems to be the decisive winner today. As we mentioned on the weekend, the technical-centric kind of trading environment prior to this week may come to an end as the storyline changes to corporate report dissemination. When an earning season starts, all we need is a few big earning reports to kick start the momentum. We often say that market is rarely wrong. In fact, market is never wrong. How traders interpret market action will determine their own trading strategy, and hence, their trading outcome.

For a while prior to the earning season, we were saying a pullback is just healthy and just plan for the week of July 13th. We were also very selective on playing the dips. Techs/China earning plays were our main theme and they have done very well during the past few sessions. We came back to RVBD, STAR alerts yesterday and today they were positioned just right in the tech frenzy adding ~7% at their highs. Going forward, we still feel that the best earning surprises will come from the tech/China area. What's also particularly intriguing for this quarter is that many company's estimate are sitting at a reasonable(low) level. Investors/Traders' expectation may be high for many stocks out there, but the only thing they are comparing their expectation to is the current estimates. Therefore, we feel that this is definitely favouring companies this quarter. Another reason for potentially upside earning surprise is the companies' with the biggest international exposure  being the winners. We know that INTC sold a lot of chips in China. For some reason, our analysts were so obsessed with America's economy and job number, they seem to understimate the potential business from Emerging markets floating US companies. This may be partly the reason why analysts missed the mark on INTC's earning. Of course, this is INTC and we can't simply derive this conclusion upon every other company out there. However, this is a legitimate edge we have to use to gauge the overall earning trend.

Recall, we said heading into the week..”We think many companies misjudged the potential of a fast recovery and will have to improve outlooks. Billions have been added in EM GDP in the past Q with Industrial production leading the way. Companies in the SPX should see this in their top and bottom lines and sectors- stocks with the most international exposure will likely be the winners, notably technology, materials, industrials”. It’s clear these 3 groups led the charge today.

Tomorrow we have JPM to report and this is a crucial report. We should have a first glimpse on the operation of a big domestic financial company during the last quarter. JPM is much more important than GS simply because JPM's business is much more diversed and deals more with the consumers and small business. The sector jumped a hurdle or two Monday, but we don't doubt there will me a messy report or two down the line.

Other notables, NVS, MAR, IBM, NOK, PPG, HOG, CY, BIIB, GPC, BAX, APH, GOOG, PBCT, FCS, ERIC

Simply,  We said we'd be 'bullish' over 900 once again, last 3 days and bull gap pretty well confirms in our minds we hit a summer low at 869.  Why? The breadth Advancers/ Decliners, 3 days straight is too good to ignore.  Todays gap to 910 and 911 vicinity June channel top is our support/buy dip view now.  Today's action has thrown all TA and just casual market outlooks going forward for a loop we'd think, every short & long TA prognosis seemingly needs to be revised now.   Even those long term investors on sidelines this summer waiting for mid-low 800's will have to rethink now or possibly suffer from PA.  This includes every manager calling for this majority view when everything was seemingly falling apart since NFP report.   Once June congestion area absorbed (this will take some summer time), 956 high will fall as long as we hold todays gap /911.  Yeah, we're living in a 'Field of Dreams"..so far, so good though since this weekend's reference to it.

As powerful as the last three days have been, we feel that we definitely need some cooling down in order to further the advance.  In addition, we need more evidence that more companies are doing better than what analysts/economists fear. After all, this is a confirmation quarter and there's a lot of stake on the table here. We're still only in the first inning of reports. A good string of reports will not only bring more market participants back into this game, it'll also help consumers' confidence as well. It's just an inevitable chain reaction. What we may see here is those on sidelines begin to feel performance anxiety(PA) and chase. We got a glimpse of it today as volume increased and tonight some are feeling the symptoms of PA, thus, any pullbacks will be buying opportunities as long as the reports are above average.

Bottom line, there's no need to be bothered or buy antsy tomorrow if you haven't made a killing last three days. This week has caught most of the market off guard, yes..both shorts and longs. Only big difference is shorts got shampoooo..'d in the eyes with the H & S formation and lost a ton, while longs just don't make that much unless they speculated the farm into earnings. We have made some small gains here at DJIM and we feel there's lots more setups to come, most importantly, we're here for new fresh meat off earnings and don't want to get into guessing day to day moves of the SPX/SPY.