What are traders going to do with their long equity holdings?

July 13, 2015 11:16 AM
Look Ahead: Stocks

Hopefully by early next week investors will be allowed to concentrate on the actual fundamentals that drive the market because a bailout agreement for Greece looks imminent now. If seen, investors could move back into riskier assets such as equities.

In fact, there were tentative signs of this happening at end of this current week as the indices have found some apparent buying interest, so things may already be in motion. That being said, it remains to be seen whether a deal for Greece will inspire a sustained rally.

Indeed, it is not just the crisis in Greece which has weighed on risk sentiment recently. The stock market turmoil in China, the dollar’s strength and concerns about a premature lift off of rates in the United States have been among the other factors. With regards to China, although the Shanghai Composite managed to make back a big chunk of the losses suffered earlier in the week, the situation there remains quite uncertain and things could go from bad to worse if the upcoming data releases from the world’s second largest economy disappoints expectations.

In the United States, investors are probably waiting to see the results of some company earnings before deciding on what to do with their long equity holdings. The second quarter reporting season has already started and will kick into a higher gear next week.

The key earnings for next week are as follows:

  • Tuesday 14 July: Johnson & Johnson, JPMorgan Chase & Co, Wells Fargo & Co, Yum! Brands 
  • Wednesday 15 July: Delta Air Lines, U.S. Bancorp, BlackRock, Bank of America, Intel, Netflix 
  • Thursday 16 July: Charles Schwab, eBay, Goldman Sachs, Blackstone, Domino's Pizza, Citigroup, Advanced Micro Devices, Google 
  • Friday 17 July 15: Honeywell International, General Electric Co

With regards to earnings, a lot has rightly been said about the impact of the stronger dollar hurting the bottom line. We will soon find out if this was indeed the case in the second quarter and if so what the damage was. As well as safe haven demand, the dollar has been supported by expectations about the Federal Reserve becoming the first major central bank to hike interest rates.

Not a long time ago, the Fed was expected to start raising rates in June. Then expectations were pushed out slightly for a September hike and then to December. But now the calls are growing to hold off until early 2016, most prominently from the IMF. The minutes from the FOMC’s last policy meeting, released in midweek, contained very little in the way of new information other than what we already knew.

However, as some FOMC members are concerned about the developments in China and Greece, the Fed may after all wait until the start of 2016 before hiking interest rates. The prospects of rates remaining low for slightly longer than expected could potentially be bad for the dollar, but good for US stocks. 

As well as China’s Shanghai Composite and Germany’s DAX, some of the key U.S. indices such as the Dow and the S&P 500 have also found some support from their respective 200-day moving averages. This particular moving average is closely watched and it is thought that some money managers and hedge funds have specific rules that prevent them from buying markets which trade below these averages.

Others, particularly those that believe in the theory of mean reversion, have strategies that require them to buy at or around the 200-day average. It is therefore encouraging to see these indices finding some much-needed strength at these levels. BUT it remains to be seen whether this bounce is indeed driven by strong buying pressure or merely short covering.

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About the Author

Senior Technical Analyst for FaradayResearch. Matt has actively traded various financial instruments including stocks, options, and forex since 2005. Each day, he creates research reports focusing on technical analysis of the forex, equity, and commodity markets. In his research, he utilizes candlestick patterns, classic technical indicators, and Fibonacci analysis to predict market moves. Weller is a Chartered Market Technician (CMT) and a member of the Market Technicians Association.