The market has been chopping sideways on earnings news in a tight range since July 14th–a profitable pattern for out-of-the-money spread trades.
For example our open SPX call spread expiring this Friday has already garnered 70% of its total available credit–and we're only half-way in trading days to its expiration.
So this has been a good time to sell spreads as earnings volatility is juicing premiums–yet most of the market is going nowhere.
But will that continue? And where are the best trades now? To find out let's first take a look at…
The Markets and How They Affect Us
The SP-500 is locked in a sideways pattern as traders wait for a break to confirm direction…
As you can see from the chart above the SPX has traded in a narrow range from 2,155 to 2,175 over the last nine trading sessions. That is a tight range and the lack of volume suggests it is a controlled consolidation rather than a market getting ready to break down. A pending breakdown is generally accompanied by higher volume with advancing/declining volume roughly even. We are still averaging only about 5.85 billion shares a day–pretty light.
We haven't seen a rounded top yet which means this market could be basing for another move higher. Right now it looks like everyone is waiting for the Fed decision at 2:PM on Wednesday.
Chances are good however the Fed will maintain their lukewarm bias from their previous meeting. While nobody expects a rate hike in 2016, a hawkish tone could chill the bulls.
That said the US markets are still the best game in town and continue to attact global capital. Earnings haven't been spectacular–but they have been better than expected–and that's all it takes. Admittedly companies are clearing vastly lowered expectations–but beating the headline number is all that seems to matter.
Of the SP-500 companies who have reported so far 68% have beaten earnings expectations, and 57% have beaten revenue expectations, both above average. The blended rate of earnings has risen in the last week to -3.7%–an improvement from last week's -5.5%. Plus earnings beats are expected to continue so the final target for this quarter is currently about -1.5%.
The industrials and info tech sectors are leading 5 other sectors in earnings and revenue beats. This week should see the blended rate come up again with Apple (AAPL) beating estimates tonight, and Google and Amazon reporting on Thursday.
This week marks the peak of earnings season with the smaller companies starting to weigh in over the next couple of weeks. However at this point there is still plenty of gas in the tank to drive the markets higher, as long as the Fed doesn't spoil the party. And with the dollar as strong as it's been it's unlikely they would want to be too hawkish.
For one thing they don't need to be. With 19 central banks around the world already implementing negative interest rates and another stimulus package out of Japan likely this Friday, the dollar should stay plenty strong by comparison. Any mention of a pending rate hike would drive it through the roof–not something the Fed or our multinationals need.
So for now in spite of another quarter of declining earnings and revenue, the markets are likely to continue rising–for awhile. The question is…
How Do We Make Money on It?
Our first trade is a put spread on a stock that is rising steadily toward a gap from April that will likely be filled. Traders are taking positions ahead of earnings but our spread will expire before then for what looks to be a 10-day 22% gain.
And for our Roth Retirement trade we're looking at a far out-of-the-money put spread sold below support for a respectable 14% 10-day gain.
We've got two good looking trades lined up to take advantage of the current market–so let's get started…
Click here to gain access to today's picks.
Keep up the good work,
Peter