The market is pretty overbought in the short term but it is still holding up very well. This is quite remarkable considering there were some good catalysts to sell off like downgrade of Portugal’s debt and China raising interest rates. The ISM services index released today morning was slightly lower than expected also. This Friday we will see the release of the non-farm employment report and expectations are for a monthly gain of 110K jobs.
I believe that the main reason for the current strength in the market is expectations of a strong earnings season. Although some of the economic data has softened over the last few months, we haven’t heard many earnings warnings from companies. The stocks leading this rally are stocks like IBM, AAPL, AMZN, FOSL etc. which have a history of delivering good earnings growth. Therefore I think this is a rally mainly driven by anticipation of good earnings. Alcoa is going to kick off the earnings announcements season on July 11th.
It is very possible that the companies might meet the numbers for the 2nd quarter but they may guide down for the next quarter. If you start seeing this pattern in the first few releases it will set up for a good shorting opportunity on the S&P 500. In case the next quarter guidance is good and the economic data also starts to pick up, then I think a high probability trade might be to short US treasuries(bet on rising rates).