Market Taking a Breather, GS Breaks Out

Thursday, July 29, 2010

Goldman Sachs signS&P 500 fades after gap up, flirts with trader's 1,100 level

The S&P closed down 42 basis points after gapping higher about 60 basis points. Today was the market's third day of a pull-in after its impressive 6% surge in five and half days. Traders are all watching the 1,100 level to see if prior resistance becomes support. The level generally held today by dropping below in the morning but recovering into the afternoon. I'm really not too concerned with this level, I would be willing to give stocks to the 1,075 level before becoming worried about a failure.

All eyes are on tomorrow's Advance Q2 GDP number due out at 8:30 AM. Tokyo is currently taking a dive down 1.47% following the US lower and seeing some disappointing economic data. Yet, I don't think Europe or Asia will dictate tomorrow's action. Economists are predicting a 2.5% reading for Q2. The Advance number will likely be very similar to the Q1 growth of 2.7% as it is based on incomplete data weighted towards measurements from early on in the quarter.

My guess is that the market will wildly overreact to this number tomorrow morning if there's a miss or beat. Emotions continue to run high and tomorrow's number will either bring the bulls out in force or the double dip crowd will grab center stage. It's fairly comical to consider the complexity of measuring a quarter of growth in a $14.59 trillion economy just 4 weeks after the quarter ends and that a 20 basis point miss could cause drastic selling in equity markets. Also consider that the number is revised twice but such is a volatile market obsessed with every data point.

Goldman Sachs (GS) starts the next wave higher

Shares of GS jumped 3.65% today in a down tape after a week and half of consolidation. Investors are realizing how undervalued shares are at just 7.7 times trailing earnings and book value at $128 per share. I have been battling the stock for 4 days now anticipating this next move higher and trying to work into a large position. GS leaped $12 when the SEC settled with the company after months of uncertainty. Now that the $550 million fee has been leveled against the firm and the hit has been taken to earnings, GS looks ready to run. The company is a cash machine with incredible growth and now short-term relative strength and momentum has kicked in. I am long with an average price of just below $150, my stop is at $147.50 and I am looking to take first sales around $160. I see the strong possibility that GS will retake leadership of this market in the next wave higher especially if tomorrow's GDP number doesn't disappoint.

Key commodities continue to show demand

While the market has been taking a breather, the key commodities I watch are looking healthy. Doctor copper is holding the $3.20 level as this week has been one of stable consolidation with a bullish tilt. Copper closed today at $3.26 as demand remains strong. Crude oil is trading down this week but mounted a strong reversal yesterday after a huge 7.3 million barrel build in crude stockpiles fueled a sell-off below $76 before it turned, rallied and then closed back above $78 today.

Disclosure: Long SPY, GS.
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