Consolidation In Stock Indices: Is It Bullish?

THE FINAL NUMBERS - BULLISH CONSOLIDATION

NEWS: All red for the three major indices on Monday, but all things considered the action was not bad. The Dow closed with a loss of 29 points or 0.25% on the day, breaking a three-session losing streak. The S&P 500 was virtually unchanged after trading in a range of only 12 points the entire day. The NASDAQ was also little changed, falling 3 points on the day. The small and mid-cap stocks had a solid day, gained 2/3 percent and bucking the overall market consolidation.

THE BOTTOMLINE: Monday was just what the bulls would have hoped for after a weekend. Investors had time to think about last week’s rally and they did not run out and sell into the bounce as many had predicted. Instead they took a break from buying, but at the same time the sellers were not present either. This caused the market to trade within a narrow range and close the session slightly unchanged. The future of the market this week rides on one theme - earnings. If the numbers remain on the same path, I expect more upside for stocks as investors applaud better than expected reports.

McCALL’S CALL - EARNINGS UPDATE

NEWS: So far so good can be the headline for the second quarter earnings season. With a handful of financial companies already in the books, overall the numbers have been much better than expected and the stock market has been rejoicing.

THE BOTTOMLINE: Over the last two months the bar has been set so low for the second quarter earnings season, that it is not taking much for companies in all sectors to beat the estimates. The financials have been the biggest beneficiaries because even though the numbers are well below a year earlier, they are blowing away estimates. And the reason the stocks are rallying on the reports is that the lower estimates had been priced into the stocks during the June sell-off.

THE DAILY ETF UPDATE - OPPORTUNITY IN ENERGY ETFS

NEWS: The 10% drop in oil last week sent the shares of energy-related ETFs lower, but they began the week on the upside. Will the pullback mark a short-term bottom and buying opportunity or was last week a precursor of more selling to come?

THE BOTTOMLINE: The long-term trend of crude remains intact even though the 50-day moving average was breached. The support lies in the $120’s and the price of oil should begin to stabilize around the lows of last week. If this remains the case, the oil & gas companies will have major windfalls. And even if oil trades in the $100-$120 range for the next few months, expect the sector to do well.

That being said, the pullbacks that have occurred; 15% for the SPDR Energy ETF [[xle]] and 12% for SPDR S&P Oil & Gas Equipment & Services ETF [[xes]] are now buying opportunities for the long-term investor. The latter is sitting at a much more attractive level as it has not yet broken the 200-day moving average. Today XES rallied 3.5% and solidified the price support level at $44. The two-session rally for the oil & gas ETFs is not a guarantee the pullback is over, but from a long-term reward-to-risk perspective, building a position at currents levels is attractive.

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