Monday 14 July

Good Morning,

The S&P closed down 20 points on Friday closing at 6259. Over the weekend President Trump announced 30% tariffs on the EU commencing August 1, however the market will likely see this as merely the President trying to speed up the deal process. The EU has said they will extend the suspension of countermeasures until Aug 1, in other words no retaliation.

The market remains risk on but perhaps some sideways action into the end of the month as the buyback window is mostly closed. The buyback window re-opens in early August but in the unlikely event no trade deals accrue and the recent higher tariff rates remain then another major repricing event will occur.

This week we have CPI/PPI and monthly options expiry so some volatility can be expected. This should suit us for our day trading.

Q3 Outlook/Earnings Estimates

Q2 earnings begin next week starting with the banks on Tuesday. Due to tariff uncertainty S&P earnings have been marked down (to $220) as we can see from the graph below. Simply put, this is set up to beat and the likelihood is that any sell off in Q3 gets bought, we may still see one though, perhaps later in August or September/October after earnings season, if guidance is weak then a pullback could be as high -10%, if guidance is positive then -5% may be all we see.

Looking further ahead speculation and leverage are at extremes, the macro is poor, consumption is down, bankruptcies are rising (2nd chart) and business activity is stagnant but liquidity remains supportive. A large correction will almost certainly occur in time, but for the time being no warning signs are flashing, we must wait for a catalyst.

Short Ideas/High Beta Stocks

High Beta stocks are looking very overbought here so we may see a pullback in some of these names in Q3, many of these names are up 50-70%, a -20/25% decline on these wouldn't even be that bearish. Below is a list of some of those high Beta names. IWM also looks stretched here.