IS IT TIME TO BUY SPX DESPITE THE BAD NEWS?
As our clients have followed, our arbitrage model forecast for the generic market has been all bullish between July 13th and July 22nd. On July 22nd, we signaled a “sell” as soon as numbers came from the Asian markets. However, the same day, our model started to signal “buy” at around 11:00am EST while S&P was trading lower at 1,339s. Now, our arbitrage model signals an upward trend for the coming 7 trading days (until August 2nd):

• Statistical arbitrage now recommends “buy”. Our market model algorithm now indicates an upwards move in the market direction for at least the next 7 trading days. However, beyond that point, starting on August 2nd (remember last year?), we expect a fairly strong sell-off at this point in time. So, we recommend our clients to remain cautious.
• Technically, we may still see some selling pressure in S&P500 down to 1,330 and even maybe further to 1,292. However, the last two sessions’ rallies towards the market closes support our current short-term bullish view. On the upside, we see 1,390 as a key resistance point. Another key level is of course 1,422, the highest level seen earlier this year, even though we do not expect to test that level soon.
• Buy with these headlines? Yes, EU debt crisis is far from being resolved; Yes, Greece continues to be a problem; Yes, Spain’s bond yields cannot continue at these rates, and YES, EUR/USD, UST 10-Yrs, German Bunds all speak clearly about the seriousness of the problems. Additionally, US earnings are not surprisingly very much on the upside. However, as you all know, a good part of trading success comes from correct timing and patience. While we continue to see a negative macro picture, we also see some potential intervention by central banks and additional solutions on the table. As the markets hesitate to sell, it may be an early decision to sell into this hesitation.

In short, we reiterate our bullish view on the generic market for the coming 7 days.

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