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T3’s Take 3: Bulls Fight the Nuclear Summer

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1) Still Tense

The North Korea scare dominated the headlines again today following yesterday’s big scare.

This morning, the plot thickened after China said it won’t help North Korea if it launches missiles at the US.

However, China also said it would not stand for US attacks.

To me, that sounds like a reasonable medium for China. That keeps them off the hook for North Korea’s aggressions without appearing to bow down to the US.

Equity markets started the day on a sour note, with the VIX hitting 17.28 in pre-market trading, a level not seen since November 9, 2016, which was the day after President Trump’s election day victory.

So call me crazy, but I think the current market tensions will blow over within a few days.

The bears want North Korea to be a major story for the market, but I’m not convinced it is.

Before the open, I released my latest Weekly Sentiment Report.

Traders were clearly freaked.

The CBOE Equity-Put Call ratio was at 0.88 Thursday, which is well above the long-term average of 0.66.

The 3-day moving average is 0.79, which is also well above the long-term average.

These numbers indicate that traders are very bearish.

The negative sentiment is one reason that I closed out my long VIX trade this morning, and opened a new options trade betting against the VXX, an exchange-traded note tracking the VIX.

2) Buy the Dip

The SPX fell to an early low at 2437.85, but dip buyers stepped in today the stabilize the market.

As of 2:00 p.m. ET, the index rose 0.3% to 2444.89.

The Nasdaq outperformed with a -0.7% gain, though the small cap Russell 2000 was basically flat.

The US dollar took a hit today after the July Consumer Price Index rose just 0.1%.

The Fed has repeatedly said it expects inflation to rebound, but I’m not sure how many traders actually believe that.

In any case, I recommend watching Kurt Capra’s take on the declining dollar. He believes the technical trend has been deteriorating all along, and that you haven’t needed economic numbers to predict what’s been happening.

Click here to see his latest video.

3) Earnings

While earnings season has been very strong, we saw some pretty nasty reactions to fresh reports.

Momentum superstar Nvidia (NVDA) fell -6% despite smashing analysts’ expectations. That looks like a case of “sell the news” because expectations were pretty high.

Snap Inc. (SNAP), maker of the Snapchat app, fell -12% on a big earnings miss. Wall Street banks slashed their target prices pretty aggressively.

JC Penney (JCP) fell over -15% on its disappointing second quarter earnings report. The retail news flow has been pretty rough as of late so I don’t think anyone was surprised by that.

But  overall, Q2 earnings season has been an unqualified success.

According to FactSet, 73% of S&P 500 companies have reported better than expected earnings, which beats the 5-year average of 6.8%.

Blended earnings growth (combines actual results for companies that have reported and estimated results for companies that have yet to report) is 10.1%, easily beating the 6.4% expected back on June 30

Meanwhile, 69% of companies reported better-than-expected sales, crushing the 5-year average of 53%.

So while there are valid reasons to dislike the market, earnings isn’t one of them.

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