by Dan July 8, 2011 8:09 am • Commentary

As for yesterday’s rally, I don’t have a ton to add….mildly positive data on the jobs front is being treated as if we just slashed a couple points off of the unemployment rate….well we will get a good sense for that one way or another when the labor department releases payrolls and the official unemployment rate for June in 30mins…….so the real question is, what is already discounted?  At this point matched or new highs are a foregone conclusion as the SPX is only about 1% away from the May 2nd closing high, and the Nasdaq is right back there.  A big downside surprise is likely to be bought on weakness as the last piece of the puzzle near-term is U.S. corporate earnings which we will get a good sense for next week.

I think you would have to be crazy to buy the market here without some sort of pullback or at the very least a consolidation……..while the rally is starting to broaden out a bit to some names that have not really participated thus far, I would especially avoid the beta names like AMZN, CMG, NFLX, WYNN that have all run very far very fast.

Quality laggards could be the play after a pullback or consolidation if you are looking to catch the next leg of the rally……Retailers generally got a boost from better than expected same store sales and stocks like GPS, SHLD and TGT all saw gains of 4.5% or better yesterday……Barring any big surprise from the data this morning, I would expect today and Monday we could see a little consolidation before we hit some big earnings out of AA, INTC, GOOG, JPM and C later next week.

Last week I suggested a bullish risk reversal (read here) out to Nov expiration in BAC playing for a turnaround and catching 2 earnings events…….Well in the week since that suggestion the market has continued it’s rally and the banks just aren’t participating which makes me nervous that they haven’t bottomed yet and makes me less inclined to be short downside puts….I may cover the Nov 9 put in front of JPM and C earnings next week and look to sell it back out when spot is lower, but stay long the Nov 12 call.  Also I am going to look to re-establish my JPM short (read here) that I took off 2.5 weeks ago as I am becoming increasingly convinced that the banks have more bad news to come.

The glass has clearly gone from half empty to half full and the real test for the strength of the rally is how the market will react to bad news…….if it takes disappointing economic data in stride then watch out on the short side because the fix is in…..but if we start to see the sort of reaction we got accustomed to in May and early to mid June then we are likely to see volatility pick-up again.  The VIX below 16 is enticing for those looking to make directional bets in single names as I suspect that if index vols continue to stay subdued we are very likely to see out-sized moves in single names around earnings, especially after the fabulous run up we have just had.