- No more terrorists killed and little other good news to drive the market means another pullback as part of the rally test.
- Earnings take a negative turn, India raises rates, foreclosures climb. But, Factory Orders top expectations.
- Technology, small caps and growth in general leads to the downside.
- Still expecting just a pullback to consolidate the breakout, but buyers may not want to move ahead of the jobs report.

MARKET SUMMARY

Stocks slide for a second day, not even getting a new dead terrorist to bump trade.

There was little good news on Tuesday. On Monday the Bin Laden takeout drove the early action, but on Tuesday things were quite slow from the get-go. Futures were down. They were a bit sluggish but were hardly dumping lower. The market was in something of a pullback mode as shown on Monday; it gapped higher on the Bin Laden news but was unable to hold the gains. It is tired. It has a long run under its belt, and you would expect a pullback. On Tuesday the market was in test mode, so to speak, making a further pullback to consolidate that nice two-week run after earnings began.

While there were no positive catalysts to drive stocks, there were negative catalysts to further erode enthusiasm about new buys. Earnings were blas . SHLD issued a forecast that was well below expectations. That cast a pall on the retail sector, and SHLD specifically had a sharp gap to the downside. PFE announced in-line earnings but missed on revenues. The stock was down but managed to bounce off its 50 day EMA. CLX is having some problems. It gapped lower because it missed on its earnings. It was citing higher costs and the fact that generics can undercut and outprice CLX. MA posted some decent numbers and was up. It said volumes were higher because more people have to use their credit cards to buy gas.

There are some things that flash danger signs, and that is one of them in my offices. There is a problem when a lot of consumers need to place gasoline purchases on credit just to get to work, school, etc. We are setting up for problems down the road, but MA enjoyed it. Most gas stations have pushed the credit limit per fill-up from $75 to $125. You cannot fill up a car with $75 these days.

India raised its interest rates 50BP. It was tired of the baby-step approach and went full bore, with a 0.5% increase. It seems it wants to get control of its inflation. China has been doing the same. They are suffering inflation. We are not suffering a lot of inflation yet because our velocity of money is so slow. Our economy is very slow. With all the excess liquidity circulating in our economy, inflation would surge if our economy had any gumption at all. We are all worried about the day that the economy actually gains footing and starts to make serious moves. If that happens, the Fed will have to act quickly. The Fed is likely too late to stave off massive inflation already   much higher than anything India or China is experiencing by the time our economy catches hold. The seeds will have been sown, as they say, and we will be hard-pressed to avoid 1970′s-style inflation (and perhaps stagflation).

In the 70′s we suffered from a malaise. The economy did move up but employment was very high. Interest rates were very high at the same time. It was a strange combination of economic factors that the Phillips Curve followers could not figure out. When you have a slow economy, you should have low inflation and low interest rates. Instead, the opposite was happening. The problem was that the Phillips Curve does not work. It has only worked about six years in the history it has been posited by some leaders in economics. You just need to open an economics book to figure out that the Phillips Curve does not work. As a matter of fact, open a history book and compare the two. You can figure it out pretty quickly.

Finally, I would like to talk about delinquencies and foreclosures. Delinquencies fell 12% versus the end of 2010, but foreclosures rose 33% over March. A really sharp increase in foreclosures as the moratorium has ended and banks are going through with those foreclosures. The bad news is that mortgages that are 90 days delinquent are twice the number of those in foreclosure right now. We will see a lot more foreclosures coming, and that will dampen prices further. Things will get worse before they get better. Perhaps prices can start to stabilize when this surge of new foreclosures is flushed through the system. I am not holding my breath, but we will see what happens.

There was not enough good news to gin up any buyers, and stocks opened lower. They did try to come back. There were some factory orders a half hour into the session. That showed a 3% gain that topped expectations. In February, the -0.1% factory-order reading was revised upside to 0.7%. A nice boost. You have love revisions when they are in your favor because they show the tide is turning. The economists are too pessimistic and have undershot the actual improvement. That is obviously a positive. With the ISM being stronger than expected on Monday, hopefully that will show the slow patch of Q1 is over. The economy has tailed off dramatically from the last quarter of 2010. If it is over, then we have to worry about inflation. The Fed has made it very clear, however, that that is a worry it would like to have versus a deflation worry. Better watch what you wish for is all I can say.

Stocks moved higher and they moved lower. Then they got serious about selling after a mid-morning bounce. They tailed off dramatically and then managed a last-hour recovery. It did not seem like much. It looks like the market is skewed well to the downside. Looking at the daily chart, however, the SP500 tapped the 10 day EMA on the low and reversed quite nicely to cut its losses. Not all of the indices fared as well as the SP500. The Dow closed basically flat. NASDAQ lost 0.8%, and it came back rather nicely from its afternoon low that undercut the 10 day EMA. Although NASDAQ managed to hold that level on the close.

SP500, -0.35%; NASDAQ, -0.8%; Dow, flat; SP600, -1.2%; SOX, -1.25%; NASDAQ 100, -0.5%. It was not a great day, but the losses were skewed toward growth in the NASDAQ, the SP600, and the SOX. The gains were skewed more toward some of the stoic defensive companies. Even the financials were helping out the SP500 somewhat. Their patterns still look like something from a nightmare, but they were up on the day and helped SP500.

WEDNESDAY

We have some significant data out before the open. Challenger job cuts are expected to continue to decline. That is a positive. There are not a lot of new layoffs announced. All of the layoffs have pretty much hit, and now we are just trying to figure out what to do with people. With are not coming up with a lot of new jobs. There are people in the continuing claims, milling around and looking for work. I sure wish we would get them all jobs. The ADP employment change will come out   its private index. It is expected to show 200K. The government report in its nonpublic payrolls are at 200K as well.

ISM services is important, but it is not paid a lot of attention. Manufacturing gets all the buzz these days. Crude oil inventories could play a roll given that crude is now experiencing somewhat of a slump. It is just a victim of its own success. Important data, but it will not necessarily determine what the market direction will be. We have had a two-week run at the first part of earnings. As if often the case, there becomes earnings saturation. It so happens today earnings just were not that great, and that obviously did not help.

The market is in pullback mode. It has been down for a couple of days now. Nice bounce off the lows on Tuesday. The buyers are not giving up easily. They are putting bids in and picking up stocks as they make a test. That is very good. That shows the uptrend still has life in it   the buyers have not had the snot beat out of them.

Watching the financial stations, you would think that things were pretty horrible out there today. You could get that impression if you were watching a lot of the small caps and growth areas. They were getting tagged fairly well. Overall, however, the market managed a bounce. It managed a bounce on all indices. I am not going to say this rally is ready for the junkyard. There is still life out there, but I think there still will be more of a pullback before the market is ready to move. Typically you do not get two-day pullbacks and then a new break higher. Typically.

There was a good base that formed on SP500 and the NASDAQ, that inverted head and shoulders, and then a breakout. Now NASDAQ has come back and fully tested that breakout over the February peak. It rebounded nicely as you would expect. That suggests that it and SP500 want to move back to the upside. They very well could do that, but I think there is a bit more negative out there and a bit more caution ahead of the Friday jobs report.

The market rallied for a couple of weeks and has pulled back for two-and-a-half days. Is that enough ahead of what could be an important jobs report and to warrant starting to rally stocks just yet? I do not think so. Again, it can happen. The market will do what it wants to do, but you play the probabilities. You always have to settle yourself up for good risk and reward results. If things go your way, you make a lot of money. If they do not go your way, then you do not lose much.

We are getting a better risk/reward scenario with this pullback right now. I would like to see a couple more days. After all, it will be Wednesday. We have Thursday, and then Friday morning is the jobs report. It could be a situation where we get a pullback into the jobs report then maybe a nice boost and rally. Do you think we will get a nice boost? That is a stretch. GDP was really atrocious in Q1. The economic data is not that great, although it has shown improvement (e.g., Tuesday with factory orders and Monday with ISM manufacturing).

We have to be careful. Be patient and let the indices pull back. Remember, we have always looked at this as just a pullback. We put the SPY play on basically as a hedge. We could make more nice money to the downside in case things broke. We have a lot of good stocks pulling back, and we see other stocks doing the same. We will be looking at those for potential upside plays when this pullback runs its course.

I repeat, I am still looking at this as a modest pullback to test the breakout. I do not think it will roll over and collapse. Nice run, consolidation of an inverted head and shoulders, and a good breakout. Now a nice test. The liquidity is still in place. At some point it will be retracted and the market will suffer the consequences to some extent.

Right now, investors are still confident the Fed will keep “reinvesting” its profits into its balance sheet, therefore keeping its balance sheet bloated. That means plenty of liquidity for the economy. We know that has meant money going into the financial markets. Therefore, unless we see a serious change of character develop in rapid succession, we will keep watch for a modest pullback that provides us with good entry points for another upside move.