- Wednesday Bernanke’s QE3 comments sparked an upside move while Thursday they choked off an upside move.
- Jobless claims decline but still over 400K.
- June Retail sales post improvement.
- PPI falls . . . outside the core that is.
- Another rally fails but NASDAQ and SOX are at support and leaders are still set up nicely.
- GOOG trying to spark up an earnings rally on expiration.

MARKET SUMMARY

Stocks start well but find there is no pot of Fed money, at least not new money, at the end of Bernanke’s testimony.

On Thursday we found out that what Ben Bernanke gives he can also take away. This time, however, it had about the same effect when he gave as when he took. On Wednesday Fed Chairman said that the Federal Reserve was considering the possibility of initiating additional stimulus for the economy. He said they would consider Quantitative Easing if need be. The market rallied on that news, but it could not hold the moves. It gave back a good chunk of the gains, though they did manage positive results.

On Thursday the market started higher. There was decent economic news out, and the futures were up. The market opened and started to rally nicely, and then Mr. Bernanke started his testimony to the Senate. On Wednesday it was to the House. In his two-day son of Humphrey-Hawkins testimony, he told the senators that the Fed was “not prepared to take action at this point.” The action he was talking about was some further type of stimulus. The market immediately started to buck and pitch, and it sold off through mid afternoon. It tried to bounce, then came down and formed a double bottom. It bounced off of that, but it could not see the move through to the end of the session; indeed, by the end of the day the gains from early in the morning were lost. In some cases it was hard to see any green left at all. NASDAQ, -1.2%; SP500, -0.7%; DJ30, -0.45%; SP600, -1.6%; SOX, -1.5%.

Significant losses on the growth indices, and even SP500 felt the angst as it slipped below its 50 day EMA, a level it held on Tuesday and Wednesday. Indeed it was trying to bounce off that level on Wednesday. Does this mean that it is the end of the rally, that there is definitely more selling ahead? It very well could be, but note that the NASDAQ sold off and held its 50 day EMA on the low, bouncing modestly off that level. SOX has been leading the downside move just as it led the downside decline in June. It is right at that support, and it is in a position where it can make a bounce. NASDAQ and the SOX look as if they have done their selling at least they have sold down to that next support level. If the market wants to bounce, it can. There are still leaders in very good shape that can bounce nicely off of their pullbacks. If they are inclined to do so, we could see a rebound resume with these other two indices at support. That was one of the scenarios I had outlined. As has been the case the past several sessions, however it is up to the buyers to prove they will actually make the market turn back up.

What had the market looking halfway decent on the day? Was it that the debt negotiations were in good shape? No. President Obama told the Republicans not to call his bluff as he walked out of the meetings on Wednesday afternoon. That was similar to what we have seen other members of Congress do earlier. It is not very professional on either side, of course, but the President is supposed to be the chief negotiator. It is somewhat disconcerting that he would say this and walk out when he is trying to bring the two sides together. Nonetheless, that is the way the political football is being kicked in DC. It does not seem to be bothering the market that much.

The real news of the morning had to do with some economic reports, and they were half way decent. Initial jobless claims came in at 405K. That was better than the 410K expected and the 427K revised higher from the prior week. Retail Sales were better than expected, clicking off a 0.1% gain versus the 0.2% loss expected. Not bad. If you ex out autos, they were flat. If you take out oil, you get a 0.2% rise in Retail Sales. In other words, oil was dropping quite precipitously. Indeed, gasoline station sales declined 1.3% for the month.

Interestingly, department stores managed a 1.4% gain, looking pretty sharp. It is always nice to see the department stores come around. They are somewhat of an economic barometer. Retail Sales were better, and the PPI numbers overall were more impressive. There was a 0.4% drop versus a 0.2% drop expected and a 0.2% gain in May. The Core PPI bounced up to 0.3% gain, topping what was expected at 0.2% and the 0.2% rise in May.

The 4.7% decline in gasoline pulled the PPI down overall. It is a hefty drop in those prices, and it helped pull the overall number down. Again, just as last month, we have the Fed confronted by higher inflation at the core. We will see what happens on Friday with the CPI; I think there could be a scare. But maybe not. We will just have to see what the number is. Nothing seems to be scaring the market much, other than China and Europe. They were relatively quiet on the session.

FRIDAY

Bernanke is not scheduled to testify or say anything at all on Friday, but is there is still plenty of data out. There is the CPI for June. It will be interesting to see if that core bumps up unexpectedly again. There is a very important New York Empire Manufacturing report out before the market opens. It tumbled last month to -7.8, but it is expected to recover and crack positive again. I do not know where they are pulling that out of, we but we will see. Many experts are now reducing their GDP estimates to below 2% for Q2.

Industrial Production and Capacity Utilization are also out ahead of the open. They are expected to improve although, once again, that is more wishful thinking that anything else. Michigan Sentiment is out a half hour into the session. We will see if it improves at all. Sentiment has definitely been lagging as we saw with the Conference Board Consumer Sentiment last month. It is still at recession levels. Hardly something to feel good about, particularly if you are in the White House and planning on your run for 2012. Frankly, do not think anybody in DC is safe after the performance we have seen, whether we are talking about the economy or how they act in Congress.

But I digress. Tomorrow we get GOOG’s earnings. That is impressive. We will see if it can spark a rally that holds. Remember, the last two rallies for the last two days have failed to hold at all. Now we have NASDAQ and SOX at support. We have those leaders that are still set up rather nicely. As long as you have good leadership and indices at support, you can have the moves to the upside. The problem is we have had the moves to the upside, but they are not sticking. As long as indices and the leaders particularly the leaders can hold at near support, then there is the likelihood that they make a break upside.

Even though I say there is a likelihood they can make the break upside if they hold, we have a downside bias right now. The indices bounced up to the top of their range, they made it, and they have turned back down to sell in their range. They have been unable to break out of the range either way. We can live with that. We can play that, and we have been. We have some downside positions at the ready. We are also watching the upside because NASDAQ and SOX are holding that support and leadership still looks good. We are not making up plays, but they just look good. We are ready if they make the move.

Therefore, while we head into Friday with an overall downside bias view of the market, and will thus be looking at downside plays, we are not going to ignore upside if it presents itself. That is especially true given that NASDAQ and SOX are at support. Nonetheless, remember it is still a trading range right now. We are not having breakouts, and that is why I think we might get a further downside move. It is also expiration Friday, and that tends to exaggerate the moves sometimes. We have some positions with July options that we will want to cash out of along the way.

Friday may not be a good day to enter plays overall, but if we get a great play that is making the moves we want, we will put at least some money into it. We will see what tomorrow brings. A lot more economic data, and more budget crisis negotiations. We will also see just what the market does overall. It really has not been paying too much attention to all of that data.

Jon Johnson