- Investors look past economic data, US and Europe debt issues toward earnings and, yes, QE3, bouncing stocks to close the week.
- GOOG earnings, M&A offset Friday economic data
- New York PMI contracts for the second consecutive month.
- Production and capacity disappoint again.
- Michigan Sentiment dives, following consumer confidence.
- Bernanke, Congress talk of avoiding becoming ‘another Japan.’ Sorry but we ARE Japan.
- Administration bedeviled by the lack of hiring by the companies it gave billions to. Did I say this was the 1970′s all over again?
- Not convinced the market can bounce from mid-range support, but there is a pullback ahead of earnings, and if the leaders that are holding up rally, the indices will follow.

MARKET SUMMARY

Bad economic data, debt crisis, but stocks rise as investors look toward earnings and QE 3.

Strange as it may seem, with all the poor economic data and both Europe and the US struggling with a debt crisis, SP added a little sauce to the goose on Thursday night. It said it might go ahead and downgrade the US ahead of little Timmy Giethner’s August 2nd deadline. It put the US on CreditWatch negative just for good measure. It is interesting to watch the credit-rating agencies try to blackmail or force the hand of Congress and the President to strike a deal that neither may want. Interesting that CNBC finally picked up on this today and asked SP if they were not trying to influence these people. Of course they said they just do the ratings and call them as they see them, etc. That sounds great, but the problem is that SP, Moody’s, and all other credit rating agencies have zero credibility. Apparently they cannot see too well having missed the entire mortgage crisis.

Of course Ben Bernanke missed the entire mortgage crisis, saying it would not spread to other areas. Of course that would also mean Senator Schumer missed it and our dear old Congressman Barney Frank missed it as well. He denies that to this day. He swears he was warning people, but I do not see how he was doing that. People from the Bush administration were going before Congress to say we had a problem with Fannie Mae and Freddie Mac. Did Barney Frank agree and say we should deal with it? No. As I understand it, there were some personal issues with who got hired in certain jobs, so he did not want to touch Fannie Mae or Freddie Mac in any way. As soon as they said there was no problem with them, that pretty much killed any chance of reform. I am digressing, but you see how the problems start and how they carry over because we never learn from our past.

SP has no credibility, but the problem is it is the only ratings game in town. So we are stuck with it and have to deal with its nonsense — or what I call blackmail — as we try to resolve our problems. I still say it would be better not to raise the debt limit, to make do with the money we are bringing in and tighten our belts somewhat. That seems logical. That is what every financial planner says to anyone in over their head. Cut back on expenses, tighten your belt. You are not getting any more money coming in unless you find another job, and even if you did, you would need to take that money and pay off your debts. Wow. What a novel concept. Probably every financial planner in the United States and most of the land masses of the world would say the same thing, yet we are balking at that very advice. It is fascinating to watch this. It is like a monumental joke, but the problem is it is being played on us.

The economic data was pretty much terrible for the session. The New York PMI came in at a whopping -3.76 when it was anticipated to rise. Everyone thought it would move up positive after a -7.79 showing in June. It did not happen. It was worse once again. Back-to-back losses show a contraction could be coming. Chicago was actually improved as we saw a week ago. That was because the auto plants did not shut down as much as anticipated as a result of Japan.

ISM was up. Everyone assumed everything was fine, but it lags the regions. Everything outside of the Midwest is slowing down, and that is not a good sign as we forge ahead in the second summer of recovery. The CPI was a bit better overall than expected, falling 0.2% after a 0.2% gain in May. The core was hotter, however. It was the second in back-to-back 0.3% gains. It has not had gains this big in three years. As far as the decline in the overall, that was nice. It was the first decline in a year, but that hardly makes you feel better.

Fuel fell 4.4%. Apparel jumped 1.4%; that is the most since 1990. There is no doubt that prices are rising. Year-over-year the overall was up 3.6% while the core was up just 1.6%. Not terrible. Not over the 2% limit the Fed likes to look at, but it is still going up. Whether you like it or not, it is heading up as the economy slides down. Stagflation anyone? It is not like it was in the 70′s, but we could get there in a hurry.

Industrial production was as expected, rising 0.2%. Looking back to May, it was written down to -0.1% versus the 0.1% gain originally reported. Negative revisions are not good. Things are worse than anticipated. Capacity stayed at 76.7%, and that was less than expected. Michigan Sentiment was much lower than expected at 63.8. 71.4 was expected with 71.5 in June. Just as the Conference Board’s Consumer Confidence was much lower than expected (indeed at recession levels), the Michigan Sentiment is lower than expected by far. For Michigan, they are very much at recession levels. But all of these negatives did not matter. There was some M&A activity. It always helps when someone decides the water is good enough to jump in. BHP, in the industrial metals, decided it was going to purchase PH. That stock bounced up modestly. BHP bounced down a bit, but overall it was good for the market and stocks managed to move higher.

Moving into earnings it was really mixed but, the market was focused on FLIR. It makes the night vision goggles and some of those cool heat sensors where you point it at the wall and it tells you the temperature. FLIR was down. It had bad guidance simply because the government is not spending as much money on war materials. That moved across the entire defense sector as those stocks sold off fairly heavily. Otherwise earnings were great. GOOG is one of our positions, and it announced a blowout session and exploded higher. We made a lot of money in our options. That is great. I wish all could be like that. Not all stocks are GOOG, but you want to be in them when they make those moves. It turned out nicely.

M&A and some earnings seemed to offset all of the really nasty negatives out there. Again, why is this happening? Why is the market so sanguine when it seems like Rome is burning? It believes that Ben Bernanke will come out with QE3 and flood more liquidity into the world economy. When it does that, a lot of that liquidity goes right into the stock market. You will see commodities rise and stocks rise. Therefore, the market is pricing that in along with some apparently decent earnings as well. The market has pulled back somewhat ahead of earnings results, and that give it a good ramp to rebound in its trading range, back up toward that prior high.

The market had to shake off some issues on the day. It was not all easy for stocks. They managed to rally out of the gates, sold off, and then traded up and down in a range and suffered through a mid-afternoon swoon that took the indices back to negative in some cases before a last-hour rally pushed the indices back up to positive territory across the board. NASDAQ, +one%, SP500, +0.6%; Dow, +0.3%; SP600, +0.6%; SOX, +0.6%.

Not a bad session at all, but hardly anything great. Yes, NASDAQ and the SOX managed to bounce off of their support. The NASDAQ moved off of its 50 day EMA that it tapped down at on Thursday. The SOX managed to bounce off of its June low after undercutting it initially. A nice doji with a long tail on it. That could propel the index up higher next week. I was talking about a potential double bottom, and maybe we will get that from the SOX. I guarantee you I will not complain if that happens.

MONDAY

There is plenty of data next week. We have housing starts, existing home sales, jobless claims, and then the Philly Fed on Thursday. It is expected to notch a flat reading after a -8 reading the prior month. Of course that was what the New York PMI was supposed to do, but it fell short. Hope does spring eternal, so they have bumped up the numbers.

The big story will be earnings, and maybe the debt crisis battle going on in DC. Earnings will be the driver, however. There is a plethora of results in the coming week. The good thing for the market is that it has suffered a pullback over the past seven or eight sessions, and that has put the indices at support. SP500 is at its 50 day EMA, and NASDAQ is holding above its 50 day EMA. As noted earlier, SP600 has its ABCD at its 20 day EMA. There is always SOX at its June low, trying to put in a low at that level and bounce to the upside with a double bottom. It can happen if the earnings are there. We have plenty of leaders in position to move higher, having used this pullback to their advantage to set the next move.

I am skeptical of whether the market can make a higher low and rally to the upside. What my gut or my skepticism warns of may mean nothing, however, because you have to go with what the market is showing you. Yes, we see downside positions that are possible, but a lot of those could be inverted head and shoulders ready to move to the upside. There are a lot of leaders, and we have to go with what we see. The market is range-bound right now, so there are upside and downside plays. We have been taking a bit of both, but leaning more toward the upside because they have been showing better patterns and better setups than the downside.

We have had the pullback and we have earnings. GOOG was blowout. If we get more good earnings, the market is in position to rally and take on that prior high. Again, I am skeptical that it can break out because the economic data is so bad. But again, the market is not really looking at the economic data given what they heard from Ben Bernanke last week. He said the Fed was not ready to move right then, but on Wednesday he let the cat out of the bag that they were seriously considering it. It is queued up and ready to go, but the budget crisis needs to be resolved first. Then the Fed will make its move. That is what the market is banking on, and that is what the market is building in, as well as expecting some pretty good earnings. If we see the upside, we will continue to take it. We may not feel comfortable doing it, but we will take it. We will keep good stops as well.