- Monday’s worries gone with the wind of strong earnings guidance and a potential budget deal thrown in.
- IBM a company making it happen. Bailed out banks making losses.
- Housing starts jump in June. What the heck are we supposed to do with them?
- Wynn and wet blankets
- Market wants to rally from mid-range and AAPL will help it continue at least through Wednesday morning.
- Higher low in the range can mean a breakout. Just doesn’t guarantee one.

MARKET SUMMARY

Pullback ahead of earnings set up another bounce attempt.

Monday found the same old problems coming up and kicking the market in the teeth and selling it off. On Tuesday those were forgotten in the wake of strong IBM earnings and a strong outlook from that company and a few others. This despite the fact that the banks we bailed out are not making money. Even GS, who played more of a sinister roll in the TARP bailouts, is not making money. BAC reported a record loss. Go figure. So a bank that we bailed out needs, what, more money? Likely. It gets 0% loans from the government, then turns around and buys bonds and gets a guaranteed return. Yet it still loses money on the bad mortgages and bad loans it made.

Was there ever a better case showing that these banks and institutions should have been allowed to collapse? Over the weekend I said that we are Japan. We are doing the same things and, dare I say, making the same mistakes as Japan. We are propping up institutions that should have failed; they are behemoths that are incapable of adapting to the current environment. They made bad decisions based on bad ratings from the likes of SP and Moody’s, which are now holding the federal government hostage. They say they need to make a debt deal or prepare to be downgraded (as if they had any credibility).

It reminds me of a kid who starts a fire and then calls the fire department. The fire department makes them a Junior Firefighter because he was Johnny-on-the-spot, calling them and helping them put out the fire. These institutions should have failed. Where would we be now if they had failed? According to the doomsayers, if we defaulted on our debt we would be somewhere in oblivion simply because we had problems and let some of our hallowed institutions fail. History shows that the great institutions that become incapable of adapting to changing economics die. And they should die. We would be so much stronger. We would be a world leader and we would be growing right now if we did not adopt the tired, failed policies of the 1930′s, the 1970′s, and the 1980′s with Japan’s bailouts. They are still living through those problems in Japan, and we are importing them to the United States. But I digress.

It was an up day for the markets. It is hard to complain about what the markets were doing. What happened intraday? The news from IBM was basically boffo. IBM gapped to the upside and surged higher. We just want to let that puppy run. With the kind of stellar guidance it provided, the market was feeling good. It did not hurt that housing starts came in much stronger than expected. Housing starts jumped up 14.6% versus a flat showing the prior month. It was much better than expected. Building permits were up 2.5%. That was better than expected but not as good as the 8.2% climb in May. Housing starts gave a one-two punch. That got things rocking and rolling in the morning, and there were big gaps upside. That made it difficult, unfortunately, to move into as many new positions as we wanted to. Some stocks had set up very well over the past few sessions, and I was looking for breaks. We got some of them, but some gapped away. Fortunately we were able to pick up some over the last few sessions anyway. We were able to ride them higher along with our existing positions that enjoyed great moves to the upside.

It was kind of ironic listening to some comments from the people putting in earnings. Steve Wynn, the democrat and big hotel and casino guy, was all over Obama. He said his policies have been a wet blanket on the economy and have caused more troubles than any other President as far as Mr. Wynn can remember. Well, I remember some others that were pretty bad such as Jimmy Carter. It is the same type of situation as in the 70′s, and I have made the comparison many times over. The big policies, the big regulations it is really no different. Wynn is a big democrat, but he is also a capitalist and a free enterprise kind of guy. He does not like what the government is doing, and many other businesses feel that way of course the behemoths like GE on the public dole do not agree. It is just those that actually have to make their own money. There is a lot of indecision out there. You can hear it from purchasing managers all the time.

In any event, it was rather interesting to hear someone who finally had the guts to come out and say what everyone talks about in the business circles. I go out to small business luncheons all the time. I hold some myself just to keep a pulse on what is it going on with the small businesses. They say the same things over and over again. This administration and the federal government in general spends too much, whether republican or democrat. They spend too much, they tax us too much, and they overregulate us. They do not have as much money to spend as a result, and the opportunities are not there like they used to be. This that is very disconcerting for them because they want to be successful. They want to be able to create jobs but they cannot. Most do not know what the healthcare bill will do. Unless you know, you cannot hire people because you may get socked with a major expense you did not expect. All this has done is made them have to consult with tax attorneys. That helps the tax attorneys, but it does not create any business. But I am digressing again.

It was a big day on earnings, and that had the indices plowing higher, making their own wake to the upside with a nice reversal off of the early week sag. We will see if it can continue. Stocks definitely pulled back ahead of the earnings, and they are getting good results. As a matter of fact, they are getting good results after hours, as AAPL once again blew things out. Go figure. AAPL tends to make its own wake more than anyone. It surged higher, trading at almost $400 after hours, closing around $376. Very strong and helping to lead the way upside. Others were not so stellar. RVBD is a stock I like to play, but fortunately I am not in it now. It is down over 10 clicks. A huge loss, over 20%, after hours on an earnings miss.

It was an upside day. There was the initial surge in earnings, the midday test, and then an afternoon surge that was aided by the talk of a budget deal. There is the gang of six who supposedly presented a package that Obama agrees with. The package supposedly has overall tax cuts. The marginal tax rates go down, the tax rates on corporations go down. It closes some loopholes, but supposedly the net effect is lower taxes for everybody. That is something great that the republicans and democrats should be able to get behind. I just did not think the President would get behind that, but maybe he is. I am just weary of it. I do not mean this in a negative way, but it is just the way things are split in the current situation. Everyone is polar opposites and cannot stand each other.

I just want to pay fewer taxes and be able to create more jobs like every other small businessman. I feel like I am being snapped at all the way, hamstrung, and having logs thrown in front of me. I am having a difficult time doing what I want, as are most small businesses. I am skeptical that this administration would agree to anything that would help me. I do not think this administration wants to help small businesses. I think it sees them as a roadblock to what it wants. Small businesses create wealth, new jobs, and new technologies that raise our standard of living. When you create wealth and raise the standard of living and empower the individual, that necessarily diminishes the power of the government. I think there is a competing ideology that does not want the power to be in small business. That is just my opinion, but it is one I am parroting from dozens upon dozens of small business owners and leaders in the communities.

Again, I digress. Word of the potential budget deal came out, and stocks rallied. They finished the session near the highs of the day. SP500, +1.6%; NASDAQ, +2.2%; Dow, +1.6%; SP600, +2.3%; SOX, +3.3%. Strong moves indeed. That is nice to see. Volume was light, but it is summertime so we will cut them a bit of slack.

WEDNESDAY

We had a day to the downside on Monday, and we had a day to the upside on Tuesday. What will happen on Wednesday? If the earnings are any indication, we should have a pretty good move to the upside. As noted, AAPL was doing very well. It already has a great move in place, and it is surging higher after hours. It is not the only one. There are others performing well, such as VMW. It was up on the day, and then it blasted higher on earnings after hours. They are putting in good moves, but not everyone is enjoying the fruits. YHOO fought its way back after hours, but it gapped lower. RVBD is getting shellacked after hours. If it is not good, then it is not good. If it is a positive and the market perceives it as such, the rewards can be great. That is the nature of earnings.

Watch the gaps. We will keep track of them because we will be playing the gaps, both upside and downside, in a week or two or three. We will keep an eye on these gappers as we move forward with the rest of the action in the market. It comes down to just how strong this earnings run will be. Will it be able to take the indices through the prior peak, or will it just run up to those prior peaks, or will it not even make it that far? Will it be a one-day event? Will the issues that have been plaguing the market come back to haunt it again? Those would be some issues in Europe and problems here in the US.

Tomorrow we have a little bit of data, but not much. We have the weekly mortgage purchases. There are existing home sales for June. Housing starts were high, but now we want to see the home sales. 80% of the market is existing homes. Crude oil inventories are out as well, and that could impact crude prices somewhat. Thursday will be more important with respect to the economic data, but right now it is all about earnings. It looks like AAPL will be leading things to the upside again, so it becomes a question of staying power. Will the markets be able to hold on to the gains they are going to enjoy on Wednesday?

You do not want to see a gap and reversal. We will have to see. The indices held at an interim range inside support and are on their way up big time. They had the momentum to make the breakout, and we will see if they can. The economic data has not been good. You would not expect the future to be bright, but stocks keep building in gains. They are helped by strong earnings and good outlooks from very important companies, of course.

I cannot tell you if there will be a breakout or not. I can tell you it looks like they will be upside, and we will take advantage of it. We will let our positions continue to run. If we get some positions that we feel we can still get good entry points on and be chasing the bus, then we can move in. After all, this has been one day to the upside. We can get a pullback, and that gives us a little chance to move in. Just a breather before we can pick up new positions. Not all stocks move at the same time or at the same rate. They come out and waves. If this move will continue, we will see more stocks breaking to the upside that we can take advantage of.

That is our game plan. We will ride this move back up to the prior peaks and see if it can make the break through. If it cannot, we will be ready with some downside to play a move down in the range. Why? We are still range-bound right now. It does not matter what index you look at; they are still in the range. Some look better than others. SP500 does not look as good as the Dow maybe, which is still trending higher with higher highs and higher lows. We will watch see if there is a breakout. If there will be a trading range, we will play the trading range to the downside. For now, based on the earnings and the hold and the higher low inside of the trading range, we need to look at playing upside at least through the top of the range. Then we will evaluate at that point and see if we will get a breakout or if the market just wants to sell and range-trade some more. It can do that, and that would be fine with me. We have been making money on it, and we will continue to do just that.

The monkey in the wrench, as John McClane said in “Die Hard,” is the shenanigans on Capitol Hill. There has been talk of a deal. Can they make it happen? Can they all save face and feel like they have strength going forward? We will have to see. Hopefully we can get something worked out that is palatable to everyone. We do not want to spend more, but we also do not want to default. We just need to take care of business. Ultimately, no matter what deal they make, it will not matter. Why? Congress will spend the money until they do not have it, unless we have a Constitutional amendment that says you can only have X% of GDP as a debt. I am not one of those people who believe you cannot have any debt. We have always had it, and we have done quite well when we have debt. We just have to have it as a certain percent of our GDP and not at the outrageous levels we have right now.

Hopefully the sane people will prevail. They are up there on both sides, and they can make the deal. If they do not, then we have problems because a lot of this rally is predicated upon their reaching an agreement. Then we do not get our credit totally thrown down the toilet and can move forward and try to make something happen. We got a great break to the upside and we will get more tomorrow. If it starts to roll over, we will look at taking a bit more gain as we look for opportunity to continue playing what appears to be a bullish move.