- It’s a deal but it’s not that great and it cannot trump bad economic data.
- Stocks gap but cannot hold the gains. The indices did hold the 200 day SMA, however.
- ISM manufacturing report clings to expansion, hitting a 2 year low as UK, Russia, and Australia go negative.
- Commerce Department: Household spending hits a 2 year low.
- An upside gap lost, then a rebound from selling to support as the investors debate not the debt deal but the economy and stimulus. All, of course, inside the trading range.

MARKET SUMMARY

A deal that is not that big of a deal.

It was heralded late Sunday and early Monday. The deal that bridged the impasse between the ‘enhanced revenue’ side and the ‘stop the spending’ side. There were no new taxes (read my lips). There was nothing done with Social Security or Medicare. There was an ‘immediate’ cut of almost a trillion dollars . . . over 10 years. A committee is supposed to agree on other cuts unless it cannot agree. If no agreement can be reached, then theoretically automatic cuts kick in. And, of course, the debt ceiling is raised $900B immediately and is structured so that this does not have to come up until well after the 2012 elections.

In other words, with a little flash, a lot of name calling, and a bit of deception, our leaders kicked the can down the road with a deal that does not do even what the ratings agencies wanted. Not that ratings agencies should count given their history, but they are holding the keys right now to the fate of many governments. Is that what we formed this government for, to be dictated to by others, e.g. ratings agencies, oil producing countries, etc.? Of course if we had just taken care of business and not allowed to get ourselves in this position then we would not be looking for imperfect solutions to our problems.

But I digress. The real story is the market reaction to the news. Futures rose sharply in anticipation of the open. Stocks dutifully gapped upside on the news. We were on the watch for tests that would give us the opportunity to pick up new positions. The tests came, and they kept coming. NASDAQ lost 80 points high to low before bouncing some to close. SP500 blew 32 points, the Dow 284.

NASDAQ -0.43%; SP500 -0.41%; DJ30 -0.09%; SP600 -0.63%; SOX -0.00%

Disappointment with the ‘deal?’ Perhaps that had something to do with it. There was definitely some relief that a deal looks done. Gold sold back, taking some of the fear trade out. The dollar was lower but ended up stronger; that looked positive to be ‘deal’ related, particularly given the terrible economic data that would have undercut the greenback given the specter of more stimulus. Oil was lower, however, and bonds surged; not the expectation if the ‘deal’ would cure our ills.

Of course it won’t. It is a rather weak-kneed compromise worked out by two diametrically opposed sides; one thinks government should provide everything and thus has to spend and spend more. The other believes the individual is the center of the nation’s strength and thus wants to shrink government to empower individual action. It is as if we are at a time of a second revolution, a time where we either rediscover what this country was founded for or throw in the towel and go back to basically the system we broke from. Thing is, they won’t be nearly as powerful without the US being an economic superpower because our technology creation and consumption drove much of their economies as well as ours.

Man, I digress again. No it appears the economic data is still holding sway over the market. Of course that is only to a certain extent. The market rebounded off the lows right? The indices ALL are still holding their 200 day SMA, right? Big names recovered and held up very well, right? That is still very much trading range action is it not? And why would they be holding a trading range with the ISM manufacturing report limping in during July, missing expectations and just managing to hold off slipping into contraction?

Because . . . things are so bad they are good. I believe the John Cougar (pre-Mellencamp) song was ‘Hurt so Good.’ Things are so bad as seen from regional manufacturing, GDP, national manufacturing, consumer confidence, durable goods orders, etc. that ‘Helicopter’ Ben Bernanke will, if he is true to his pre-Chairman writings, throw more stimulus at the economy. That will do what it did last time (hopefully in his mind): inflate asset prices further in another quantitative easing run. Just look at the SP500 chart from March 2009 to present and the two big runs as pointed out this past weekend: each run started with the start of a quantitative easing program. If the Fed announces another it knows the proceeds will go into commodities markets and then into equities markets. That will inflate asset prices and hopefully once again buoy the ‘wealth effect’ and get consumers to buying again. Then when that fails you start up QE 4 . . .

TUESDAY

The ‘deal’ is now a done deal, at least as far as the House is concerned. The Senate will pass it Tuesday. Rah, rah team.

Before the open Personal Income and Spending are out, another important reading for June, particularly as the commerce Department (trying to prove it is worth keeping versus getting the ax it should) reported that Household Spending rose a measly 0.1%, the weakest since, once again Q2 2009. 0.1% is expected for spending on Tuesday; not pushing the edge of the envelope.

The market is in its range. It is trading just as you would expect a stock or index to trade inside a range in ‘normal’ times (cannot say I remember when the last time things were ‘normal’ for our country, economy, and markets). It is as if the debt issue, downgrade worries, a pathetically weak economy are exerting any inordinate pressure on stocks.

But you cannot forget the Fed and Bernanke’s law. You know the physics line you learned about how nature abhors a vacuum. Bernanke abhors not flooding the economy with liquidity when he perceives an economic vacuum. I still believe that is what is keeping the market holding in its trading range even if it did sell off last week. I say it again: the economy is not the reason stocks rallied off the March 2009 low. It was a liquidity move, and with the economy rolling over here in 2011 it is going to take more liquidity to gin up another significant rally that breaks out from the current 5.5 month range. QE1, rally. QE2, rally. Third time is the charm right? Does that mean a rally or a crash? How about a rally THEN a crash.

The indices are at the 200 day SMA or at least tapped it or at it on the lows. Still a good place for a rally; doesn’t mean it will happen, just a good place if the buyers show. There is some leadership that can push though a lot of stocks are up sharply and are sluggish as the consolidate. We will continue to look at some index plays upside and others that have rallied and tested and can give us another move. Would love to see an emerging group step up but not seeing a lot just yet eagerly lining up with good patterns to lead higher. That means it is up to the current leaders that are now testing back in flags, ABCD consolidations and the like to hold and resume their upside moves.

For now we are just looking to play the range. Now that is something not new. It is a range so we play it, and right now after the selloff the upside risk/reward is better. Tried it Monday but failed. Still in position, and even though we are not wild about playing a run, if it starts anew toss aside the gut feelings and play what is working.