- Stocks finish the week adding to the relief rally, but the move didn’t scare the sellers.
- July retail sales not bad considering the period it covered, but August Michigan sentiment considers more recent events and dives below expectations.
- Oil has bounced but looks ready to sell again. Doesn’t speak well for world economies, but works for lower gas prices.
- Market has nothing to seriously rally for without some kind of further economic change or aid.
- Private insurance mandate overturned by appeals court, setting up a summer 2012 Supreme Court date.
- Still looking for a continued upside relief rally, but for now looks only like a . . . relief rally.

MARKET SUMMARY

Relief bounce continues, but it hits some headwinds Friday.

Stocks finished the week continuing the relief rally that started to gel this past week. “Relief rally” is an awkward term, however, given that the market bounced back and forth each session. For three days in a row, SP500 either gained 50 points or lost 50 points. Friday was the rubber match. It bounced higher, and all the indices managed to put in respectable gains. They were not huge gains, and they certainly did not scare any of the sellers out there. Stocks did close off their highs significantly, and I will talk more about that later. SP500 gave back two-thirds of its gains after stalling below the 10 day EMA. It did not even come close to the November peak.

The Friday session started out all right. It was under water early in the day, but then retail sales came in better than expected. They put in a 0.5% gain, which was in line. The June number was revised upward to 0.3% from just a 0.1% gain previously reported. If you take out autos, they were still solid, coming in at 0.5% again. That was much better than the 0.2% expected. Importantly, June was revised higher again up 0.2% from flat. It is always great to see the revisions to the data, because it shows the experts are too pessimistic. They cling to their old beliefs of weakness or strength just as, I suppose, a lot of America clings to their religion and guns. But I digress. The experts are made to change their ways by the change in the data. I am not saying retail sales are about to explode to the upside, but they are tenaciously hanging on despite all of the weakening indicators in the economy and the negativity in the sentiment.

Another important thing to consider is that retail sales just measure gross dollars. It does not matter if they sell more or less of a product; it is all about price. If the price goes up and they sell less, it may still look like Retail Sales are strong. If we have a lot of inflation, retail sales can literally be inflated by inflation. There would be no net benefit in gained sales, however. You also have to factor in a lot of the expense in retail sales each month. Gasoline builds a lot of the prices. The price of gas has been rampaging. You have to cut that out of the equation because gasoline just represents money we burn in the tank. We do not produce anything with it. We still have to get to work those who have work, that is. There are 14M+ unemployed. But we have to use the gas regardless. If it goes up in price it makes it look like Retail Sales are stronger, so you have to ex out gas as well. Ex out gas and autos, and you then have a 0.3% gain, and that is still very respectable. It is tenaciously hanging in there despite all the negatives we have here and elsewhere.

On Friday we had the same issues about France. Again the worries were that there would be a downgrade. Industrial production was down in June in the EU overall, and there were more rumors that France would go under or be downgraded. Indeed, Italy has passed an emergency package this weekend to try to stave off any kind of collapse.

Stocks were able to rebound on the retail numbers, and that bolstered the open and got stocks moving well. Then a half hour into the trade, we had another important economic report. The preliminary Michigan Sentiment for August was much lower than expected at 54.9 versus 62.5 expected. People felt it would fall anyway, but it was not believed it would fall to these very weak levels that scream recession.

There was a lot to impact people’s psyches here. You had the budget debate, and maybe that is what impacted it. You have people thinking, “What do we do? This is such a mess.” Congress cannot get its act together and the President can’t agree with them either, but that is the way our system works. Sausage-making is not pretty, and unlike the President and many others in Congress republicans and democrats alike it is their job to represent the people who elected them and do what they say. You cannot blame them for doing that. That is what they are supposed to do, and that is what makes the process like kind of ugly.

That is the way the process works, and we need to know how it works. We do not need to be so thin-skinned about it. We need to have principle people there who, whatever side they are on, stick to their guns and try to get the best deal they can. That is what they were doing. It was not a great deal, and it will not really do anything. It did not help prevent a down grade. SP said if we did not do “X,” we would get a downgrade, and we did not do “X.” It was not even a “Y” we just did something strange.

In any event, it is done. We just have to deal with it and stop being so thinned-skinned. It is good to see retail sales were not bad in the face of all the negative economic data. Of course these were July numbers. A lot of what happened recently was in August, and that was not factored into the Retail Sales numbers. But, as it turns out, people tend to be more thin-skinned than their wallets. Historically that is the case, so I would not expect too much damage from the sausage-making being done in Washington over the debt deal.

Stocks managed to recover, but they were still just a shadow of what they were before the news came out. They were moving well and looked strong, then the rest of the data just was never the same. It kind of frittered away the gains toward the end, and the indices gave up quite a bit of ground.

NASDAQ, +0.6%; SP500, +0.5%; Dow, +1.1%; SP600, +0.34%; SOX, -0.4%. SOX is really being the anchor chain on the market. The chart of the SOX is not great, as you would expect.

Again, this action left stocks with decent gains on the day, all things considered for such a wild week. But they were well off their session lows. Looking at the charts, it looks like they were giving up or running out of gas well below the November peak. NASDAQ is the same thing. It reached up and actually gapped to a doji below the 10 day EMA, right in the middle of the November range. Not great action. The DJ30 did the same thing. It surged to the upside, fell way off the high, not coming close to the November peak. It looks as if they are running out of gas on this relief bounce before they ever got started.

That is going to be the question of the week. Do they turn over right here or will they continue to put forth the relief bounce spawned from the extreme internals and the sharp selling over the last couple of weeks? We also have to worry next week about the European issue and, of course, the U.S. data. There will be a lot out. But a lot of people are pointing only to Europe as it problem. The U.S. has its troubles as well. The data shows that the economy is hanging on, but it is hardly growing after two years of “stimulus,” the “Summer of Recovery,” and two rounds of Quantitative Easing thrown in by the Federal Reserve. It is pathetic. We are talking 1930′s and 1970′s kind of growth, which should be no surprise since we are promulgating 1930′s and 1970′s style economic policies.

MONDAY

There is a lot of data out next week. There are a couple of manufacturing reports from the regions one starts the week and one ends the week. New York is early and Philly Fed comes late. There are housing starts, there are existing home sales. The CPI is coming out. There is industrial production and capacity and leading economic indicators, which have not been very accurate. They never really are. It has been showing things are improving, and they are not.

Lots of data to digest as the market tries to make its rebound. Looking at the market, there is plenty of room for stocks to rebound. But looking at the economic data in the US and the problems out of Europe, there is not a lot of reason for the market to rally without some kind of economic aid, whether from the Congress and the administration or from the Federal Reserve.

The economic data has been waning. The indications are not good for any kind of pickup, so everyone has their eyes on the Fed to see if it will do something. No one really expects anything out of Congress or the administration since they could barely get a budget detail because there was supposed to be no more spending.

Of course, there is the perverse idea in Washington, DC that cutting taxes and giving incentives to invest in the U.S. is spending. That is not spending because it is not their money in the first place. It is OUR money. It is not spending to let people keep their money. It is a philosophy about government and economics, but it is not spending.

The market really needs something to make a new, sustained rally. I am talking about just a relief rally, right? That is all I am viewing this as. I am not viewing this as any nirvana move to a new high. We just want to scratch out a rally either to the top of the November low which is our low point or, better yet, up to the neckline in the SP500′s head and shoulders near 1260. That is what we want to play. That is what we have positioned ourselves in as the market positioned itself to bounce higher, given the extremes and the indicators it put in earlier in the week. It very well could continue; it is set up quite well to do so. I think Friday it was just fading back because of a late-afternoon lack of bids on a “Let’s get out of dodge” Mentality after a very tough week.

We are looking for further upside this week. The caveat is that the patterns are what the patterns are. On Friday there was low volume as they bounced up toward the 10 day EMA and could not hold the move. They looked tired. If they roll over, we have to be ready to deal with reality and take what the market gives. That means playing some of those downside patterns that look so good.

We are going to have downside patterns at the ready. We already have some, and we are looking at other plays we can take advantage of as well. There are a lot of them out there. Just by preponderance, you would think the market may want to turn lower given the technical picture. That is why we have to be ready to take it that way if that is where it wants to go. We will be ready to do that. But if it continues the rally, which would be the unexpected course for many people, then we stick to the same plan we had already. We will let our positions we have purchased move higher. Some that are still in good position can run for us without needing a huge gain in the market overall. In other words, they are well-placed and ready to move. We can pick up some of those. We already have many in hand that we want to let run. We do not want to get too extended on this move. It is just a relief rally, and they can reverse at any point in time.

We will play any further move with those plays. We will let the positions we need to have recover do so. If they run out of gas, we will close them. Then we will be ready to initiate the downside plays and make more money downside when what I think is a relief rally caps out either at the 10 day EMA, at the November peak, or even up at the neckline from the SP500 head and shoulders.