Exhaustion is finally starting to weigh on the market's July rally. Investors are absorbing the June durable goods order, a surprising oil inventory report, big news on a Microsoft/Yahoo! alliance, and a steady stream of earnings reports. Most sector indices are trading lower with banks, defense, biotech and healthcare the only bright spots still in positive territory today.

Trading turned volatile in Asian markets on Wednesday. There was excitement over the world's largest IPO in China this morning. The China State Construction Engineering Corp. (CSCEC), the company that build the "Cube" for the 2008 summer Olympics, debuted today and rallied more than 56% by the closing bell. Yet the IPO fervor was not enough to save the Shanghai market. Investors were spooked by concerns that the government might try and curb the red-hot stock market. The Chinese Shanghai index lost 5% in a single session but this follows an 80% gain for 2009 and more than a 100% gain from its 52-week low. Weakness in the Shanghai index infected the Hong Kong Hang Seng, which lost 2.3%. The Japanese NIKKEI managed to eke out another small gain of 0.2%.

Across the Atlantic the rally is still alive. Investors shrugged off disappointing economic numbers out of England regarding a drop in consumer credit. Markets also ignored a disappointing earnings report from one of the world's largest steel makers ArcelorMittal (MT) who reported another quarterly loss. The English FTSE rose 0.44%. The French CAC-40 rose 1.0%. The German DAX rallied 1.7%.

Back in the states investors were mulling over the June durable goods order. This measure of big-ticket items caused a stir when the headline number dropped 2.5%, the biggest decline since January's drop when the report fell 7.8%. Economists were only expecting a 0.6% decline. The sudden drop sparked fears that the economic recovery was already in jeopardy. Yet drilling down deeper into the report the pull back was fueled by huge declines in aircraft demand. Aircraft and autos make up the transportation sector, which tends to be more volatile. Excluding the transports the durable goods order actually came in at a positive +1.1% in June, which was better than economists' +0.0% forecast for durable goods without the transports. The market will get another look at the economy with the Federal Reserve's Beige Book report due out later this afternoon.

Another surprise today was the weekly oil inventory numbers. Economists were forecasting a drop of 1.5 million barrels. Imagine the shock when the Energy Department reported a surge of 5.15 million barrels instead. Demand continues to be soft and with inventories on the rise it does not paint a very bullish picture for oil. Crude oil futures are plunging more than 5% to under $63.85 a barrel. Further exacerbating the move is a sharp rally in the U.S. dollar. The dollar strength is pushing gold, copper and the rest of the commodity sector lower.

The big corporate news today was a deal between Microsoft (MSFT) and Yahoo! (YHOO). Together the companies have partnered on a 10-year search-engine deal that allows MSFT access to YHOO's search audience. MSFT has been desperate to take on search giant Google (GOOG). Over a year ago MSFT offered $47 billion to buy all of YHOO, an offer that valued the company near $33 a share. Today's 10-year partnership has no upfront payment for YHOO but allows YHOO to keep 88% of the revenue from all the search-engine ads for the first five years. This new partnership will face antitrust scrutiny but an approval is expected since a combined MSFT-YHOO search deal only gives them a 28% market share in the U.S. compared to GOOG's 65% market share. Worldwide the new MSFT-YHOO search would only garner 11% versus 67% for GOOG. Investors have been hoping for some sort of deal between MSFT and YHOO for months and the fact that there is no up front "purchase" of the YHOO search division has left them disappointed. Shares of YHOO are down 11.3% at $15.25. MSFT is up 0.4% at $23.55. GOOG is off 0.9% at $435.71.

Currently the S&P 500 index is off less than 5 points at 975. The NASDAQ composite is off less than 9 points at 1967. The Dow Industrials are off less than 30 points at 9067. The small cap Russell 2000 index is off less than 3 points at 549. Overall stocks continue to defy gravity as investors keep buying the dip.

Let's take a quick look at charts for the major averages:

Chart of the S&P 500:

Chart of the NASDAQ:

Chart of the Dow Industrials:

Chart of the Russell 2000 index:

Reviewing the OptionInvestor.com play list I see that FLR is contracting. The stock is down 4.1% but has not yet hit our trigger to buy calls at $50.25. Strength in the U.S. dollar is pushing the FXE toward the $140 level and its 50-dma. The dollar strength is also pushing gold lower and that's having an affect on the GDX. LEAP, a put play, is down 4.9% and trading toward its recent lows. NKE has continued to bounce and hit our stop loss midday.