After a monster buildup in the overnight futures the cash market failed to impress as every minor uptick lost traction with a partial slide backwards. It was still a winner at the close and that is all that counts.

Market Stats Table

There was little in the way of economics to interest traders today with Consumer Credit for July the only material report. Consumer credit fell by a record $21.6 billion in July to a total of $2.472 trillion. Nonrevolving credit balances fell sharply while revolving credit balances continued to drop as well. Total credit fell -10.4% with revolving credit falling -7.8%. Nonrevolving credit fell -11.1%.

I have been reporting on banks canceling credit cards and cutting credit card balances for months. We are seeing that in the chart below. Consumers worried about jobs and the economy are also paying down balances as they retreat into a conservation mentality.

Consumer Credit Chart

PS, I heard today that Bank America is cutting credit card limits on anyone who uses the checks they send out in the mail. You know the ones where they send blank checks for balance transfers, special purposes or to spend on yourself. I get them every month from a half dozen credit card companies. Be warned that using one from Bank America will get your open credit line reduced. According to Bank America if you use the check on yourself it suggests you are short of cash and no longer worthy of your current credit line.

Reports due out on Wednesday are Mortgage Applications, Chain Store Sales, Job Openings, Quarterly Services and the Fed Beige Book. The key report in that list is the Beige Book, which is the report on economic activity in each of the Federal Reserve regions. Analysts will be looking for signs of improvement in the economic fundamentals and projections for the future and try to predict the outcome of the September 22nd Fed meeting. At 1:PM there will be another $20 billion of 10-year notes auctioned. Today there were $58 billion in 3&6 month bills auctioned along with $38B in 3-yr notes.

In stock news Bank America (BAC) is still under fire by the New York Attorney General over bonuses to Merrill Lynch employees. Bank America claims they sought the advice of counsel and was told they did not have disclose the bonuses to shareholders. Cuomo said the bank could not use attorney client privilege as a defense for not turning over documents held by the BAC attorneys. Cuomo gave BAC until Sept 14th to provide more information. BAC opened higher but declined to close fractionally negative for the day.

Morgan Stanley semiconductor analyst Mark Lipacis stimulated some broad based buying in chip stocks this morning. He said the current investor belief is that the inventory restocking wave is over and chip stocks have peaked. He believes this is entirely untrue and the restocking cycle hasn't even started. He believes the true restocking wave will last a lot longer and provide positive profit gains for the entire second half.

He upgraded ALTR, XLNX, PMCS and LRCX to overweight because of niche markets with active product cycles these companies service. He downgraded TXN and NVLS to equal weight and STM to underweight. He said these downgrades related to competition, expense control and in the case of TXN the gains in the stock price.

Texas Instruments (TXN) is expected to raise its Q3 sales forecast when it provides mid-quarter guidance on Wednesday. Broadpoint AmTech said TI's September quarter was benefiting from a mild broad based recovery. Wedbush Morgan said margins were improving and they were growing market share. Pacific Crest Securities said the book-to-bill ratio for TI was over 1.0 meaning it has more orders than it can build. However, Morgan Stanley cut their rating on TI to neutral from buy saying all the good news was already baked into the price.

Micron (MU) also received an upgrade from UBS to a buy. UBS said prices for DRAM chips made by Micron would rise in the near future.

The semiconductor index has been in rally mode for the last three days with a breakout to a new 11-month closing high on Tuesday at 316. This is the leading sector for the Nasdaq and as long as chips are moving higher the Nasdaq should follow.

SOX Chart

Even AMD garnered an upgrade from a Barclay's analyst. The analyst must have been out in the sun too long over the weekend. He upgraded AMD to overweight from equal weight and raised his price target to $7 from $4. His reasoning was PC demand was improving, AMD has some new products in the pipeline and a possible improvement in margins. He also cited "legal progress with Intel" as a reason for the upgrade. He said AMD could actually revise estimates higher for the first time in recent memory. BUT, he expects AMD to lose -2.04 in 2009 compared to -1.79 in his prior estimate. For 2010 he expects a loss of -1.10 compared to a prior estimate of -98 cents.

OK, he increased his estimate of losses for both 2009 and 2010 but he raised the price target on the stock. Find that boy some sunburn lotion and make sure he drinks plenty of fluids. His delirium will eventually fade. At this point Intel lets AMD exist only because their demise would turn Intel into a monopoly. Intel lets AMD use their patents and has sold them technology to allow them to survive. AMD stock spiked +14% to $5.19 on the upgrade as shorts rushed to cover. What were they thinking? Any day the market is open is a good day to sell AMD.

AMD Chart

Apple Inc (AAPL) gained +2.62 the day before their big announcement event on Wednesday. This was probably short covering ahead of the announcement and on the price target upgrade by Morgan Stanley. It is widely believed this week that the event will be less than spectacular and many analysts believe the stock will decline after the event. Apple is expected to announce a new iPod line complete with a digital camera. However, as late as today it is rumored they are having some problems with the cameras and that may delay the availability of the new iPods. Normally Apple likes to make new products immediately available but they have announced future deliveries when manufacturing problems existed in the past. The current iPod classic is rumored to have been discontinued. Other rumors include deals for Beatles and Rolling Stones songs. Steve Jobs is now expected to be on stage at the event. Morgan Stanley upgraded Apple's price target to $200.

Apple Chart

Harley Davidson (HOG) rallied +7.2% to $25 after Citigroup cited improving retail trends. Citi raised its rating to hold from sell but shorts could not take the heat and bailed anyway. Citi said channel checks show sales have improved since the second quarter. HOG profits fell -91% in Q2. Harley said it would start selling motorcycles in India in 2010 in an effort to move into the global arena. If Harley sales are improving can the general economy be far behind?

Harley Chart

Oil prices exploded higher with a +$3.30 gain to $71.32 as the dollar imploded and several entities projected $85 oil by year-end. This came the day before the OPEC production meeting on Wednesday. Algeria's oil minister said recent gains in oil prices would hold and begin to rise again in 2010 as demand returned. Goldman Sachs predicted prices would rise to $85 per barrel by year-end. Also, tropical storm Fred strengthened as it heads towards the Caribbean. OPEC is expected to leave production quotas unchanged and focus on enforcing compliance with existing quotas. Analysts claim only a 67% compliance with current quotas that were meant to remove 4.2 mbpd from production. That means current actual production cuts only remove 2.81 mbpd from production.

Crude Oil Chart

The biggest impetus for the rise in oil prices was the sharp drop in the dollar to new 52-week lows. The dollar index fell to just over 77 for the biggest one day drop in months. The dollar was crushed after a report from a United Nations agency was released on Monday calling for a reduced role for the dollar as the world's primary reserve currency. Also over the weekend a Chinese official complained about the Fed's policy of buying bonds to keep rates low. He said that was an inflation trigger that will further undermine the dollar. China and Russia have been very vocal this year about the need to diversify away from the dollar. China has called for the creation of a new global currency backed by the IMF.

Dollar Index Chart

Gold prices rallied over $1000 again in early trading on the same decline in the dollar. However, several gold producers were interviewed by CNBC and all said demand for gold was rising. Barrick Gold (ABX) announced a plan to sell $3 billion in stock (81.2 million shares) at a price of $36.95 per share in order to buy back all their gold hedges. Barrick said it would use $1.9 billion of proceeds to eliminate all of its fixed price hedges within the next 12 months. This is the amount the hedges are underwater. They basically sold their future production short into the futures market at various prices as gold rose but gold kept rising and left them exposed for the difference. ABX will spend another $1.0 billion to eliminate a portion of their floating price hedges. They will take a $5.6 billion charge to earnings in Q3 to account for the change in contracts. Barrick expects to increase annual supply by 2.6 million ounces when several development projects are completed.

Barrick said they were seeing "continuing robust supply/demand ratios" and had an "increasingly strongly positive outlook." Barrick said it wanted to be fully leveraged to the ongoing price of gold. Reportedly Barrick has about 9.5 million ounces hedged at lower than current market prices. One analyst said this was probably shareholder driven since Barrick shares were not receiving credit for the rising price of gold. Another analyst said this could be seen as the last short getting out of the market. At one time there was more than 100 million ounces hedged by the gold producers and everyone else has already closed those positions. Time will tell if Barrick made the right call. The announcement was made after the close so the stock price has not yet reacted to the news.

Barrick Gold Chart

At 3:AM this morning I was watching the overseas markets and the Dow futures were up over 100 points and the S&P futures were trading over 1025. The U.S. markets appeared poised for a monster rally at the open. Traders sold into that rally at the open and the S&P struggled to hold that 1025 level all day. There were four separate attempts to sell the market throughout the day and the dips were bought but on light volume. The S&P closed right on that 1025 level and a +9 point gain for the day.

However, I did not view the market action as bullish. Current resistance is around 1035 and the SPX could not get over 1025 on multiple tries. I was glad to see the gains but I remain skeptical. Odds are very good that we will remain in a range bound market for the next several weeks from 980-1040. I would love to be proved wrong with a breakout to the upside.

The rally today was driven by commodities and industrials after Goldman Sachs said they were seeing improvements in the manufacturing sector. The financials closed down for the day and that was the main drag on the market. If the financials are not having a good day it is very difficult for the broader market to move higher. Were it not for the strong gains in energy and metals the outcome would have been entirely different.

For the rest of the week the market has more risk to the downside than the upside. Breaking out over strong resistance in September would be a major accomplishment. Falling back to support at 980 would be the move everyone expects. That is probably why we could creep higher because nearly everyone is expecting a decline. The markets typically move in opposition to what traders are expecting.

S&P-500 Chart

S&P-500 Chart - 5 min

The Dow is facing the same strong resistance at 9600 as the S&P at 1035. This level held for two weeks in August and dates back to November 2008. If by chance the Dow fails to exceed the 9500 close the rest of the week we could be setting up again for another head and shoulders pattern with 9500 as the right shoulder.

The key point to this rally is the overall reluctance of traders to accept it. I have been calling it the denial rally for months because even the bulls are a always worried it is going to roll over and fall into a correction. This denial sentiment continues to feed the climb as traders rush to buy every dip when it appears the dip is ending. I attribute today's rally to the various items I described in the preceding paragraphs as well as the influx of new month end retirement contributions. Funds had to put that money to work and this is the first real week in September. Last week was an extra week for August for all practical purposes plus it was a holiday week. Today is when that month end money was put to work.

I don't know what is going to push the Dow over 9600 this week unless it is the return of strength in the financials. Until some event appears to trigger short covering at that level I fear we are going into hold mode between 9100-9600.

Dow Chart

I have said for a couple weeks that the Nasdaq worried me. It appears the Nasdaq was listening and is attempting to put my mind at ease. The tech index rallied +19 points to close just shy of resistance at 2040. This is exactly where it failed in late August and a breakout here would be bullish especially if it can get past the 50% retracement level at 2063.

We can thank the chip sector upgrade for the rally and Apple's 2.6 point gain did not hurt. BIDU tacked on +14 points and FSLR +13 to help push the composite index back to resistance. The current range for September is 1960 to 2040 and hopefully that is not the track that we will be stuck with the rest of the week.

Nasdaq Chart

There is little in the way of economics to keep the market moving the rest of the week. The Beige Book is the only material report left. Texas Instruments is expected to give their mid-quarter guidance on Wednesday and that could help/hurt the Nasdaq chip rally. Other that that the markets are going to be focused on the dollar, crude and gold. I will be pleasantly surprised if the rally continues but I am not going to be shocked if it fails. I am long so I am rooting for a breakout but will be stopped out if it does not appear.

Jim Brown