After seven days of declines the markets have reversed that losing streak with six days of gains totaling about 8% on the Dow.

Market Stats Table

The markets rallied on better than expected earnings news, a lack of negative guidance and some positive economic news both in the U.S. and abroad. The rally came on light volume as investors waited for Intel's numbers after the close.

In economic news the Job Openings Labor Turnover Survey (JOLTS) showed that the number of people hired in May was larger than the number of people who left jobs for any reason. This is a lagging report but tends to me more accurate than the other employment reports. The survey showed that 4.5 million workers were hired while 4.09 million left their jobs. Unfortunately there was a significant impact from the census worker hiring in May. Private sector hiring was only 3.8 million. The survey was viewed as positive but it was a lagging report and ignored by investors.

JOLTS Chart

The Trade Deficit for May widened unexpectedly by $2 billion to $42.3 billion. The real goods deficit grew to $46 billion from $44.2 billion. The sudden increase in the deficit suggests there will be a larger drag on the second quarter GDP when it is announced at the end of July. Net exports could subtract as much as 1% from the GDP. Over the last quarter exports rose by 16.3% on an annualized basis but imports rose by 20.3%.

The Treasury budget deficit for June was $68 billion. Through the first nine months of fiscal 2010 the deficit is actually 8% smaller than the same point last year. However, the spending for June was $319.5 billion and roughly $40 billion over May levels. On the bright side the receipts spiked sharply to $251 billion from $146.8 billion in May.

Consumer credit numbers released today showed that overall consumer balances declined by -4% with mortgage balances down -3.7%, bankcards -9.6%, auto loans -5.6% and consumer finance lines -14.3%. The high unemployment and the changes in terms and credit offers by banks is crushing the availability of credit. Consumers are also paying down balances at a rapid rate because of worries over the future.

The big reports for the week are still ahead with the FOMC minutes and the Philly Fed survey the two most important.

Economic Calendar

The rally today came on better than expected earnings from several companies and more importantly they did not trash second half guidance. News from overseas also helped with Greece successfully selling bonds for the first time since the EU-IMF bailout. Greece was trying to sell €1.25 billion and the offering was vastly over subscribed with bids for €3.6 billion. This was a serious change in sentiment and the first step in the austerity workout process. The yield on the auction was 4.65% and actually lower than the IMF loans.

Portugal's debt rating was downgraded two notches by Moody's but the market ignored that action because it had been expected for months.

The news of the successful Greek auction crushed the dollar with the dollar index falling to a new two month low. The decline in the dollar is positive for stocks because it reduces the currency translation issues for the 60% of the S&P that are strongly multinational.

Dollar Index Chart

The big news moving the market was of course the earnings news. Alcoa was the first Dow component to report earnings and they beat the street and posted higher than expected revenue. More importantly they did not guide lower for the second half. Alcoa predicted that aluminum demand would rise by 12% this year compared to prior estimates of 10%.

CSX also reported earnings that beat the street and said pricing and volume remains strong. They said Q3 volumes and revenues were positive across all segments. If railroads are still showing strong volumes and not having to discount traffic to get loads then the economy should be doing well.

Novellus (NVLS) was a big winner with a 6% gain after reporting earnings of 66-cents when analysts had expected 60-cents. Novellus said they were benefiting from a strong upturn in semiconductor demand fueled by strong growth in a broad spectrum of electronics products. Novellus said the upgrade of the worldwide communications infrastructure and growth in China would support a multi-year recovery in chips.

Novellus Chart

After the bell the 800-pound gorilla reported earnings that should boost the tech sector. Intel posted the largest quarterly profits in a decade. Net income was 2.89 billion or 51-cents per share. Analysts were expecting 43-cents. Intel also boosted revenue guidance for Q3 to $11.2 to $12.0 billion. Analysts were expecting $10.9 billion. Gross margin estimates were raised to 64-68% from 62-66%.

CEO Paul Otellini said large corporations were buying more computers that use Intel's most expensive chips and that was an encouraging sign for the economy. He said corporations were also upgrading workers personal computers and replacing 4-5 year old systems to take advantage of the newer technology. This suggests corporations are confident enough in the economic recovery to begin spending money again.

Intel Chart

This should bode well for Microsoft and IBM when they report earnings next week. IBM would benefit from a new corporate trend to upgrade their higher cost servers and mainframes. Microsoft is benefiting from the sales of Windows 7 and the new versions of Office and Windows Server. Both companies should post better than expected results.

One company not feeling the love was Yum Brands (YUM). The parent of Taco Bell, KFC and Pizza Hut chains gave a disappointing full-year earnings outlook and said it expects labor costs to rise in its key China market. YUM receives 35% of its profits from China. They expect food costs and labor costs to rise as a result of economic growth raising the standard of living. KFC China workers won a pay raise in June amid mounting unrest that is pushing up labor costs nationwide. YUM has 3,500 stores in China.

YUM raised its earnings forecast for the full year to $2.43 from $2.39 and analysts were expecting $2.48. That prompted traders to dump the stock in after hours trading despite YUM beating the street's Q2 estimates of 55-cents with earnings of 58-cents. U.S. same store sales were flat. Pizza Hut saw sales rise +8% and Taco Bell +1% but KFC suffered a -7% decline. While pizza may not be a health food it is certainly better than fried chicken and consumers are starting to make healthier choices.

YUM Chart

Wednesday is not a big earnings day but Thursday and Friday have some big names. Google would be a coin toss for direction but the banks should do well. However, they are expected to post the lowest earnings growth of the top ten sectors at +17% but do it on a -7% decline in revenue. Earnings expectations for financials have fallen from 21% to 17% in just the last week so there is plenty of room for an upside surprise.

GE could be the wild card for Friday. Normally GE's earnings are about as exciting as a week old newspaper but this week could be different. In an interview on CNBC on Tuesday CEO Jeffrey Immelt said "When you look at all the early indicators that we look at, like media buy, rail loading, passenger miles - all key early indicators - are trending better, they're all trending to the upside. I'm limited in what I can say because of Friday earnings, but we definitely see the economy getting better." Those comments could be a prelude to some strong guidance from GE on Friday.

Earnings Calendar

Apple did not report earnings today but the stock was down -$13 intraday. Traders bought the dip to end up with only a -$5.50 loss but the problem has not gone away. The cause for the dip remains the reception problems on the iPhone 4. You may remember Apple tried to explain it away that it was a software problem reporting the bars incorrectly. Since then they have had to admit that it really is a hardware problem when the phone is held a certain way. Their solution, "don't hold it that way" has not been going over well with users.

This morning Consumer Reports said they couldn't recommend the phone until Apple comes up with a "free" fix for the antenna problem. Recommending that users buy a $30 cover for the phone was not an acceptable response for Consumer Reports. Cheaper solutions such as recommendations to apply duct tape has been met with even worse reception. According to Consumer Reports when your products are supposedly the coolest and most demanded products on the planet you really need to keep up that image with a fast response to a critical problem.

Apple Chart

BP concluded updating the "stack" on top of the failed blow out preventer and is supposedly testing the integrity of the well today. The new stack is a combination of valves and instruments that are roughly 40 feet high and weigh 40 tons. The stack includes connections for up to four recovery vessels so oil collection can continue if the well proves to be damaged to the point where it cannot be sealed.

The new stack does provide the capability of sealing the well and preventing any further oil from flowing into the gulf. However, if the pressure tests with the well closed show that there may be other integrity issues within the well then BP will be forced to continue collecting oil and piping it to the surface rather than opting for a shutdown of the leak at the stack level.

The first relief well is only 10 feet from the leaking well casing and 150 feet from the bottom of the Macondo well. The relief well must go very slow at this level and proceed at the rate of 10-15 feet per day in order to zero in perfectly on the broken well. BP has now upped the potential final plugging date with the relief well to late July from mid August. They appear to be very confident the relief well will be on target and ahead of schedule. This will be the 41st successful relief well for the crew in charge of the drilling.

BP gained only slightly today after an 8% rally on Monday. Crude oil prices roared higher on better news from China, Latin America and the positive earnings guidance from CSX and Alcoa. Crude prices rose +2.20 to close at $77.15 to give Dennis Gartman a headache. He was on TV yesterday suggesting a heavy short in crude and energy stocks.

Crude Oil Chart

The markets stretched their gains for July to six days. This has been the best six days for the S&P-500 since 2003 with a 7% gain. The Dow has gained +749 points since the July 2nd lows. To say the markets are over extended would be an understatement. However, I believe the gains can continue for a few more days.

There are still a lot of shorts in strong denial. The market was heavily shorted going into July with many stocks having short interest that was out of sight compared to normal levels. First Solar for instance had a 24% short interest.

Obviously the broader market is nowhere near a 24% short interest but there are plenty of bears that believed the July bounce was just another bear market bounce. They were content to hold their highly profitable shorts and wait for the next decline. Now those profits are dwindling and in many cases have shrunk to losses and the bears are getting worried.

After Intel's blowout earnings tonight and strong guidance they should be very worried. S&P futures are up +8 points overnight.

It is not clear sailing ahead despite the improving sentiment. The S&P has strong resistance at 1100, 1111 (200-day) and 1120-1125. For the S&P to clear those levels without a bout of profit taking would be unimaginable. It would be possible but not probable. If the futures hold until Wednesday's open we could blow over 1100 but then the serious resistance comes back into play.

It is not that I believe the earnings the rest of this week will be so outstanding but I do believe the earnings next week with Microsoft, IBM and others, will be outstanding in terms of guidance. This should keep the bulls engaged and new money flowing back into mutual funds.

Long term, it is still summer and the doldrums are just ahead. Eventually the excitement will fade and the "what have you done for me lately" feeling will come back to haunt the market. In plenty of years there were strong Q2 earnings only to see the market lows set in Q3. It is simply a market cycle thing and we still need the economics to confirm there is not going to be a double dip. It is one thing for the indexes to rally for seven days and another for the economic reports to improve. Right now all the economic reports are still trending lower.

I know the market anticipates events by six months but the current rally is technical not fundamental. The market was oversold going into the end of quarter and the earnings cycle. Shorts have been forced to cover on a daily basis. This will eventually end but probably not this week. There is still too much good news to be reported but investors are fickle. Eventually they will glaze over on the earnings news. Enjoy the rally while it lasts.

The Dow touched 10400 today and will run into strong resistance at 10450-10500. With Intel's after hours spike that could be on Wednesday. If it does decide to take profits the first real support is in the 10100-10150 range but after an opening spike on Wednesday that would be several hundred points away. That suggests there will be some point in the middle where buyers will decide to make a stand.

Dow Chart

The S&P-500 rallied to 1095 and the 50-day average. The next resistance is 1100 followed by the 200-day at 1111 and the June resistance ranges at 1120-1125. This is a veritable minefield of problems and it will take some additional strong earnings news to lift the S&P over these problems. Support on the S&P is 1075. I am starting to fear that the S&P is going to lose traction as the week comes to a close despite some large companies still left to report.

Wednesday does not have any major companies reporting other than Marriott and they are not a market mover. The S&P will need to depend on Intel sentiment to remain positive on Wednesday. Google has not been kind to traders in recent quarters and that could hurt sentiment on Thursday. The potential for profit taking definitely exists but I think the S&P will move higher next week.

S&P-500 Chart

The Nasdaq is laboring under the weight of Apple and continued declines in this stock could be a drag on the index. Offsetting the Apple drag will be the Intel news on Wednesday. However, Google is the next pothole on Thursday. The Nasdaq is back into its congestion range and the next serious resistance is around 2320. I believe it will move over the 50/200 at 2255 on Wednesday thinks to Intel but getting over 2320 will be a challenge.

Nasdaq Chart

In summary I believe the markets will move higher next week. We could see some profit taking this week simply because we are so over extended. The longer we move higher without any pause to reload the harder the drop will be when it occurs. I still believe the markets will begin to fade before the end of July unless the economic indicators suddenly improve. However, we are seeing a rotation out of bonds and into stocks and that is implied confidence that there will not be a second dip.

Jim Brown