The stock market rally has stalled but stocks did manage to recover from their morning lows. The Dow Industrials were off more than 120 points at its worst levels and the S&P 500 dropped toward the 1,080 level before bouncing back. The DJIA settled near -7 points for the day and the S&P 500 managed to close in positive territory at 1,096. The market was initially weak on disappointing economic data that overshadowed better than expected earnings from J.P.Morgan Chase bank (JPM). Overall investor sentiment seems cautious with money flowing into the safety of U.S. treasuries. The yield on the two-year note fell to an all-time low of 0.58% before settling at 0.61% this afternoon.

The late-day turnaround was attributed to BP and Goldman Sachs. Oil stocks rallied into the closing bell after an afternoon announcement from oil giant BP who said the oil leak has been contained with the new cap recently attached. This is the first time since April that oil has stopped leaking into the Gulf of Mexico. This is a temporary fix and BP is testing to see if the valves will be able to withstand the pressure. The company is continuing its efforts to drill two relief wells that will eventually be able to cement the well and plug it permanently. There was also word late in the day that BP was close to a deal with Apache to sell part of its stake in Alaska's Prudhoe Bay oil field for approximately $10.5 billion. Shares of BP soared late in the session and closed up +7.5% at $38.92.

You can expect lots of headlines about Wall Street powerhouse Goldman Sachs (GS) tomorrow. Before the closing bell a bulletin hit that the SEC was going to make a major announcement. Traders correctly assumed that the SEC was going to announce a settlement with GS and shares of GS rallied +4.4% to close at $145.22. Back on April 16th the SEC shocked the markets by announcing civil fraud charges against GS for a mortgage securities deal. In June the courts granted Goldman Sachs a thirty-day extension to respond to the SEC's allegations and it was widely accepted that GS was probably negotiating a settlement. Today the SEC announced a $550 million settlement, the largest fine against a financial company in the SEC's history. About $300 million will go to the SEC and the rest will go toward victim compensation. Last year Goldman reported a net profit of $13.4 billion. Removing the black cloud of uncertainty surrounding GS for $550 million might seem like a deal to Goldman's management. GS will have to admit they made a "mistake" and adjust how they market some of their products. Shares of GS continued to rally in after hours and was up another +5% near the $153 level.

Chart of Goldman Sachs (GS):

It was a rough day for overseas markets. Major indices in Asia and Europe were down across the board. The Japanese NIKKEI lost -1.1% after tagging three-week highs yesterday. Investors ignored news that the Bank of Japan had upgraded their economic forecast for the rest of 2010. The big headline today was China's Q2 GDP number. Economists were expecting China's GDP to slow down from +11.9% growth in the first quarter to +10.5% growth in Q2. The headline today was +10.3%. On a positive note industrial production rose +13.7% and inflation at both the wholesale and consumer level declined. Yet investors are growing more concerned that China's economy may slow down too fast in the second half of 2010. The Hong Kong Hang Seng index lost -1.4% and the Chinese Shanghai index fell -1.8%.

European markets were holding on to minor gains the first half of the day but quickly turned south on the parade of disappointing economic data in the U.S. this morning. The Greek market was an outperformer with a +2.2% gain thanks to a rally in domestic banks. News that Piraeus Bank SA, a large Greek bank, had offered to buy up significant stakes in two of Greece's largest lenders fueled the rally. Another PIGS country to make headlines was Spain. The country was successful with a 3 billion euro ($3.8 billion) debt auction of 15-year bonds. The bidding was strong at 2.57 times versus the prior auction in April at 1.79. If demand for Spain's debt is rising it's a very positive signal that investor sentiment is healing for the EU region. At the end of the day the English FTSE lost -0.8%. The German DAX fell -0.9%. The French CAC-40 slipped -1.4%.

Another sign of improving investor sentiment for the EU was a strong rally in the euro currency, which closed at $1.29 against the dollar. Normally euro strength and dollar weakness is bullish for commodities. Yet gold had a quiet day with a $1.30 gain to $1,208.30 an ounce. Crude oil fell 42 cents to $76.62 a barrel. The CRB commodity index still performed well but that was due to a +6.7% rally in wheat futures and a +6.5% rally in natural gas.

Most of the economic data this morning was a disappointment. The U.S. recovery has been led by a bounce in manufacturing but the manufacturing sector is quickly losing momentum. The Philadelphia Fed report showed an unexpected drop. Economists were looking for a rise from 8.0 in June to 10.0. Instead the Philly Fed said their general business conditions index fell to 5.1, the worst reading since August 2009 and a long drop from May's 21.4. New orders fell from +9.0 to -4.3. One of the few positives was the employment component, which moved from -1.5 to +4.0 but this remains a below average reading.

The New York Empire State manufacturing index was not any better. This time economists were expecting the general business conditions to decline from 19.6 in June to 18.8 in July. Unfortunately, the index plunged to 5.1. That is not a typo. Both the Philly Fed and Empire State reading came in at 5.1. Readings over zero suggest growth and expansion but this is moving the wrong direction. At 5.1 this is the lowest reading since December for the New York region. New orders dropped from 17.5 to 10.1. Back in April the new orders component peaked at 29.5. The shipments component dropped from 19.7 in June to 6.3 in July. The employment component slipped from 12.4 to 7.9. These two reports only confirm that the U.S. is seeing a slowdown in activity. Whether or not this is just a pause in the recovery or the beginning of the double-dip is the big question.

In other news the markets digested the PPI, industrial production, factory output, and the weekly initial jobless claims. The Producer Price index, a measure of inflation at the wholesale level, slipped -0.5% following a -0.3% drop in May. Economists were expecting a -0.1% decline in June. This is the largest drop in five months fueled by a big -2.2% drop in food prices, the biggest decline since early 2002. Energy prices slipped -0.5%. The core rate of PPI, which excludes the more volatile food and energy prices, rose +0.1%, which is in line with expectations. Finished goods saw prices pull back from May's +5.1% to +2.7% in June. The headline number's decline is the third monthly drop in a row and could start to fuel deflation fears.

This morning the Federal Reserve said June's industrial production unexpectedly rose +0.1% thanks to higher temperatures raising demand for electricity. Meanwhile factory output fell -0.4%. We're also seeing some volatility in the weekly jobless claims. Last week the media was hyping the sharper than expected decline in weekly jobless claims. Today weekly jobless claims fell another -29,000 to 429,000 but larger headlines dominated the news. The four-week moving average declined -11,750 to 455,250. Unfortunately the number of continuing claims spiked +247,000 to 4.68 million. You may recall that last week the Labor Department said continuing claims fell -224,000.

It is earnings season and corporate results will continue to dominate the headlines for the next couple of weeks. This morning investors were disappointed with JPM's earnings report. Our nation's second biggest bank reported a profit of $1.09 a share ($4.8 billon), which was 39 cents better than analysts' estimates. Revenues fell 7.6% to 25.61 billion compared to expectations of $25.59 billion. Looks like a blowout number, right? Yet these results were fueled by a huge release of loan loss reserves. CEO Jamie Dimon admitted these were not "normal ongoing earnings". The company did say that charge-offs and delinquencies were coming down but they remain at elevated levels. Management said it was too early to say how much improvement they will see from here and Dimon added that it was too early to tell how the new financial reform bill would impact their business. Shares of JPM rallied on the headline number early this morning but sank to -2.6% intraday only to bounce back into positive territory by the close.

Do you remember all the talk about how the wide yield curve was going to fuel huge profits for the banking sector? It looks like those profits may not be so strong with JPM's revenues down quarter over quarter and year over year. This is not a good sign since JPM is considered one of the best of the best for the big banks. Investors will be focused on Bank of America and Citigroup's earnings tomorrow morning before the opening bell. Analysts expect BAC to report a profit of $0.22 a share and Citigroup to report a profit of $0.05 a share. Since we're talking about banks I should mention that the Senate passed the financial reform bill 60-39 this evening. Passage of the bill was not a surprise but Wall Street remains wary since the regulations to implement this bill are still unwritten. The effect of unintended consequences could be HUGE. This is a monster bill of 390,000 words. The Associated Press said that's the equivalent of half the King James Bible. Do you think any of the senators actually read the entire bill before voting on it? The bill goes to President Obama's desk to be signed next week.

The earnings parade continued this evening with Internet titan Google (GOOG) reporting results after the close. Wall Street was expecting a profit of $6.52 a share on revenues of $4.99 billion. The search giant delivered a profit of $6.45 a share on revenues of $5.09 billion. That is a 7-cent miss. You might see reports that revenues rose 24% to 6.82 billion but that includes the fees that GOOG has to pay toward its partners. The big drop in the euro last quarter had a negative effect on GOOG's European business. Investors are worried about the company's growing payroll with another 1,200 employees joining GOOG last quarter. Shares of GOOG were down about $20 in afterhours trading near $474 a share.

Chart of Google (GOOG):

Semiconductor maker and Intel rival AMD reported earnings after the closing bell tonight. AMD delivered a profit of 11 cents a share, which was 5 cents better than expected. Revenues rose 5.1% to $1.65 billion, better than the $1.55 billion estimate. Last quarter's profit of $43 million is a huge improvement over the $330 million lost a year ago. AMD's CEO said their success was due to strong demand for their mobile platform products.

Technically the market has stalled with the S&P 500 stuck under resistance near the 1100 level. If the index can breakout the next test is resistance near the simple 200-dma around 1,110-1,112 and then the 1,120 area. If the index rolls over I would look for very short-term support near the 1065 area. Thus far the S&P 500 remains in a bearish pattern of lower highs and lower lows.

Chart of the S&P 500 index:

The rally in the NASDAQ has stalled right at technical resistance with its 50 and 200-dma, which is conveniently located near the 2250 level. If the rally continues we can look for resistance near 2300. On a pullback look for support near 2150.

Chart of the NASDAQ index:

The situation in the small cap Russell 2000 is very similar. The oversold bounce has stalled near resistance. You can see this resistance near its 200-dma and the 640 level. All of the major indices still have a bearish trend of lower highs and lower lows.

Chart of the Russell 2000 index:

I cautioned readers last week that the rally was probably short-term and the duration of any rally would depend on corporate earnings and guidance. Tomorrow we're going to hear earnings from BAC and Citigroup. Plus we'll hear from market bellwether General Electric (GE). Next week there will be a virtual flood of earnings reports. Friday will also bring the CPI results and Michigan Consumer Sentiment report. Economists are expecting the CPI to fall -0.1% and the Michigan Sentiment numbers to slip from 76.0 to 74.5.

I'm not suggesting this oversold bounce is over yet but short-term traders may want to be looking for a bearish reversal in the next several days as a possible entry point. Tomorrow could see a lot of volatility. News from BP that they have successfully stopped the leak, even short-term, is bullish for BP and bullish from a psychological standpoint. News that Goldman Sachs has settled with the SEC is a huge market positive and should fuel gains for the banking sector. However, this could be derailed if BAC or C really disappoints in their earnings report. Reaction to GOOG's earnings report is certainly bearish and could weigh heavily on the NASDAQ.

-James