Market Stats:

The stock market's rally appears to have stalled as the S&P 500 index struggles with technical resistance near the simple 200-dma. The major U.S. indices posted their second decline in a row but the S&P 500 is still up over +8% from its closing July lows. According to Reuters, about 50% of the S&P 500 component companies have reported their Q2 earnings results and 77% of them have beat analysts' expectations. There was a huge wave of earnings results released last night and this morning and while the trend of better results continue the news failed to impress traders.

The markets were focused on economic data, which proved to be disappointing. The durable goods report showed an unexpected decline. The Fed's Beige Book report was lukewarm. The U.S. dollar spent the day drifting sideways, which left commodities to trade on their own. Agricultural-related commodities like coffee, corn, oats, sugar, and wheat all performed well. Gold futures managed a minor bounce (+0.4%) following yesterday's sell-off. Crude oil futures slipped -0.8% and closed under $77 a barrel following the weekly inventory report. The EIA said oil inventories increased +7.31 million barrels but economists were expecting a decline of -1.73 million barrels. This was the biggest jump in inventories since March 19th. It is possible that last week's tropical storm disrupted deliveries to refineries, which would account for part of the unexpected jump in inventories. Yet U.S. refiners were still operating at 90.6% of capacity, compared to 91.5% the week before.

In other news the bond market rallied, pushing the yield on the 10-year treasury down to 3.0%. Investors were digesting a $37 billion auction of 5-year bonds. The bid to cover ratio was strong at almost 3.1. Money has continued to flow into the bond market, which suggests investors are cautious and looking for safe havens, not riskier assets like stocks.

Foreign markets were a mixed bag on Wednesday. Asian stocks rallied. The Japanese NIKKEI index led the way with a +2.7% gain to a new two-week high thanks to strong earnings results and a weaker yen. A weaker yen makes Japanese exports cheaper. Camera maker Canon was a standout as its stock surged +5.7% following a strong earnings report this morning. The Chinese market continues to rally as well. The Shanghai index gained +2.2% and the Hong Kong Hang Seng index extended its gains to seven days in a row with a +0.5% gain. In Europe the trend was mostly lower as investors reacted to the disappointing economic data in the U.S. this morning. The German DAX index fell -0.4% and the English FTSE slipped -0.8%.

The trend of waning momentum in U.S. economic data continues. Before the opening bell the U.S. Census Bureau announced that durable goods orders, for goods meant to last at least three years, fell -1.0%. Wall Street was expecting a gain of +1.0%. Manufactured durable goods in June fell $2.0 billion to $190.5 billion. This was the second monthly decline in a row. To make matters worse they revised May's numbers lower. The transportation segment declined -2.4% and is now down four out of the last five months. However, transports can be a volatile component of the durable goods numbers. Minus the transports durable goods orders will still down -0.6% compared to estimates of +0.6%.

The Federal Reserve's Beige Book report also confirmed that growth in the U.S. economy is losing steam. The Beige book provides an in depth look at the 12 regional districts of the country. Eight of the 12 districts said growth was "modest". Only the Cleveland and Kansas City areas said growth remained "steady". The Atlanta and Chicago regions said growth had declined. Retailers said sales were okay but they remain cautious as consumers seem to be focusing on the essentials. The Beige book report also showed that both commercial and residential real estate was slowing down. On a side note the Mortgage Bankers Association said their applications index fell -4.4% last week.

There has been a large amount of earnings reports in the last 24 hours. I'm going to try and hit some of the highlights (and lowlights). If you're not interested you may want to skip the new few paragraphs. This morning we had two heavy weights in the healthcare industry report earnings. Both Aetna (AET) and WellPoint (WLP) beat analysts' estimates and raised their guidance but it wasn't enough for investors. AET delivered a profit of $1.05 a share, which was 31 cents ahead of expectations and revenues came in at $8.55 billion versus the $8.49 billion estimate. WLP managed to beat estimates by 12 cents with a profit of $1.67 a share. WLP's revenues fell 6.8% to $14.22 billion and that was below estimates of $14.66 billion. Shares of AET lost 2.8% while shares of WLP fell 3.7% for the day.

Investors were not impressed with results from industrial companies like Boeing (BA) and General Dynamic (GD). BA was one of the worst performers in the Dow Jones Industrials with a -1.9% decline as investors sold the news. BA beat estimates by 5 cents with a profit of $1.06 a share but revenues missed estimates at $15.57 billion versus $16.13 billion. BA's management reaffirmed their prior 2010 guidance but this was below Wall Street's estimates. The sell-off in BA is not too surprising since the stock had rallied +10% in the last few days. Meanwhile shares of GD failed to move much on its earnings beat. The company delivered a profit of $1.68 a share compared to analysts' estimates of $1.61. Revenues were flat at $8.1 billion but GD's management raised their 2010 earnings guidance.

One of the better performers today was C.H.Robinson Worldwide Inc., a transportation stock that surged more than +6% to a new one year high near $65 a share. Last night CHRW reported earnings of 59 cents a share. That was 4 cents better than expected. Revenues rose +27% to $2.45 billion versus the $2.32 billion estimate. The results prompted an analyst upgrade this morning from "hold" to a "buy" with a $73 price target.

It was a rough day for the homebuilders. The DJUSHB home construction index plunged -3.3% following a disappointing earnings report from Meritage Homes Corp. (MTH). Before the bell this morning MTH delivered a profit of 13 cents a share, which was better than the 12 cents analysts were expecting. MTH's revenues surged +31.5% to $291.4 million compared to the $255.7 million estimate. Yet investors sold the news when they saw that MTH's new orders plunged -22% as a result of the expiring homebuyer tax credit. After the closing bell we heard similar numbers from Ryland Group (RYL), the nation's seven-largest homebuilder. A year ago RYL lost $1.70 a share. For the second quarter RYL lost 49 cents a share. It was an improvement but Wall Street was only expecting a loss of 25 cents a share. Revenues improved +37% to $373.3 million, which was much better than the estimate ($302 million). Yet the real story here is probably RYL's orders, which fell off a cliff with a -44% decline following the tax credit expiration.

Credit and debit card processor Visa (V) was a headliner this evening. Processed transactions rose +14% to 11.7 billion for the quarter. Cross-border volumes climbed +17% as the trend from cash and checks to plastic continues. Visa reported a profit of 97 cents a share on revenues of $2.03 billion, which beat Wall Street's estimates of 93 cents a share on revenues of $1.97 billion. Visa's CEO said the company might struggle to keep up this performance next year since it is too early to tell how the new debit-card regulations will affect their results. Fortunately, the switch from cash and checks to cards is a long-term bullish trend for the company. Visa's main rival, Mastercard (MA), reports earnings on August 3rd.

In non-earnings news Amazon.com (AMZN) was making headlines as speculation grows the company is poised to announce a new Kindle model. The online retailer has had a huge success with its ebook reader the Kindle and recently reduced the price on it to $189. Yet today AMZN's website put a "temporarily out of stock" notice for the Kindle product, which only heightens expectations that AMZN will announce an upgraded model soon.

Market technicals are mixed. Short-term the trend for the S&P 500 is still up but momentum has stalled as the index tests technical resistance at its 200-dma. If we just look at the month of July you could argue that the S&P 500 is in the second half of its bull flag pattern, which would suggest an up move toward the 1140 level. Yet I'm not convinced the index will get that high with additional resistance near 1130 (June's high of 1131) and the simple 100-dma near 1128. If the current two-day dip continues we can probably look for some short-term support near 1100 and the 1080 levels.

Chart of the S&P 500 index:

If you step back and look at the last few months you can almost picture the S&P 500 forming an inverse head-and-shoulders pattern. It still needs to form the right shoulder with another dip and rebound near the 1140 area. If this scenario were to play out then we are looking at a potential rally toward the April 2010 highs near 1215. Personally, I'm not that optimistic on the market but it is a possibility. Longer-term I am still concerned that the S&P 500 will correct down toward the 950 area.

2nd Chart of the S&P 500 index:

Weekly Chart of the S&P 500 index:

Earnings season continues but investors will turn their focus toward economic data. Next week the big event will be July's non-farm payroll (jobs) report. We still have a couple of key reports this week. Tomorrow the market will be digesting the weekly initial jobless claims and the continuing unemployment claims. Analysts expect initial claims to come in at 464,000. On Friday we'll hear the Chicago PMI report, the final July Michigan (consumer) sentiment numbers. Plus, we'll see the advance Q2 GDP numbers. Economists are estimating the U.S. economy grew at +2.5% in the second quarter.

I want to caution traders about this market bounce. The short-term trend is up and nimble traders can still play the trend. However, I want to warn you that the trend of waning momentum in the economic data is a true concern. Bulls will argue it is just a slow down as the economy slowly improves. Bears will suggest we're starting to slip toward the double-dip recession. No one has a lot of certainty either way right now. The disappointing consumer confidence numbers this week are a warning flag. Hopefully the back-to-school shopping season that starts soon will show that consumers are not as nervous as they appear.

It is worth noting that a couple of UBS analysts published a research note yesterday that warns investors to sell now and take profits. They are concerned that the market will roll over and the S&P 500 will retest the 944 area. That is awfully close to the 950-942 level of support I have been drawing on the weekly S&P 500 chart. For me the takeaway here is that traders should not get too married to your positions or your bias. Stay nimble and keep your trades small.

-James