The minor profit taking today was bullish because there was a real chance we could have given back all of Monday's short squeeze gains.

Market Stats Table

The short squeeze on Monday pushed the indexes to levels that were above recent resistance and there was a good possibility that we would see a significant decline back to those levels on Tuesday. Despite the mixed economics the selling was lackluster and the indexes managed to hold onto most of Monday's gains.

Pressuring the market at the open was the Personal Income report for June. Income and spending slowed dramatically from the early 2010 rate. Personal incomes were flat with the headline number at zero for June. Spending rose only 0.1% and the lowest level since September. The PCE deflator, a measure of inflation at the consumer level, fell -0.1% to only 1.4% for the year. The Core PCE was flat at zero and the first time it did not rise since March 2009. This is just one more data point that confirms the economic slowdown that began in June.

Personal Income Chart (Moody's)

Factory Orders for June declined by -1.2% compared to a decline of -1.4% in the prior month. This is the second monthly decline and the first time in negative territory since August 2009. This is a lagging report and was inline with analyst estimates. This was not a market mover but another data point in the wall of worry for the bulls.

Factory Orders June (Moody's)

The Pending Home Sales for June fell to 75.7 from 77.6 in May. The consensus was for a gain to 79.0 and that did not happen. At 75.7 the index is at its lowest point on record and a dismal picture of the housing sector. This is strictly a result of the expiration of the homebuyer tax credit and the lack of motivated buyers as we moved into summer. The index declined -30% in May and another -2.6% in June. The decline puts the index -10.6% below the June 2009 level when we were just coming out of the recession. Future gains in housing will depend entirely on a pickup in employment. Until jobs become available again the demand for housing will remain low.

On the positive side the vehicle sales for July rose to 11.8 million on an annualized basis from 11.1 million in June. This was inline with analyst estimates. This pace was the highest level for the entire year but still well below the 16.5 million plus level before the recession. Losing the economic impact of producing an additional five million cars a year is significant. Note the cash for clunkers spike in the chart below.

Vehicle Sales Chart

Economic reports due out on Wednesday include the Challenger Employment report and ISM non-manufacturing. The two major economic events in our future are the Non-Farm Payrolls on Friday and the FOMC meeting next Tuesday.

Research in Motion (RIMM) finally announced its iPhone competitor today called the BlackBerry Torch. The phone has a touch screen and a slide out keyboard. This is not a product that will blow away the competition but it is an upgrade for Blackberry users. The Torch will sell for $199, same as the iPhone and it will run on the AT&T network. In fact AT&T claims it spent thousands of hours working with RIMM in developing this phone, which suggests AT&T will be vigorously marketing their new product. AT&T said this was the best Blackberry phone ever and AT&T said there would be as big an advertising campaign as you have seen in some time.

The Torch also has an on screed keyboard and a new operating system called Blackberry 6. The phone is much closer to the iPhone and the Android with features and applications. RIMM lost $1.45 in today's market but much of that was continuing backlash from the decision by several nations in the Middle East to restrict the Blackberry because the messages are encrypted and not available to governments spying on its citizens. Saudi Arabia and the UAE were the most recent countries to make the threat.

Anadarko Petroleum (APC) reported earnings after the close of 49-cents compared to analyst estimates of 35-cents. Anadarko raised its production guidance for the second time this year to be in the range of 232 to 236 million BOE. That is a 5% to 7% increase over 2009. Despite having to shutdown drilling activity in the gulf the company said its land based programs in the Marcellus, Eagleford and Haynesville shale plays helped boost production by +6%.

The big hickey hanging over Anadarko is the potential bill for 25% of the cleanup costs in the gulf. Anadarko is a 25% "non-operating" owner of the Macondo well. Anadarko has taken a strong stance that "based on publicly available information, testimonies and investigations to date, this tragedy was preventable and likely the result of the operators (BP) gross negligence and/or willful misconduct." Anadarko has pledged to aggressively fight any attempt by BP to bill APC for cleanup expenses.

Anadarko Chart

Baker Hughes (BHI) is not exposed to the Macondo well but the company is exposed to the moratorium in the gulf. BHI reported earnings today of 41-cents that were 2-cents below estimates due to the drop in services income in the gulf. BHI said the impact was 3-cents in Q2 and could rise to between 8-11 cents in both Q3 and Q4 if the moratorium was not lifted soon. Revenue rose +44% to $3.37 billion. BHI was crushed on the earnings news and lost -6.57 for the day.

BHI Chart

In a different sector Priceline shareholders will be celebrating when the market opens on Wednesday. The company reported earnings after the close that blew away estimates and the stock spiked +$37 in after hours trading. Earnings of $3.09 beat street estimates of $2.65. Bookings were up +43% to $3.4 billion led by international travel and hotel reservations. International bookings were up +63%. The company said it expects bookings to rise another 33% to 38% in Q3. Expedia (EXPE) also reported stronger sales and profits last week. Shorts expecting an earnings miss in PCLN were severely disappointed.

Priceline Chart

Whole Foods Market (WFMI) reported earnings inline with estimates but an +88% improvement over the comparison quarter. Same store sales rose +8.8% and the company raised its full year outlook to $1.38 per share. Unfortunately that was inline with analyst estimates and was joined by lowered sales expectations for Q4. This caused the shares to decline -$2 in after hours.

Electronic Arts (ERTS) reported better than expected earnings after the bell and reaffirmed guidance for the full year. Investors were not excited but the stock price rose slightly in after hours. ERTS is finding it harder to market its older titles like the Madden football and the Sims.

DR Horton (DHI) reported earnings that were inline with estimates and lower than historical norms because of the severe drop in sales after the tax credit ended. However, DHI said sales improved modestly in June and July. The DHI CEO said 2011 would be a tough year for builders after the pull forward of buyers into the tax credit period. DHI shares fell -6% on the gloomy forecast.

Dean Foods (DF) lost -10% after reporting earnings that were inline with estimates at 25-cents on revenue of $2.95 billion. That revenue was light and the CEO complained that consumers are not making enough money and are facing tight budgets when they shop. He said the highly promotional environment for private label brands and especially milk was what hurt results. Pricing for store branded milk is below historic levels and the gap between it and the major brands is growing. That keeps shoppers buying the less expensive options. Income fell -28% in the unit that markets milk, creamer and dairy products. However, sales at the organic segment including plant based beverages like soy, rose +18%. S&P analyst Tom Graves reiterated his "strong sell" on the stock saying continued competition will hurt profits. Earnings reports have not been kind to Dean Foods recently.

Dean Foods Chart

Dow component Procter & Gamble shares lost -3.5% after it reported earnings that disappointed the street. PG reported earnings of 71-cents that missed the street estimates by 2-cents but the worst part was the lowered guidance. PG said earnings for the next four quarters could fall below analyst estimates because of low spending by consumers and higher advertising requirements to maintain market share. The CEO said sales in the developed countries (US and Europe) were very slow. PG lost a little more than $2 but because of it's weighting in the Dow this equated to -18 Dow points.

Other consumer products companies have also warned of weak spending. Clorox met expectations but said promotional spending would be higher for the next six months. The company predicted earnings of $4.50 to $4.65 per share and analysts were expecting $4.58 per share. Clorox said sales would be at the low end of its prior growth forecast.

Colgate (CL) also reported weaker than expected sales and higher costs from advertising spending. Kimberly Clark (KMB) reported an increase in profits but said higher material costs and promotions would weigh on future earnings.

Office Max (OMX) reported higher than expected profits but warned the slowing economy would weigh on future profits and predicted revenue declines in Q3 and the full year. Shares fell -13% on the dismal outlook. The CFO said the economic outlook was keeping businesses and consumers from spending money. He said the back to school shopping season was shaping up to be a "very tough environment."

Offsetting the decline the Dow caused by PG was a nice gain by Pfizer. Pfizer reported a +9% gain in profits helped by a +58% gain in revenue. Much of that gain was due to the acquisition of Wyeth last October. Net income was $4.96 billion or 62-cents per share. This beat estimates by a dime. Pfizer is facing some stiff generic competition for its $13 billion a year drug Lipitor and eight other high margin drugs when protection expires in 2015. In planning for this revenue drop Pfizer has cut 17,500 employees from a targeted 19,500 by 2012.

Pfizer Chart

To date over 370 of the S&P-500 companies have reported earnings and the earnings growth for Q2 is now +42% and well above prior estimates. It should settle in the high 30% range after everyone reports. The financial sector has posted growth of +37% and almost double what was expected only a month ago. This helped push the sector to a new three-month high in Monday's short squeeze.

August and September are historically the two worst months of the year for the markets. Traders and funds alike were already setting up for an August decline as we ended last week. The better than expected PMI news from China and the better than expected U.S. ISM report provided ample fuel for a giant short squeeze that pushed the indexes well over current resistance.

In theory the squeeze rally should have been quickly sold today and that did not happen. The S&P built a two-day base at 1100 last week and used that base for the Monday rocket launch to 1127. That came within four points of the resistance high in June at 1131. For reference the 100-day average is 1127 and while the 100-day is not normally a reactive indicator for the S&P I am sure there were some traders thinking that was a good place to sell.

The lack of any material selling today even in the face of a multitude of less than exciting earnings reports is bullish. While that bullish reluctance may not survive the week it was noteworthy.

Volume was very low at only 7.1 billion shares and the A/D line was 2:1 negative. There was little selling pressure but it was broad based. Volume should continue to slow and that could increase volatility.

S&P-500 Chart

The Dow managed to spike well over the June highs thanks to the short squeeze and it was able to hold its gains today. This is bullish but two days does not make a trend. The odds are still strong that we will see a decline into August. The guidance from companies like PG, CL, KMB, OMX was partially offset by news from PCLN and EXPE but the key to their earnings was "international travel." Most consumer companies still claim the U.S. is not growing. Traders will have to decide if the global growth is going to trump U.S. growth and produce higher profits for U.S. companies. Most of the Dow components are large multinationals that will benefit from the global growth.

I am neutral on the Dow over the 10600 level. This is a breakout and the lack of selling was bullish. However, it we see it start to roll over the pace of the decline could accelerate. Support is well back at 10400 and that gives the index a wide range to explore without damaging the trend.

Dow Chart

The Nasdaq is the troublesome chart today. The Monday squeeze failed to exceed the prior week's highs and was not even close to the 2341 high set back in June. There is significant resistance at 2300 and again at 2320. The Nasdaq big caps are weak. Intel broke below its 200-day average on Friday and closed fractionally below it again today after Monday's spike higher. The Semiconductor Index is on the verge of breaking below the 200-day and several chip stocks released poor guidance.

The Nasdaq and the Russell 2000 are the weak links heading into August. Until the Nasdaq can move over 2320 I doubt any rally in the Dow and S&P will last. Note in the chart that the downtrend line in blue was exactly where the Monday rally failed.

Nasdaq Chart

In summary I think the lack of any material selling in the face of negative guidance from multiple companies was bullish. However, tech stocks are going to be the indicator to watch as we move through the week. If techs continue to weaken then it is only a matter of time before traders will start to pile on the shorts.

We have the Non-Farm Payrolls on Friday and a potential pothole in the road and the FOMC meeting next Tuesday. That is also a potential negative because the Fed's economic outlook is deteriorating. There are rumors the Fed could implement some more stimulus next Tuesday and that could cause traders to worry that conditions are declining faster than they thought. Time will tell but those two events could seriously damage or improve market sentiment depending on how they transpire. Who knows, maybe we actually added jobs in July. Stranger things have happened before.

Jim Brown