Market Stats

The S&P 500 posted its third day of gains this week but the rally failed near resistance at the 1100 level for the second day in a row. There was an absence of any significant economic data on Wednesday but investors continued to digest late season earnings news from the likes of Target, Analog Devices, and Deere & Co. The dollar managed a minor bounce after two days of declines. Bonds eked out a small gain. Commodities bounced back from their intraday lows with gold up $3.10 to $1,231.40 an ounce. Crude oil closed down 47 cents at $75.30 a barrel. The EIA reported that oil inventories declined by 800,000 barrels, which was much less than expected. We are quickly running out of oil storage at Cushing, Oklahoma.

Foreign markets were mostly lower. Japan and India were exceptions with the Japanese NIKKEI index edging up +0.9%. This follows a new eight-month low the NIKKEI set yesterday. Strength in the yen against the dollar makes Japanese exports more expensive in the U.S. and it's having an impact on the Japanese stock market. Meanwhile India's Sensex index delivered a +1.15% gain. The Chinese market was quiet. The Chinese Shanghai index slipped -0.21% and the Hong Kong Hang Seng fell -0.54%.

The 16-nation eurozone reported a better than expected rise in construction output for June, which rose +2.7% versus +0.7% in May. The data was buoyed by a +7.2% jump in Spain's construction. Germany, Europe's biggest economy, saw construction output fall -0.9% but that was better than the -1.9% decline in May. Unfortunately investors pretty much ignored the report. Overall banks and commodity-related stocks led the decline in Europe. The German DAX index fell -0.32%. The French CAC-40 lost -0.41%. The English FTSE gave up -0.89%.

Yesterday traders reacted to the PPI data and industrial production numbers. Today the only news was corporate earnings and the Potash/BHP deal. Shares of POT rallied another +3.3% to a new two-year high near $148 following yesterday's +28% gain on the BHP Billiton $38.5 billion takeover offer. As you know POT initially rejected the offer and now BHP has moved into hostile takeover mode. There was a lot of speculation about POT today and a few analysts are expecting the final bid price to reach $160 a share. Normally, merger and acquisition news is considered bullish for the market since it is a sign of confidence by management to spend your cash on acquisitions instead of hoarding it.

While on the topic of M&A news a Citigroup analyst issued his opinion that the homebuilders are poised for a significant round of mergers. The U.S. residential real estate market is still struggling with new home sales falling and building permits sliding after the expiration of the tax credit. In an effort to build up market share the major players may resort to acquisitions. Josh Levin is the analyst and he believes D.R.Horton (DHI), KB Home (KBH), MDC Holdings (MDC), and Pulte Group Inc. (PHM) are likely buyers. The potential targets are Beazer Homes USA Inc. (BZH), Meritage Homes Corp. (MTH), and Ryland Group Inc. (RYL). It is worth noting that the entire group appears to be rebounding from the bottom of a two-month consolidation near their 2010 lows. The DJUSHB home construction index rose +1.6% for the day.

During the session earnings were the major headlines. After Home Depot and Wal-Mart's earnings reports yesterday, Target (TGT) led the earnings parade. Target Corp. is the country's second largest discount retailer. They reported a profit of 92 cents a share on revenues of $15.53 billion this morning. The EPS number matched estimates but revenues were a little under estimates of $15.62 billion. Shares of TGT gapped open lower this morning but traders bought the dip as TGT's management sounded more confident about the second half of this year. Same-store sales rose +1.7% and gross margins inched up a tenth of a percent to 32.0%. TGT said traffic was strong and their credit card division did very well. TGT expects to earn 68 cents in the third quarter and $1.38 in the fourth this year.

Another retailer reporting today was BJ's Wholesale Club, the company competes with Costco (COST) and Wal-Mart's Sam's Club. Shares of BJ had surged +27% in the first three weeks of July but the stock has since cut those gains in half. BJ reported this morning and missed estimates by 6 cents with a profit of 67 cents a share. Adding insult to injury was negative guidance where BJ expects 2011 earnings to hit $2.40-2.50 a share versus Wall Street's estimates of $2.68. The stock gapped down near $41.50 at the opening bell but managed to trim its losses with a -2.7% decline to $42.14.

Yet another retailer making headlines today was American Eagle Outfitters (AEO). There is growing speculation that AEO, and its 1,000 apparel stores, might be a takeover target - at least that is what the option market is suggesting. There was a huge jump in call option activity. The busiest strike price was the September $13 calls. The stock rallied +4.2% on Wednesday to close at $12.84. The stock has been churning sideways in the $11.50-13.00 zone for over two months. AEO is due to report its Q2 earnings on August 25th before the opening bell. Wall Street expects a profit of 13 cents a share.

Deere & Co. (DE), the largest producer of farm equipment and an S&P 500 component, reported earnings before the bell this morning. Wall Street was expecting a profit of $1.22 a share on revenues of $6.5 billion. DE delivered $1.44 a share on revenues of $6.22 billion. This is a significant improvement from a year ago with profits doubling from Q2 2009. Unfortunately, DE issued some mixed guidance for the fourth quarter. Management expects Q4 revenues to come in at $6.24 billion, which is above analysts' estimates, but DE sees Q4 profits around $375 million, which is under expectations. Shares fell 1.8% today but that's pretty minor considering the +21% gain off DE's July lows.

The technology sector got some news from the semiconductor industry with earnings from ADI and AMAT in the last 24 hours. Analog Devices Inc. (ADI) reported earnings last night after the market's closing bell. The company reported earnings that were 5 cents better than expected with a profit of 65 cents a share. Revenues surged +46% to $720 million, besting estimates of $706.5 million. The company said their backlog continues to grow and management raised guidance. ADI now sees Q4 earnings in the 68-72 cent range on revenues in the $740-770 million zone. Wall Street was expecting Q4 results of 61 cents on revenues near $715 million. The stock gapped open higher and posted a +4.4% gain for the session. Shares remain inside their four-month old, $27-31.50 trading range.

The results from Applied Materials (AMAT) were more disappointing. The world's biggest manufacturer of semiconductor-making equipment missed estimates by 8 cents with a profit of 17 cents a share. The 17 cents might not compare to consensus estimates and Reuters is suggesting that AMAT actually beat expectations with a profit of 29 cents versus Wall Street's 25 cent estimate. Revenues did manage to beat expectations at $2.5 billion compared to $2.4 billion. AMAT offered some positive guidance for the third quarter, where the company sees revenues rising by 5%. AMAT's management raised their Q4 earnings guidance into the 28-32 cent range, above consensus estimates of 26 cents. The stock closed virtually unchanged on the session. Unfortunately, given last week's breakdown in AMAT's stock price the trend still looks bearish.

The major headline after hours tonight was General Motors filing for an IPO later this year. There has been speculation for months that GM would try and IPO right around the November elections. The company filed for an IPO with regulators today in what many believe is the next step in becoming an independent company again. The White House and GM both came under extremely heavy criticism when GM filed for bankruptcy and eliminated about $40 billion in liabilities. Yet bankruptcy wasn't enough to save the failing automaker and the U.S. government engineered a $50 billion bailout. Now the U.S. owns about 61 percent of GM. It is expected that the U.S. Treasury will sell a significant portion of its stake and reduce its ownership to under 50%. Analysts speculate that the Treasury will then slowly sell off its remaining shares over the next few years. The ticker symbol will be "GM" and the stock will be listed on both the NYSE and on the Toronto exchange in Canada.

The S&P 500 managed its third gain in a row this week but the index clearly failed at short-term resistance near 1100. That was the second failed rally in a row. I want to warn readers to stay cautious. This is just an oversold bounce from last week's sell-off. The path of least resistance is still down and I would look for the bounce to roll over in the 1100-1110 zone. I find it interesting that the rebound stalled at 1100. Not only is that round-number resistance but it's also the 50% retracement of the recent sell-off (see chart below). If you are a calls only or long only player I would wait. We might get a better entry point near 1040 or 1010 in September.

Hourly Chart of the S&P 500 index:

Chart of the S&P 500 index:

The NASDAQ doesn't look much better. It will probably fill the gap and trade back into the 2260-2270 zone but first it has to breakthrough technical resistance at its simple 50-dma. The NASDAQ has been struggling near the 2225-2230 area. Eventually I would expect a retracement back toward the July lows in the 2100-2080 zone.

Chart of the NASDAQ index:

The small cap Russell 2000 index doesn't look any different. The oversold bounce this week has thus far produced a 50% retracement of last week's sell-off. The index managed to tag its simple 10-dma midday before paring its gains. I would not be surprised to see the $RUT bounce toward 640 before rolling over. The question is, "will the July lows near 590 hold as support?"

Chart of the Russell 2000 index:

Looking ahead at Thursday stocks will react to the weekly initial jobless claims and then Friday will be impacted by earnings after the closing bell. The trend for the weekly jobless claims has been rising and that's a significant stumbling block for the bulls. If this economy is going to recover we need to see jobless claims going down. Unfortunately American businesses are unlikely to begin hiring again until after we see how the November elections play out and/or how the holiday shopping season shapes up. Tomorrow economists are expecting initial claims to come in at 475,000. We will also see additional economic data from the Leading Indicators report and the Philly Fed report. Analysts are estimating the Philly Fed will see an improvement from 5.1 to 7.5.

Thursday night headlines will be dominated by earnings from tech giants Hewlett-Packard (HPQ) and Dell (DELL). Investors are keenly interested in what HPQ will have to say following the unexpected departure of CEO Mark Hurd earlier this month. Wall Street expects HPQ to deliver a profit of $1.08 a share. Dell Inc. is the planet's third largest PC maker and it looks like investors have lost confidence in the stock and the management team. The stock is trading near one-year lows and with the huge bearish double top forming over the last several months it looks like DELL is headed for its 2009 lows near $8.00. The Point & Figure chart is forecasting a decline toward $7.00. Analysts are expecting DELL to report a profit of 30 cents a share.

School has already started for millions of students around the country but it still feels like summer on Wall Street. Volumes remain very low and they might stay low until after the Labor Day holiday. My market outlook hasn't changed. I'm still expecting a pull back toward 1040 or 1010 on the S&P 500. Maybe if the index can hold these levels we might see a bullish entry point for a late Q3, early Q4 rally. The U.S. still faces the rising risk of a double-dip recession and slipping consumer confidence and spending doesn't help. If we see a market breakdown then my long-term outlook is for a decline toward 950 on the S&P 500 index.

-James