The markets continue to wait on the Fed and a peaceful year-end for mutual funds on Friday. All the bets have been placed and we are waiting for the Fed to turn over their cards.

Market Statistics

Currencies and economics continued to push stocks around but the movements were slight as funds protect their positions for year-end. Having the indexes at six-month highs for the mutual fund fiscal year end would be the perfect ending for fund managers trying to protect their bonuses. I suspect they will continue to try to pin the indexes to these levels for the rest of the week.

On the economic front the news was mixed with Consumer Confidence rising slightly to 50.2 from 48.5. Not a giant leap but at least in the right direction. However, the low level of confidence suggests holiday spending could be a problem. The expectations component led the gains with a +2.3 point move to 67.8 from 65.5.

Buying plans were flat with the exception of a -3.5 point drop in the percentage of people planning on buying a household appliance or big screen TV. Only 24.2% of respondents said they were considering a purchase. That is the lowest level since June.

On the positive side this was only the second improvement in an October in the last 20 years. The +13% stock market rally was credited with the improvement. More consumers said they expected the market to move higher over the next six months.

Consumer Confidence Chart

The Richmond Fed Manufacturing Survey rose back into positive territory at +5 from the September reading at -2. New orders rebounded from zero to 8.0 but backorders remained flat at -12. This is another in the string of regional Fed manufacturing surveys that has shown improvement even though it was only a minor gain. However, rising employment has been a theme in these reports. Employment in Richmond rose from -3 to +4 for a 7-point gain.

Richmond Fed Manufacturing Survey

There were a couple of home price reports but they did not tell us anything we did not already know. The Case-Shiller showed home prices declined in August by -0.3% for the 20-city index. This is a lagging report and we saw information on Friday that suggested the drop accelerated sharply in September with a -2.9% drop for Sept/Oct. It will be another month before Case Shiller reports those numbers.

The FHFA Purchase Only Home Price Index, also for August, showed prices declined -2.4% over August 2009. This was actually better than expected but still a negative trend. I doubt there is anyone in the country that was surprised housing prices are declining after the end of the homebuyer tax credit so the reports were ignored.

Tomorrow we will get the Mortgage Applications, Durable Goods, New Home Sales and oil and gas inventories. The big report for the week is still the GDP and regional ISMs on Friday.

Economic Calendar

The main focus for the market other than just counting down the minutes until the Fed meeting is still earnings. We have had some mixed results and some weak guidance but overall the picture is still positive. The most important earnings for Wednesday are from ADP. They process the payrolls for millions of workers across the country and that makes their guidance and commentary important.

Earnings Calendar

Broadcom (BRCM) reported earnings after the bell that more than tripled to 60-cents from 16-cents in the comparison quarter. Net of charges that rose to 74-cents and beat the 70-cent analyst estimate. Revenue increased +44%. Broadcom said both wired and wireless businesses posted solid growth. Broadcom raised guidance for revenue to $1.8-$1.9 billion for Q4 and that was more than the $1.75B analysts were expecting. Broadcom shares spiked more than 10% in after hours trading to hit $42.

Broadcom Chart

Silicon Image (SIMG) did even better than Broadcom with earnings of $60.5 beating the estimates of $49 million. Earnings per share were 18-cents and that beat estimates by a whopping 13-cents. They also raised guidance for Q4 and raised profit margin estimates to 55% to 56%. Shares rallied nearly 25% in after hours.

SIMG Chart

F5 Networks (FFIV) also beat the street with earnings of 79-cents compared to estimates of 71-cents. Revenue was up +10%. They raised their guidance significantly to 80-82 cents per share and analysts were only expecting 73-cents. FFIV rallied +$7 in after hours trading.

FFIV Chart

In the energy sector we start getting the earnings from the big guns on Wednesday with COP, on Thursday XOM and Friday CVX. Today we heard from the services sector again with National Oilwell Varco (NOV). The earnings did not show any giant gains and were flat with the comparison quarter but the shares were the second biggest gainer on the S&P. NOV beat the street slightly and the backlog was flat at $4.7 billion but the guidance was outstanding.

NOV has pending orders with Petrobras to outfit several DOZEN new rigs Petrobras is building. Now that Petrobras has their funding NOV expects these orders to tentative orders to go firm in the next month or so and add billions to its backlog for delivery in 2011 and 2012. We have been long NOV in the OilSlick newsletter in anticipation of this event.

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NOV Chart

Ameritrade (AMTD) posted profits that declined by 27% in Q3 as a result of a dramatic decline in trading activity after the flash crash. The worry by the average retail trader after the flash crash has been persistent and funds continue to flow out of mutual funds. Investors are scared as they get close to retirement and Ameritrade said this was a challenge for the quarter although the trend had improved slightly towards the end of the quarter. The zero interest rate is also a challenge because Ameritrade can't profit from interest on funds in customer accounts. The only way they can profit today is by trading activity until those rates begin to rise and daily trading activity has been running -30% lower than 2009. AMTD posted earnings of 20-cents and below analyst estimates of 23-cents.

AMTD shares plunged on the news but recovered to positive territory after several brokers said made positive comments. AMTD finished the day flat.

The metals sector posted the biggest losers. AK Steel reported a loss of 54-cents compared to estimates for a 34-cent loss. Higher iron ore prices and weak steel selling prices eroded profits. Iron ore had a benchmark price that was 98.65% over the 2009 benchmark. This was significantly higher than the 65% increase AKS had expected. Weak demand continues to be a problem preventing steel companies from passing on price increases. AKS declined -4% on the news.

U.S. Steel (X) posted a Q3 loss of $51 million compared to the profit it forecast as recently as July. They said steel prices decline across the board and customers were decreasing inventory levels ahead of the slower building season over the winter months. This is consistent with comments from the other steel companies and it appears there is a bear market in the steel market. U.S. Steel declined -3% on the news.

Engine maker Cummins Inc (CMI) reported earnings of $1.33 after items and that missed estimates of $1.41. Despite the miss profits nearly tripled but it was on a +56% increase in overseas sales not U.S. sales. The U.S. market continues to be weak because of tighter Federal emission standards that pushed up the cost of engines and lowered performance. Before the new standards went into effect the engine makers saw companies buying up all the available inventory of the older style engines to use as future replacements. They are still fighting that excess inventory held by trucking companies. CMI shares are up over 100% in the last 12 months so profit taking on the miss was to be expected. CMI shares lost -6% on the news.

So far in the Q3 earnings cycle S&P reported that 210 companies have reported with an overall gain of 26.8% over Q3-2009. Over 179 companies have beaten estimates by an average of 58.7% while 28 companies have missed earnings by an average of -25.7%. IBM rescued the Dow from a -70 opening drop when they announced they were buying back an additional $10 billion in stock. That represents 6% of the outstanding shares. The new program will be added to $2.3 billion unspent in a prior $8 billion authorization. IBM said it was going to request authorization for another buyback at the April board meeting. IBM shares had opened a couple dollars negative and the news spiked the stock about $3 to $142 and rescued the Dow from its drop. The excitement faded as the day progressed and IBM closed up only 83-cents.

Research In Motion (RIMM) demoed their new PlayBook tablet at the Adobe developers conference and apparently it was a hit. Comments were "pretty impressive" and now some analysts are speculating it could actually take a bit out of the iPad market. The RIM CEO showed off the tablet for the first time and told onlookers "We are delivering a professional experience that you are used to seeing on your desktops and laptops. We are not trying to dumb down the Internet for a small mobile device." The tablet is aimed at business clients and appears to be suddenly attracting a lot of attention. RIMM gained +6% on the news.

RIMM Chart

The biggest competitor in the business space will be Cisco's professional tablet with high definition audio and video and will include Cisco's Telepresence product. That is a high-end video conferencing application. The tablet will run the Android OS and is expected to deliver in Q1.

Cisco Tablet

It was another boring day in the markets as investors and fund managers wait for the week to expire. Fund managers are hoping for a peaceful finish for October with the markets up +13% since August 31st. This would be the best possible outcome for fund managers to end the year on a high note. I would not be surprised to see one more attempt to spike the market on Wednesday and then hold it through Friday.

As we move into next week there is an entire list of things that could go wrong and I won't repeat them here again but suffice to say there is a possibility of a big vacuum next week. The Fed knows this too and I am hoping they pull one more rabbit out of their hat to keep the consumer sentiment positive. What they are doing is just a band-aid on the bigger problem but as stock traders we want to see them keep pushing stocks higher at least through year-end.

The Dow closed at 11,169 and still in striking distance of a new high for the year this week but also far enough away to require some major momentum to make it happen. I doubt we will see +5, -5 moves the rest of the week. Eventually somebody is going to blink and we will get a decent move. Support is 11,100 and resistance 11,250 and that is the range I expect until the next news event.

Dow Chart - Daily

Dow Chart - 10 min

The S&P posted a whopping +0.02 point gain to close right on 1185 for the second consecutive gain. There is no reason to over analyze this because the technicals are clear. The 1185 level is showing some serious magnetism and fund managers are probably clinging to that level as a launch point for one last try to break 1200 before their October year-end. Support is 1180 making for one extremely tight range that will eventually see a jail break by next week. The only question is which direction the fugitives will run.

S&P-500 Chart

The Nasdaq is undergoing a classic pin job at 2500. If anyone ever has a doubt that fund mangers and market makers control the market they only need to look at the Nasdaq for the last two days. They have pinned it to 2500 and I suspect they will eventually move it over that level by a few points before Friday's close. The current resistance level is 2515-2520 and I fully expect that to be tested before the week is over and I believe they will try to close the week at that level. It would look great in all their year-end publications to be over the 2500 threshold and sitting at the high for the year.

It is going to be a tough job without any material tech earnings to provide motive power but hopefully the string of chip stock earnings after the bell today will lift the SOX and that give managers what they need to lift the Nasdaq.

Nasdaq Chart

In summary I believe managers will try to close the indexes at this level or slightly higher on Friday. Whether they wait until Friday or try it before the major economic reports is unknown. There is no magic formula for this week. It is simply a numbers game for the final windows dressing month of their fiscal year. The added quicksand factor is the unknown Fed announcement next week. That should keep volume low and volatility nonexistent. I am still in buy the dip mode long term but I would be overly cautious in holding longs past Friday's close.

Jim Brown