Erratic economics and fear of next week's FOMC meeting caused the Dow to trade in a 347 point range and lose -178 points for the week.

Market Statistics

The high for the week of 15,300 was set at the open on Monday. It was all downhill from there except for the obligatory short squeeze on Thursday. Weaker than expected economics and the fear of a change in QE at next week's FOMC meeting caused investors to take profits.

We should not get too excited since this is a summer weekend and volume was very low at 5.4 billion shares. Ships can sink in a calm sea but typically we need more volume to show conviction in any move. There is no conviction other than the dip buying at the 50-day average on the S&P but even that is weakening.

On Friday the economic reports were not favorable to the market even though it should help keep the Fed on hold. Consumer sentiment for June declined from the five-year high in May at 84.5 to 82.7. Analysts had expected a rise to 86.0. Sentiment rose +8 points in May and analysts expected those gains to continue.

The June decline was due to a drop in the present conditions component from 98.0 to 92.1. That is the largest monthly decline since August 2011. The expectations component rose slightly from 75.8 to 76.7. Slower job growth, higher gasoline prices and the daily political scandals all weighed on the present conditions. As long as the market remains near its highs we should not see a big change over the summer. Since the markets typically trade lower into August we should expect some choppy sentiment numbers in the next two months.

Consumer Sentiment

Industrial production for May was flat at zero after a -0.4% decline in April. This was slightly lower than expected at +0.2%. Prior months were also revised slightly lower. Capacity utilization declined for the third month to hit 77.6% and the low for the year after a cycle high at 78.1% in February. Manufacturing production capacity fell to 75.8% and the low for the year.

Auto production was the bright spot with a +0.7% increase. That puts the annualized growth rate over the last three months at +7.4%. Autos manufactured rose over 11 million (annualized) for the first time since 2007.

Consumer goods production declined -0.1%. Business equipment declined -0.3% for the fourth decline in the last five months. Computer equipment rose +1.2% and the strongest month in 2013. Transportation equipment rose +0.5%. Utilities declined -1.8% because of the mild weather.

The report showed manufacturing has gone from very slow growth to an outright decline. With the decline in factory orders and back orders we should expect this trend to continue well into the summer.

There was nothing in the industrial production report that would encourage the Fed to cut back on QE.

The Producer Price Index showed an unexpected spike of +0.5% in May after declining for two months. However, the core rate rose only +0.1% because the majority of the headline gain was from food and energy.

This is only the third gain in eight months for the headline number and puts the trailing 12 month inflation at +1.7%. That is hardly a number that should worry the Fed. Producer prices are very weak because of weak demand.

The drought of 2012 is still impacting food prices. Smaller cow herds and higher beef prices are a major factor and that includes milk. Eggs are higher because of higher feed costs due to failed crops.

Next week's economic calendar is busy with the highlights on Wednesday when the FOMC meeting ends and Bernanke gives his quarterly press conference. The Fed is not expected to change the current QE program. However, they may change the statement to warn of a coming change in the amount they are spending each month. The Fed is very good about giving the market a warning of an impending change.

In his press conference Bernanke is likely to try and clarify the confusion around the recent comments on tapering. The taper talk has created uncertainty in the market and weakened both equities and treasuries. While Bernanke is not adverse to talking down the market most analysts believe the quantity and disparity of the various taper comments probably did more harm than good. He may try to smooth expectations about future changes.

He will not give a specific date or a specific amount of a proposed change. The Fed wants the market to be reserved because that keeps bubbles from forming. They just do not want to see the markets moving helter-skelter all over the place and creating confusion.

The bottom line is to expect some calming comments from Bernanke.

The next most important event is the HSBC Flash PMI for China. That has roiled the market in recent months because it shows China to be contracting rather than expanding. If this trend continues we can expect to see the global markets to decline as well. The flash PMI fell to 49.6 in May and a seven-month low.

Next in importance is the Philly Fed Survey on Thursday. This is the first major regional report for June and it has a high correlation to the national ISM two weeks later. The report dropped firmly into contraction territory last month at -5.2 and expectations are for a return to a couple ticks under zero for June. However, given the declines in industrial production, the very weak order components and the impact of the sequestration there could be a negative surprise.

The Consumer Price Index on Tuesday will also be key since it will have an impact on the Fed deliberations. The headline number declined -0.4% in April and the second monthly decline. The core rate rose only +0.1%. The trailing 12 month inflation rate is +1.7% and falling. April was a 12 month low. The lack of inflation at the consumer level is very troubling for the Fed after five years of aggressive stimulus. Bernanke has vowed not to let the economy fall into a depression and that is another reason the Fed is not likely to make any changes to QE in the near future.

The Fed does not want to be seen adjusting the number every meeting. It would be embarrassing for them to cut the QE to $65 billion next month and then be forced to raise it back to $85 billion or higher a couple months later because the economy continued to decline. Slow and steady wins this race. At this point Bernanke will want to risk over stimulating instead of under stimulating.

Economic Calendar

There are also some high profile earnings reports next week. Adobe on Tuesday after the close should give us a better read on how their subscription model is growing. They are moving from a purchase model to a subscription model on titles like Photoshop.

More important is the FedEx earnings on Wednesday. Back in early May several brokers warned that expectations for FedEx earnings were too high. The continued recession in Europe and the slow decline in China and Asia were forcing FedEx to mothball planes and prices were not providing enough revenue at the lower volume levels. The stock sold off slightly but then rocketed higher. That bloom faded when the broader market collapsed in late May. Shares have been trending higher over the last week and it will be interesting to see if recent buyers were right or if FedEx will disappoint.

Also on Wednesday are chip stocks Jabil Circuit and Micron. Red Hat (RHT) will also report and the stock is sitting at a 52-week low. Expectations are minimal and that is normally when a good earnings report can produce a giant short squeeze.

Oracle rounds out the list when it reports Thursday after the bell. The only person that makes any real money from Oracle shares is Larry Ellison. Everyone else just gets whipsawed around in the chop until they get tired and sell it. I would personally ignore Oracle's earnings but their guidance could be the key for expectations for the tech sector when the real Q2 earnings begin in four weeks. Listen for subscription and license growth or declines.

Darden Restaurants (DRI) reports on Friday and we should watch for any sign that consumers have been eating out less because of higher food prices and higher gasoline prices. Any decline in customer traffic could be symptomatic of a new wave of consumer weakness. The retail sales from May did not suggest that but we need to keep watch for any early signs of consumer weakness.

In stock news Restoration Hardware (RH) posted the kind of earnings most companies only dream about. The company reported a +38% increase in revenue and same store sales increased +41%. This compares to same store sales in Q1 of +26%. The company specializes in high end hardware and it is stealing market share from everyone. They raised guidance for revenue in Q2 to $380 million compared to analyst estimates for $351 million. They raised earnings guidance to 42 cents compared to analyst estimates of 38 cents. This was their second beat and raise quarter. Shares rocketed higher by +16% to $68. Restoration went public in November.

RH Chart

Monster Beverage (MNST) capped a decent rally with a -4.4% decline on Friday. News moving the stock was the potential for a ban on energy drinks. Most investors probably thought this had gone away after the flurry of headlines in November that knocked the stock back to $40. That particular set of headlines did fade but a new one erupted last week. The AMA's House of Delegates, the principle policy making body, is set to debate high energy drinks at a meeting this weekend. There are new concerns that the AMA will endorse at least a partial ban on the advertisement and/or sale of energy drinks to anyone under the age of 18.

Monster had shaken off the prior headlines and announced just last week that overall sales had risen +9% and international sales +17% in April and May. There are several studies that suggest the energy drinks may be harmful and specifically to teenagers with no self control.

Monster Chart

Oil prices traded at a nine-month high intraday as shares spiked to $98.25 on worries over events in Syria, Turkey, Sudan and Egypt. Investors worry that the conflict in Syria could spread to other regions now that President Obama has authorized sending U.S. weapons to Syrian rebels. The White House said it now had proof Syria has been using chemical weapons against the rebels.

Let me get this straight. The U.S. is giving weapons to the rebels, which are supported by Al Qaeda, in order to counteract the Syrian regime supported by Iran, Russia and Hezbollah. Once the civil war is over those weapons will then be used against the U.S. and Israel similar to what happened in Libya. That country is now in a state of lawlessness and it is too dangerous for U.S. energy firms to send in workers to get the oil facilities repaired. If the rebels win the Syrian civil war the odds are very good Syria will be even more lawless than Libya and Jordan, Israel and Turkey will have a new fight on their hands.

I am glad I don't have to make the decisions over U.S. politics in the Middle East. I don't think there is a correct answer and definitely no easy way out.

The oil supply picture for the rest of the decade is only going to get worse as these countries and others struggle to overcome the bitter internal factions and the results of years of war damage.

Dollar Index Chart - Daily

WTI Chart (Continuous Electronic Contract) - Daily

For two weeks the Japanese Nikkei controlled our markets. On Thursday the Nikkei was down -6.4% to 12,445 and closed in bear market territory. The Dow dipped at the open then rallied for a +180 point gain. On Friday the Nikkei gained +2% and the Dow opened positive and then gave up -106 points at the close. Apparently the Nikkei curse has run its course after two days of opposite moves in the U.S. markets.

Nikkei Chart

Gold can't move back over $1,400 despite rampant demand in the retail sector for gold coins, bars and jewelry. The picture below was taken on June 11th in China when more than 10,000 people lined up at a gold store to buy gold. This same buying panic is happening all over Asia and India. The gold they are buying is not going back into circulation anytime in the near future. China is suffering from much higher inflation than the USA and gold is a valid way to protect against that inflation.

Gold is not going to remain at the current level forever. With the Freeport McMoran Copper & Gold Grasberg Mine closed for up to three months there will be a sharp decline in the amount of gold moving to market. The mine is the second largest in the world and produces 3,000 ounces of gold per day and 3 million pounds of copper ore. Through June 11th more than 80,000 ounces of gold production has been lost. Freeport has announced a force majeure on output from the mine.

Freeport reported gold sales in Q1 of 191,000 ounces, a decline of -28% due to declining grades of ore at its various mines. This is a symptom affecting all miners. Ore grades for all the major metals have been declining over the last decade and production of the finished product is slowing. As Jim Rogers says, "They are not making any more gold."

That is small consolation for gold investors that have been crushed by the recent declines but this decline will eventually reverse. We know interest rates are going to rise, wars are going to increase and stock markets don't go up forever.

More than 10,000 people in line to buy gold in China

Gold Chart

Ten-year treasury yields declined -2.2% on Friday as volatility in the equity markets and weak economics sent some investors scurrying back to the "safety" of treasuries. With Bernanke buying 90% of the available short term treasuries and 20% of all mortgage backed securities issued there is some strong support under treasuries but every hedge fund with money to spare is shorting that market. Eventually they will be right. The history of treasury yields is frightening.

The yield on the 30-year treasury hit 18.63% back in October 1981. I had a 12% home mortgage at the time and I was buying a rental house every month because real estate was so cheap. The high interest rates and suddenly higher utility rates had people fleeing to apartments by the millions. I had a lender that sent me a list of his new vacancies in my area every month. Rents collapsed just as I overdosed on rentals and I spent a couple years working myself out of that headache. People under 50 don't understand what can happen to the economy. They have never seen rates that high and hopefully I will never see them again either. The chart below is from the St. Louis Fed database. The gray areas are recessions.

30-Year Treasury Yield Chart

10-Year Treasury Yield Chart

Fortune magazine reported the money on deposit at the Federal Reserve by banks has now risen to more than $1 trillion. To put this in perspective before the financial crisis the bank balances at the Fed rarely exceeded $25 billion. Balances began to increase in late 2012 but still just a few billion. In the first quarter of 2013 the deposits surged to exceed $200 billion. In late April the deposits surged again to more than $1 trillion. JP Morgan has $214 billion on deposit at the Fed, up from $61 billion in 2012. Wells Fargo has more than $100 billion, up from $40 billion in 2012.

You would think with all that extra cash just lying around the banks would be making loans like crazy. However, nobody wants the money or to put it another way, nobody with credit wants to borrow any money. Lots of people that would have qualified for a loan before the financial crisis would gladly take out a loan but the banks don't want to lend to them today. In the NFIB survey last week 52% of respondents said they did not want to borrow any money. More than 28% said they did not need any more credit. Only 5% of businesses said they could use more credit and those are probably the 5% that don't qualify under the new banking standards.

The banks have a lot of money and nowhere to put it except at the Fed. They don't want to lend it to another bank because of uncertainties lingering from the financial crisis. They can't buy treasuries because the Fed controls the market and they all expect interest rates to rise and crush treasuries. In fact a lot of the treasuries the Fed has been buying on the open market came from banks. The banks are afraid of future interest rate rises so they sell their treasuries. The Fed buys them; the bank ends up with a lot of cash and no loans so they deposit that money at the Fed. The Fed currently pays 0.25% on funds deposited at the Fed. That is $2.5 billion at the current deposit balance. In the future when the Fed decides to raise rates the amount of interest the Fed will pay on deposits will rise as well. That means a lot of government money will be paid to banks in the form of interest for their deposits.

Once interest rates rise the banks will withdraw their deposits and make loans. Where it is not worth the risk today to loan a marginal credit money at 5% it may be worth it at 10% at some point in the future. Eventually the Fed will have to deal with the surplus in deposits that are not helping the economy. The Fed would like that money to be put to work and not collect dust in their electronic vault.

There is a bear market in real estate or at least in the real estate ETFs. The iShares RE ETF is the IYR. It has fallen from $76 to $66 over the last four weeks. Reasons blamed include the 52-week high in mortgage rates, rising home prices keeping buyers on the sidelines and the surge in foreclosures. Homes in foreclosure rose to more than 3 million in May. Lenders are seeing the +12% spike in prices in 2013 as a sign they can foreclose on slow payers and liquidate the property to rid themselves of the problem. They are deleveraging their balance sheet and slimming their loan portfolio to performing loans only.

The surge in inventory is faced with a decline in demand as mortgage rates move over 4%. Those who were going to buy already have and those on the fence have a new reason to wait. The decline in the housing sector is going to be a major drag on GDP.

IYR Chart

Lightning struck the presidential elections in Iran and a reformist candidate won on the first vote with more than 50% of the votes out of a field of six. In order to give the appearance of fairness the Supreme Leader Ayatollah Ali Khamenei allowed two reformists to run for the post along with five "conservatives" also seen as principlists and candidates aligned with the Supreme Leader and the principles of the Islamic Revolution. Nobody expected the reformists to get enough votes to even qualify for a runoff election. They were the token straight men.

A funny thing happened on the way to the election. Hassan Rohani started drawing crowds and struck a chord with the population. He campaigned on ending the 30%+ inflation and the nuclear sanctions that have pushed unemployment to more than 25% and crushed the business community. He waved a giant key at his rallies signifying he would unlock the closed doors that are keeping the country from moving into the 21st century. On June 11th the fellow reformist unexpectedly dropped out of the race swinging his votes to Rohani. In the final days of the campaign two former presidents Ali Akbar Rafsanjani and Mohammad Khatami joined forces to endorse him. Suddenly a wave of pro reform sentiment swept through the population and Rohani was elected with a 51% majority. I am sure the Supreme Leader and his council are stunned that their carefully choreographed election fell apart so quickly they could not do anything about it.

The Supreme Leader still holds the majority of the power including control over the military but having Rohani as president is going to be a major upset in the way that power is used. This is a major change in Iran. It actually means there may not be any military action by Israel and the USA. Rohani is in favor of increased freedom for the press and non-governmental organizations. He wants to ease social restrictions and remove the government's "unwanted interventions" from Iranian lives. He has a masters and doctorate law degrees and he is very smart and fluent in English, Arabic and Persian. This should help in his negotiations with world leaders. He said that while sanctions are not responsible for all of the country's problems they must be immediately tackled to move the economy in a new direction. This could impact oil prices if the underlying security premium begins to bleed off.

Markets

Helping to push the markets lower on Friday was a downgrade of economic expectations by the International Monetary Fund. The IMF left the growth forecast for the U.S. at +1.9% for 2013 but they cut expectations for 2014 from +3% to +2.7%. The +3% forecast was made in April.

Leaving the 2013 prediction at +1.9% actually puts them on the high side of many estimates. The consensus seems to be tracking more in the +1.4% to +1.5% range because of the drag from sequestration. The IMF believes the sequestration could remove as much as -1.75 points off the 2013 GDP. If that is correct it is going to be very difficult to show any GDP growth in Q2 and Q3.

The IMF also said it does not see the Fed changing its QE3 purchases until the end of 2013 or early 2014. The IMF sees only a "very slight" decline in the amount of monthly bond purchases in 2014."

It also urged the Fed to "carefully manage its exit plan to avoid disrupting financial markets." The IMF said unwinding its record low interest rates and the $85 billion in monthly QE purchases will be challenging even though the Fed has a range of tools to withdraw the stimulus. The IMF warned of abrupt and sustained moves in long-term interest rates and excessive interest-rate volatility if the withdrawal is not handled correctly. Such moves "could have adverse global implications, including higher international financial market volatility." That would be a monumental understatement.

The Fed has never successfully unwound a period of increased stimulus. The Fed has never had this much stimulus in place before. If you do the math the outlook for a successful unwind without market disruptions is exceedingly slim.

The IMF also warned "recent data suggests a slowdown in global growth." Pointing to weak investment prospects in Brazil, India, Russia and South Africa, Director Christine Lagarde said, "We could be entering a softer patch." Europe has been in recession for the last six quarters and analysts do not expect growth in the current quarter. The ECB said last week that it "continues to see downside risks surrounding the economic outlook for the euro area."

The U.S. markets turned down about the same time the IMF forecast and comments were released.

The U.S. is (choose your favorite):

The cleanest shirt in the dirty clothes hamper.
The best house on a bad block.
An island of refuge in a stormy sea.
The least leaky boat in a storm.
The market of last resort.

Whichever saying you chose the intent is still clear. The U.S. markets, even after three weeks of high volatility are still the strongest markets in the world. Despite that label there may come a point where the U.S. catches the bear flu currently spreading around the globe.

I showed the chart for the Nikkei earlier showing Japan entered a bear market last week. Just hitting that -20% threshold may mean a rebound for them since they currently have the most aggressive QE program on the planet for their size. However, the way that program is being implemented has not produced the same results as the Federal Reserve. Japan's JGB yields are all over the map and the yen has been rising rather than falling. This proves just having an aggressive QE program is no guarantee of a bull market.

With the rest of the world markets following China's prospects lower will that eventually infect the U.S. as well? That is the beauty of being the market of last resort. Investors fleeing all the other markets will look for the strongest place to invest and today that is the USA, or is it?

There are signs our economy is slowing. We are not yet in recession but you can hardly call estimates for +1.5% growth a self sustaining economy. If the Fed would quit rocking the leaking boat with its taper talk we might be able to get to year end without a serious correction.

They floated the "taper" balloon and it was immediately shot down. Eventually they will be forced to trim the purchases simply because of physical limitations. If they wait until the economy is self sustaining the damage to the markets will be a lot less.

For the time being the Fed should look around at the other global markets and the economic forecasts for China and Europe and think really hard about whether they want the U.S. markets to lead or follow.

China Shanghai Chart

Russia Chart

Brazil Chart

Some believe the Fed is on the path to permanent stimulus. We are five years into the current monetary easing cycle and most analysts don't believe the Fed is going to end QE3 until late in 2014. Just ending QE3 is not the end to stimulus. With the Fed funds rate basically at 0% they will still have to hike rates significantly to return to a "normal" status somewhere in the 4% range with mortgage rates back in the 8% range. I seriously doubt anyone reading this can imagine moving to that type of rate environment anytime soon. Maybe by late 2015 the Fed will start raising rates slowly but it may take a couple years to return to "normal" or somewhere in 2017. That assumes the normal 5-7 year business cycle does not interrupt the process and put the Fed back into an easing mode.

I have not even mentioned unloading the nearly $4 trillion in securities they will own by the end of 2013. The Fed has said they could allow them to run off (mature) rather than sell them back into the market place but that means the Fed will be stuck with a $4 trillion balance sheet for the rest of the decade and that will limit their ability to respond to the next big economic problem when it appears. Despite their talk of allowing the portfolio to mature they will have to sell some of it back into the market even if the monthly totals are miniscule compared to the total balance sheet.

The bottom line here is that the Fed is facing a significant battle in the years ahead and that means the stock market will bear the brunt of the reaction. If the economy were to return to 3.5% to 4.5% GDP growth it would make the process much easier but that would mean the global economy would have to improve significantly as well. With the Middle East and Northern Africa in meltdown mode that is going to be a drag on the global economy. Countries in riot mode are not going to see rising consumer demand. Despite the appearance of financial strength in Europe it is all phony. There are still problems in the eurozone that will come back to haunt a major portion of the global economy. The ESM bailout fund has still not been approved by all the countries and it could fail.

The U.S. is the market of last resort but that does not make us impervious to global contagion. Just because we have been vaccinated against many strains of the global flu does not mean we won't get sick. We will suffer a milder case of whatever is ailing everyone else but we can still get sick.

Meanwhile the Yen carry trade is in unravel mode. The Yen has rebounded more than 10% since the 96.41 low on May 22nd. In currency terms that is a major move. Investors are trying to decide if that is just a dead cat bounce after the eight-month decline or has the Abenomics program failed. A continued rise in the Yen will cause selling in equities.

Japanese Yen Chart

Twice now the S&P has dipped to the support of the 50-day average and both times there was a significant technical rebound. While that is a good pattern to establish it also sets us up for a clear sell signal if at some point in the future the 50-day does not hold. That is now the line in the sand that all future dips must honor or risk millions of stop losses being triggered.

I think the real question is not "will support break" but "where will the dip stop when support breaks." It is practicably inconceivable that we will not see a bigger correction at some point this summer. August and September are two very bad months for the markets and we will be that much farther down the road on the taper discussions.

Of course if Bernanke says something in the Wednesday press conference that sounds like "We are not going to taper until year end or early 2014" the market is going to rip higher and shorts are going to be crushed. The odds of him saying that are nearly zero but the recent uncertainty over the taper comments suggests he will try to say something to calm the storm. The taper comments have acted as a form of monetary tightening at a time when the economy is actually slowing. That is the opposite of what Bernanke wants.

We have to assume that the market weakness last week was the pricing in of multiple assumptions of Fed action and inaction. The market is never wrong. We just don't know what it is really thinking. Millions of investors have placed their bets ahead of the Fed or more likely removed some bets from the board. There is normally a bout of volatility following the Fed statement but the press conferences have muted that somewhat. This conference may be different and we could see some enhanced volatility depending on what he says and what investors are expecting.

If support at the 50-day (1613) breaks it is followed by 1598, 1580 and 1540. There are quite a few analysts that expect 1540 to be tested this summer. It may not happen next week but odds are good it will happen eventually.

If we get a rip roaring rally after the Fed meeting there are multiple lines of resistance at 1640, 1650, 1660, etc. Every failed rally and lower high on the way down becomes a resistance point on the way back up.

So far the downtrend from the May 22nd high has held on every test. A break of that trend could trigger additional short covering.

On the daily chart the Relative Strength Index (RSI) is on the verge of a major breakdown.

S&P Chart - 90 Min

S&P Chart - Daily

Like the S&P the Dow respected the 50-day average support at 14,990 and that is the clear line in the sand for sellers. Traders will have their stop losses just under that level so that a failure of support will take them out of their positions. If a support break does occur the Dow has strong support at 14,500 that should hold on the first test.

The pattern of lower highs is still intact and without a strong post Fed short squeeze that suggests the next move on the Dow will be down.

Dow Chart - Daily

The Nasdaq is following the same pattern of lower highs with support at 3400. The MACD is showing no evidence of an upturn since it rolled over on May 22nd. Watch 3400 for support followed weakly by 3380.

Apple rolled over after the Worldwide Developers Conference failed to spark any enthusiasm and it closed at a new 30-day low on Friday. Without strength in Apple the Nasdaq is going to be weak. Analysts are now saying the next iPhone announcement may be disappointing and we could see a sub-$400 price in the coming months. The low on May 22nd was $385.

Nasdaq Winners and Sinners

Nasdaq Chart - Daily

The Russell 2000 Small Cap Index is still the strongest of the major indexes. It remains well above the 50-day although it has not been reactive to that average as you can see from the April decline. The Russell has the same pattern of lower highs but it remains much closer to resistance at the 1,000 level than the Dow or S&P and their same relative resistance levels.

While the Dow and S&P have been slipping the Russell has been consolidating. There is a difference. Using the Russell as our sentiment indicator for fund managers and the broader market it would appear nobody is running for the exits. Normally managers would be taking profits ahead of the summer swoon.

Support on the Russell is 965-970 and odds are good it will be bought.

Russell 2000 Chart - Daily

For next week I expect Bernanke to clarify taper expectations. If he does not do it in a positive way the path for the market is down.

We have entered a period where bad news is now bad news. Good news is now bad news. That is contrary to recent months where bad news meant extended QE and was therefore good news. Fundamentals are coming back into focus although very slowly.

Q2 earnings are just ahead with the S&P companies expected to grow profits by +3%. We did see a large number of guidance warnings in the Q1 earnings cycle. Putting that into context of a newly enacted sequestration on March 1st those companies might have been over compensating for the bad news. If the impact of the sequestration has not been as bad as expected then we could see a lot of positive surprises. It is too early to tell yet since we are just now entering the warnings cycle for Q2.

This is going to be a week with a large number of headlines and the market will be reacting to those events. Be prepared for volatility.

Enter passively and exit aggressively!

Jim Brown

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"Forgive your enemies, but never forget their names."
John F. Kennedy