The final GDP numbers for the first quarter of 2010 were a disappointment. Investors were also unhappy with the latest earnings report from RIMM Thursday night. The early morning tone on Friday was bearish and stocks were poised to hit their fifth decline in a row. Yet a better than expected consumer sentiment number and a watered down financial reform bill helped reverse early losses. Leadership in the banks played a big role in lifting the S&P 500 to a meager gain and end the streak of declines.

The U.S. dollar posted its third decline in a row and appeared to be accelerating lower on Friday. This gave commodities a boost. Gold rose more than $9 to $1,255 an ounce, close to its all-time high. Copper made a big move as well with a +2.7% rally on Friday. Crude oil surged to $79 a barrel (+3.3%) but part of this move was fueled by hurricane fears. News that a tropical depression could turn into a hurricane and move into the Gulf of Mexico lifted oil higher and shares of BP lower. BP's stock sank to a 14-year low as traders try to discern what a hurricane would do to clean up efforts. Should the storm intensify and move north it would force a two-week delay as crews dismantle their operations, outrun the storm and then restart their attempts to plug the leak. This would leave the well gushing unchecked for several days!

The stock market sell-off has been worldwide. The Japanese NIKKEI broke through support near 10,000 and the 9,800 level for its biggest weekly loss in a month. The next level of support is the 9400 level, where the NIKKEI has bounced twice. The Chinese and Hong Kong markets are also rolling over but have yet to test their June lows. In Europe stocks fell for the fourth session in a row closing at two-week lows. Miners were weak on demand concerns with several countries trying to trim their budgets. Morgan Stanley issued cautious comments on British retailers. The German DAX index produced a failed rally under key resistance near the 6300 level. Not everyone has a bearish attitude. More than one analyst believes that when EU regulators disclose their bank stress test results it could lift investor sentiment and stocks. Of course we'll have to wait and see if that data is released.

I am a little surprised the U.S. markets didn't see deeper declines on Friday morning. The Q1 GDP numbers came in at +2.7% growth compared to the prior estimate of +3.0%. Then again there were whisper numbers that GDP could have fallen to +1.5% growth so maybe there was a quiet sigh of relief. Friday's report confirms the recent string of disappointing economic data. Economists are concerned that the growth spurt could run out of gas as the inventory build out begins to slow down. The latest numbers showed inventories grew from prior estimates of $33.9 billion to $41.2 billion. The Q1 data also shows an increase in imports and weakness in consumer spending.

The GDP figures placed consumer spending at +3.0%, which was almost double the Q4 numbers of +1.6% but less than May's +3.5% growth rate. If you read this column then you already know that consumer spending is widely quoted as 70% of the U.S. economy. Consumer sentiment is normally a good indicator of consumer spending. Yet I am wondering if there is a disconnect between consumer's feelings and their actual purchases. We'll have to wait and see what June's numbers are but last month the Commerce Department said May retail sales fell -1.2% breaking a seven-month streak of gains.

Hopefully the University of Michigan consumer sentiment figures on Friday are a sign of things to come since confidence numbers increased from 73.6 in May to 76 in June. Economists were expecting a rise to 75.5. The bump to 76 happens to be a two-year high but it's worth noting that the ten-year averages is 84.5 so consumer confidence remains weaker than normal. Most of the gains in confidence came from the current conditions component with a jump from 81 in May to 85.6 in June. The expectations component, which is supposed to measure consumer confidence about the economy six months into the future, inched up from 68.6 in May to 69.8 in June. The decline in GDP growth could be a sign of things to come. Analysts are starting to downgrade their GDP estimates for the second half of 2010. It is estimated that we need a minimum of +3% growth to balance job creation with our population growth (that's about 125,000 new jobs a month).

The bigger story on Friday was the financial reform bill (a.k.a. fin-reg). A Bloomberg article probably said it best, "Banks dodged a bullet". Investors have been concerned over what might be inside the biggest banking reform bill since the 1930s. This uncertainty has been a black cloud over the financial sector, one of the largest chunks of the stock market. You already know that Wall Street hates uncertainty. Knowing that the House and the Senate have finalized the fin-reg bill removes a lot of uncertainty and naturally the banking stocks rallied.

It could have been worse was the general opinion. The final version of the bill has a watered down Volcker Rule, which limits a bank's ability to invest their own money in hedge funds or propriety trading. The new rules limit this to 3% for any particular fund. A lot of the major banks are already in this 3% range so it's no big change for them (which is positive). The bill does require more regulation of derivative trading, which will need to be cleared through an exchange. Yet this was widely expected and thus not a surprise for the banks. Exchange stocks like the CME and ICE rallied on expectations they will see more business.

I'm only skimming the surface of fin-reg. Details of the 1,500-page financial reform bill have not been released yet and the bill still has to pass its final vote in Congress. The major point here is that Wall Street has a lot more clarity on what the new rules will be and the banks be able to make the appropriate changes and carry on. Removing the cloud of uncertainty eliminates a major obstacle for a significant portion of the stock market. This increases any chance of a sustainable rally if stocks can turn higher.

Chart of the BIX Banking index:

Normally summer Fridays can be volatile, low-volume sessions as traders leave early for the weekend. Not this Friday. Volume surged thanks to the annual Russell index rebalancing. The Russell 1000 (big caps) and Russell 2000 (small caps) indices were shuffled and money managers need to raise $14 billion to buy the new additions. Where did they get the cash to make these purchases? They sold shares of the remaining Russell components. Normally it's not a big deal. Unfortunately this past Friday was special because Berkshire Hathaway B-shares were being added to the Russell 1000 index, making this year's rebalancing larger than normal. The end result saw several big cap, highly liquid names like WMT and PEP get crushed as fund managers sold stocks to raise money for the rebalancing.

The market technicals look ugly, especially short-term. Monday's bearish reversal was very widespread and we're seeing lots of bearish reversal patterns on the weekly charts too but these need to be confirmed. I will note that the Russell 2000 ($RUT), the Semiconductor index ($SOX), and the Dow Transportation index ($TRAN) all paused at their 61.8% Fibonacci retracement of their mid June bounce. It's probably wishful thinking on my part that these indices will rebound from this technical level but it is something short-term traders could watch.

Chart of the S&P 500 index:

A week ago in our watch list I mentioned that stocks were in no man's land. Well given the reversal in the S&P 500 and its drop back below the 1100 level that is definitely true today. The S&P has support at the 1040 level and resistance near 1,110 and its 50-dma (1127). The S&P 500's weekly chart has produced a bearish engulfing (reversal) pattern but it needs to be confirmed first. On the daily chart we're only a few days away from a "death cross". That's where the simple 50-dma crosses under the simple 200-dma, which is traditionally seen as a very bearish signal.

Two weeks ago I proposed that the market is getting tossed around by several cross currents. For every good economic data point it's followed by a bearish one. Do you remember the positives like strong cargo traffic at the port of Los Angeles or the +50% surge in Chinese exports. Someone has to be buying those goods. Just a week ago Europe was reacting to positive news about Spain's successful bond auction and a positive report card on Greece's austerity measures. These seem to be forgotten. Now we're focused on all-time record low new home sales and a sharp four-week plunge in the Baltic Dry Goods index. I haven't mentioned the $BDI index in a while. This measures prices for day rates on dry-good ships. Rising prices equal rising demand and vice versa. The $BDI has been plunging, which doesn't bode well for June or Q2 economic activity. It seems that we have more and more ammunition for the double-dip camp.

Chart of the Baltic Dry Goods index:

Another concern is a slowdown in government spending. The controversial U.S. stimulus package is due to expire (i.e. run out of money) on January 1st, 2011. In addition to federal money slowing down we have 46 U.S. states that are facing a budget crisis. Income tax and sales revenues have fallen five consecutive quarters in a row. That has not happened since the early 1960s. These states will have to slash services, building projects and cut spending to meet a $125 billion short fall. How many of these states are going to raise taxes to try and fill the gap? The combination of higher taxes and slower government spending is going to depress economic growth in this country and overseas. That's the same recipe that is going to push Europe back into a double-dip recession.

Looking ahead there is a G20 meeting this weekend. You can bet that Europe's debt challenges will be at the top of the discussion list. I doubt this will be a market mover on Monday but you never know. We do have a lot of economic data coming out this week. The big reports will be the ISM numbers and the Non-farm payrolls (jobs) report on Friday. The jobs report could be a big surprise. The U.S. census is almost over and temporary workers have been getting laid off. The headline number could show a drop of -150,000 jobs. To make matters even worse there could be tens of thousands of lost jobs thanks to the moratorium on deepwater drilling in the Gulf and the lost economic activity due to the spill. Friday's report could certainly be a shock!

Investors need to be very cautious. Summer is normally a slow time for businesses. If we add to the mix high unemployment, a very weak housing market, record foreclosures, worries about higher taxes in 2011, a slowdown in the inventory replenishment phase, a slowdown in government spending here in the U.S. and in Europe, and put it all together - it doesn't seem like a bullish recipe to be buying stocks. Regular readers know I've been concerned about a double-dip recession in the U.S. for many, many months but the bulls can always surprise you. There are times when stocks can climb the "wall of worry". Sadly I just can't see what the catalyst is to buy stocks right now.

Until the major averages actually break down under their June lows there is hope. We may be stuck in a trading range as investors wait for more data thankfully we won't have to wait very long. As mentioned previously this week we'll get lots of economic data but the major report will be Friday's jobs number. Even then the market may be range bound until we hit earnings season, which doesn't start for another couple of weeks.

LONGER TERM OUTLOOK

Previous Comments on my Long-Term Outlook:

My long-term outlook has not changed. I still expect the economy to see a double-dip, "W"-shaped rebound with the second dip in late 2010 (some analysts are predicting it will not show up until 2011). Lousy consumer spending, rising foreclosures, and lagging job growth will be the main culprits. Several weeks ago there were some comments out of the U.S. Treasury concerning foreclosures. The Obama administration's HAMP loan modification program can only help a certain number of homeowners and one official said that even if the HAMP program was a total success we should still expect millions of new foreclosures. Estimates were in the 3 to 5 million foreclosures over the next three years but a White House advisor was quoted with estimates in the six to ten million range over the next three years. This only reinforces my own belief that we will see another tidal wave of foreclosed homes in 2010 and 2011. What is that going to do to consumer confidence and consumer spending? It's not going to help! You can review my long-term outlook here. It's the second half our my "Two Months Left" commentary.

~ James Brown