It was a big week for economic news and stocks managed to post another weekly gain but the major averages remain under significant resistance. Last Monday started the week off with a bang. Better than expected ISM manufacturing data fueled a +2.2% rally. Unfortunately most of the gains stopped right there. As I suggested a week ago, the market churned sideways waiting for the jobs report on Friday morning.

Investors digested the disappointment in the ISM services data and the pending home sales for June pretty well. Services represent 90% of the U.S. workforce. The sector is still growing but the growth is slowing down and came in worse than expected. However, the employment gauge for the ISM services component turned positive with a reading at 50.9. Readings over 50.0 indicate growth and expansion. The same day brought the ADP employment report, which was stronger than expected. Economists were looking for +25,000-30,000 new jobs in the ADP number. What we got was +42,000, refreshing hopes for a stronger jobs report on Friday.

Hopes faded a bit on Thursday when the Labor Department reported an unexpected jump in initial weekly jobless claims. The market was expecting a decline to 455,000 but claims jumped to 479,000 and have remained stubbornly high above the 450,000 level. The disappointment continued on Thursday with the same-store sales figures for July. Wall Street was expecting, on average, +3.1% growth but retailers only delivered +2.9% and 60% of the companies reporting missed expectations. July is normally a huge clearance and discount month. If consumers aren't buying the big discounts then it doesn't bode well for the fall. On a brighter note July was the 11th month in a row that retailers did see positive same-store sales numbers but July was also the fourth month in a row that these figures came in below estimates. Part of the problem is the consumer savings rate, which has risen to a new one-year high at more than 6%. While this is great for consumers it can be deadly for retailers. The more money we save is less money we spend at the store.

Major retailers in Britain echoed bearish concerns with slowing consumer spending. Yet most of the economic data out of Europe was positive last week. Of course the big report was the U.S. nonfarm payroll data on Friday morning. Job losses were twice as bad as expected. The market was looking for a headline number of -65,000 due to a decline of 160,000 temporary census workers. The real focus was on private sector employment and investors were expecting a gain of +90,000 for this area. Unfortunately the headline number came in at -131,000. The federal government only cut 143,000 census jobs but there was a big jump in the job cuts from cash-strapped state and local governments. Further adding to the disappointment was private sector employment added +71,000, under expectations.

Accentuating the job loss figures were government revisions for June and May's jobs reports, which showed an additional loss of -97,000 jobs. Another warning signal was the drop in temporary help services. Normally a rise in temporary help jobs is a leading indicator the economy is improving and hiring is about to improve. Friday's report showed a decline of -5,600 temporary help positions.

Economists were expecting the unemployment rate to tick higher from 9.5% to 9.6% but the rate stayed unchanged as 181,000 people stopped looking for work, which reduced the workforce. If you look at the under-employed rate, which counts those out of work and only working part time because they can't get full-time work, you'll see unemployment is closer to 16.5%. We probably won't see any improvement any time soon. The federal government still has about 200,000 people employed as temporary census workers. These positions will continue to expire.

Altogether the U.S. economy has lost 8 million jobs since the recession began in December 2007. According to the east coast think tank Brookings Institution, they estimate it will take 11.5 years for the U.S. to reach pre-recession levels of employment. They looked at the last ten years and found the best monthly average job creation was +208,000 a month. We need at least +125,000 a month just to keep pace with population growth. On a side note the U.S. Department of Agriculture said that people on food stamps hit a new record of 40.8 million in May this year. That is a +0.9% increase from April and a +19% increase from a year ago. Current estimates expect this number to rise to 43.3 million people next year. The current U.S. population is estimated to be almost 310 million so that means about 13.2% of the population is on food stamps.

One of the things I find most puzzling is the rally in the stock market and the rally in bonds. Bonds are surging higher, which would suggest more and more investors are feeling nervous enough to park their capital in a safe haven security like bonds. At the same time stocks are up about 10% from their July lows. So how much of the stock market rally has been short covering? They say that volume is a weapon on the bulls. Strong volume on the rally is bullish. We are not seeing strong volume. Of course this past week the lack of volume makes sense as traders waited for the payroll data.

The rush into safety pushed the yield on the two-year note to a new all-time low under 0.5%. The yield on the 10-year U.S. treasury sank to 2.81%, a 15-month low. Right now there are expectations for the yield on the 10-year bond to fall toward 2.3%-to-2.2%. This rally in bonds and decline in yields is pushing mortgage rates to new all-time lows. The average 30-year fixed rate mortgage is down to 4.49% but so many homeowners are underwater on their mortgage they can't refinance. Although I will point out that mortgage applications have been inching higher the past couple of weeks. Just because a consumer fills out an application doesn't mean it will get approved.

The market action is mixed. The rally clearly stalled at resistance this past week. Yet stocks failed to see much of a sell-off given the disappointing jobs number. The jobs report would have been a perfect catalyst to launch the markets into the next leg higher or lower. Instead the Friday morning weakness evaporated. What are investors scared of that they would cover their shorts ahead of the weekend?

The S&P 500 has a bullish trend of higher lows but if you take another look at the index it also has a bear wedge pattern forming. I think there is still a chance the index could form an inverse head-and-shoulders pattern. We also have to consider the possibility that somehow stocks continue to rally. A breakout past 1130 on the S&P 500 would be bullish. I would certain prefer to buy a bounce near 1040 or even the July lows near 1010.

Daily charts of the S&P 500 index:

The NASDAQ's rally did not quite reach its 100-dma. While traders did buy the dip at its trend of higher lows some of the momentum indicators are suggesting this index is going to roll over soon. A close under 2250 might forecast a drop toward 2140 or even the July lows near 2070. If we're going to watch the NASDAQ we also need to watch the SOX semiconductor index since the chip stocks tend to lead the NASDAQ. Right now the SOX is going nowhere. It has been stuck in a trading range for months although the range has narrowed over the past few weeks.

Daily chart of the NASDAQ index:

chart of the SOX semiconductor index:

The small cap Russell 2000 index looks very similar to the S&P 500 but the index failed to reach its 100-dma last week. Traders bought the dip when the $RUT neared technical support at its 50 and 200-dma but the bounce was weaker compared to its large-cap peers. This is another sign that investors are nervous. A close over the 670 or 680 level would improve investor sentiment.

Daily chart of the Russell 2000 index:

Looking ahead we have a couple of events this week. On Friday we'll see the CPI data and the latest consumer sentiment numbers. Yet the real event will be the FOMC meeting on Tuesday, which could be a real wildcard. Earlier I asked why would traders cover shorts after the dismal jobs number? I think it could be the Fed meeting. The jobs data was so bad that analysts expect the Fed to announce some form of quantitative easing and no one is positive what design and shape this easing might take.

If the Fed makes some sort of move to "help" the economy it will only reinforce how fragile our situation really is. Analysts are starting to ratchet down their growth expectations for the rest of 2010 and 2011. Goldman Sachs expects the second half of 2010 to see +1.5% GDP growth and unemployment is expected to rise to 10% and stay there throughout 2011. Legendary bond fund manager Bill Gross believes that the U.S. could see its long-term unemployment rate eventually settle at 7%. He suspects that the FOMC will be forced to keep rates extremely low for the next two or three years. That is certainly not a vote of confidence.

Overall I don't see any catalyst to drive stock gains. Seasonally August and September are the worst months of the year. We are quickly approaching the 2010 election cycle and the rhetoric will only increase uncertainty. Consumer confidence and small business owner confidence continues to shrink. Thus we won't see any improvement in consumer spending. As we move deeper into the year the residential real estate market is unlikely to improve. Now there is fresh talk that China's real estate bubble could burst. Real estate values in China have ticked lower two months in a row. The Chinese government is requesting banks redo their stress tests to factor in a -50% drop in housing values.

Looking at this stock market bounce over the past few weeks I am reminded of the words of General Ackbar and his famous line, "It's a trap!" If we see the S&P 500 close over the June 21st high of 1131 then I might change my tune. Otherwise we're better off waiting for another correction and then look for the bounce before considering bullish positions.

~ James Brown