The first full week of Q2 earnings season is now behind us. Overall the results have been good but corporate guidance has been a little timid compared to prior quarters. Investors are still a bit nervous and have lifted gold to new all-time highs. The dollar has dropped on euro strength thanks to progress in Europe on another bailout deal for Greece. Meanwhile there has been no progress in the U.S. on the debt ceiling talks.

A quick recap of last week's events starts with the plunge on Monday, led by financials. This pushed the S&P 500 under the 1300 level but traders bought the dip at 1295, which happens to be the 61.8% Fibonacci retracement of its June rally. At the time European markets were sinking on worries the PIIGS countries were getting worse. Tuesday saw a strong market rebound on news that leaders in Washington were closer to a deal on the debt ceiling issue. A rebound in Europe and a round of better than expected earnings news didn't hurt. Housing starts surged to the best reading in six months at an annualized pace of 629,000 units. Building permits also came in better than expected at 624,000.

Wednesday saw further improvement in Europe thanks to a successful debt auction by Portugal, one of the PIIGS. Here in the U.S. the June existing home sales came in light at 4.77 million. Another round of strong earnings news on Thursday continued to fuel the rally. Investors ignored a bounce in the weekly initial jobless claims at 418,000. The big event in Europe was yet another meeting with EU, IMF, and ECB leaders who agreed on a new deal to help Greece's recovery. Back at home in the U.S. the Philly Fed survey came in better than expected at +3.2, which was a big improvement over last month's -7.7 reading. By Friday's closing bell the S&P 500 had rallied +2.1% for the week, which essentially erased the -2% decline the prior week. Yet from the Monday morning lows the S&P 500 has seen a +3.8% rebound.

Unfortunately the rally seemed to stall on Friday as talks broke down between congressional leaders and the White House on the debt ceiling debate. The S&P 500 struggled to get past the 1345 level. If the S&P 500 index can rally higher then the next level of resistance is 1360. Currently the index is only 25 points away from a new multi-year high above 1370. If stocks retreat then the S&P 500 should find some short-term support at 1330 and then at 1320.

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

Big cap technology stocks helped fuel big gains for the NASDAQ composite and NASDAQ-100 index ($NDX). The NASDAQ rebounded from support near 2750 on Monday and surged toward past the 2850 level by Friday. The composite is less than 30 points away from a new multi-year high. While the $NDX has already broken out past resistance and closed at new ten-year highs on Friday. This move by the $NDX is very bullish. It's going to be interesting to see if the rally continues with so many high-profile tech names reporting earnings this week.

Daily chart of the NASDAQ Composite index:

Daily chart of the NASDAQ-100 index:

The small cap stocks seemed to lag behind their big cap brothers. The small cap Russell 2000 index only managed a +1.5% gain for the week but it saw the same +3.7% bounce off its Monday lows. It's going to take another +3% rally to get the $RUT to its 52-week highs. Typically the small cap earnings are not as strong as the big cap results so this group could lag over the next couple of weeks. I'm not saying it can't rally but there is more opportunity for an earnings landmine in the small caps.

Daily chart of the Russell 2000 ETF (IWM)

The SOX semiconductor index produced an interesting week. The semis fell to a new relative low and appeared to break support last Monday. Yet the group reversed higher, thanks in part to a strong earnings report from Intel. The intermediate trend is still bearish with lower highs and lower lows and the 50-dma has crossed under the 200-dma but the long-term trend of higher lows is still intact for now. We'll have to wait and see if the current bounce rolls over or not.

Weekly chart of the SOX semiconductor index:

The Dow Jones Transportation index still has a long-term bullish trend of higher lows and higher highs. Yet the sector's gain last week was only +1.6%. If this group can keep last week's bounce alive then it will provide some confidence that the wider market's rally has further to go. A close under 5250 would be worrisome and suggest a drop toward technical support at the 200-dma.

Daily chart of the Transportation index:

Looking at the economic calendar this week we've got some big reports coming up. The July consumer confidence comes out on Tuesday. Durable goods orders and the Federal Reserve's Beige Book are released on Wednesday. The biggest event is probably the Q2 GDP estimate on Friday. Economists are expecting the Q2 GDP to come in at +1.6%. Goldman Sachs is estimating +2%. Of course we're also facing a very, very heavy earnings announcement week with hundreds of companies reporting their Q2 results.

- Tuesday, July 26 -
Case-Shiller 20-city home price index
Consumer Confidence for July

- Wednesday, July 27 -
Durable Goods Orders for June
Federal Reserve Beige Book

- Thursday, July 28 -
Weekly Initial Jobless Claims

- Friday, July 29 -
U.S. GDP estimate for Q2
Chicago PMI for July

Normally the Q2 earnings announcements would take center stage. This time I fear that the debt ceiling issue will hog the spotlight. As of this weekend lawmakers were at a stalemate and unable to come to a deal. It's been widely reported that President Obama wanted a deal by July 22nd. Now we are facing the hard deadline of Tuesday, August 2nd. The credit rating agencies have already warned us that they might have to downgrade the USA's triple-A rating. Even if congressional leaders do patch some sort of band-aid deal together at the last minute then we could still face a credit downgrade for failing to have a stronger plan in place.

Previously I had a hard time imagining that lawmakers would not raise the debt ceiling limit. It's not like they haven't done it before. Actually the debt ceiling has been raised nearly a hundred times in the past century. Now I'm not so sure it will get done but that's probably what congressional leaders want you and their opponents to believe. I strongly suspect what we are witnessing is the epic game of brinksmanship I warned you about a couple of weeks ago.

On a side note, there is a great illustration of just how big the U.S. debt really is. You can check out the website here.

U.S. National Debt (source:www.wtfnoway.com)

If we do see a deal on the debt ceiling get done then it would be short-term bullish for the market. On the other hand, the closer we get to next weekend without a deal is one step closer to financial Armageddon. America is the lynchpin to the global financial system. If our credit rating is downgraded it will have significant repercussions around the world. If you did check out the website I just linked to then you know that this country will eventually face a day of reckoning for our debt and unfunded liabilities. There is just no way to ever pay back that much money. Most people were hoping that crisis was still several years down the road.

I remain market neutral. Last week's +2% gain was nice. The bullish breakout in the NASDAQ-100 index is very encouraging. Europe's agreement for a new bailout rules for Greece should be very positive. Yet the stock market will remain hostage to the debt ceiling issue. If you forced me to make a bet I would bet that a deal gets done, which would be bullish for stocks. In the meantime, if you see opportunity I would trade small. I'd rather keep some cash available in case the market sees another sell-off in August.

- James