Stocks ended the week on a positive note but it looked more like a short squeeze following economic news out of China and JPM's earnings report on Friday morning. The market's gain also looks more like a technical bounce after a six-day decline. The U.S. dollar tagged a new relative high on Thursday and the euro currency hit multi-year lows this past week. Silver and gold can't seem to break the multi-month trend of lower highs. Oil is still trying to bounce in spite of the dollar's strength. U.S. bonds bounced off their intraday week low with the yield on the 10-year bond rising back to 1.5% on Friday. Thanks to Friday's market gain the S&P 500 ended the week up +0.1%, the NASDAQ -0.9%, the Russell 2000 -0.7%, the Dow Industrials +0.04%.

U.S. economic data continues to disappoint. The University of Michigan consumer sentiment numbers came in at 72.0, which is a seven-month low. The Producer Price Index (PPI) for June rose +0.1%, which was higher than expected. Core-PPI prices rose +0.2% for the fourth month in a row. The big event this past week was the FOMC minutes from the last meeting. Investors were hoping for a strong hint of new QE but were disappointed with the fed's "further policy stimulus likely would be necessary to promote satisfactory growth," line.

Most of the market-moving economic data came out of China. Earlier in the week China's Consumer Price Index (CPI) reading on inflation came in at +2.2%. The big headline was Friday's Q2 GDP number and the day before Mr. Wen Jiabao, the Chinese Premier, said, it is "important to promote a reasonable growth in investment." That would suggest China will continue their current plan of trying to stimulate their economy.

The markets have been agonizing over the potential for a "hard landing" in China for a couple of years now. Prior to Friday's China Q2 GDP report there were whisper numbers that real GDP growth had fallen into the +4% to +5% range. Officially China said their economy grew at +7.6%, which was slightly less than estimates for +7.7% but much higher than the whisper numbers. Of course the communist Chinese party controls the news so we don't know how accurate these numbers are. The +7.6% GDP reading marks the weakest growth since early 2009 and the sixth quarterly decline in a row but the news sparked some short covering since it was not as bad as many had feared.

China said retail sales in June grew +13.7%, which was less than May's +13.8% but above the 13.4% June estimate. Industrial production in China came in at +9.5% versus estimates of +9.8%. The Chinese government is definitely trying to stop the slowdown. They have cut their bank reserve ratio three times since last November which increases the amount of capital banks are allowed to lend. Plus, they've cut interest rates twice this year, the most recent one a surprise cut two weeks ago.

Elsewhere in the news Europe is still worried about Spain. On Monday this past week the yield on Spain's 10-year yield was above the crucial 7.0% level. Yields have retreated since then but Spain is on the brink of a collapse and the EU finance ministers declared they would try and speed up the delivery of 30 billion euros to help stabilize Spanish banks. Meanwhile back in Asia, Japan said their machinery orders fell -14.8% in May compared to an estimated -2.6% decline.

A number of headlines last week were focused on earnings since we are in the middle of Q2 earnings season. Unfortunately almost all of the headlines were negative. Company after company is warning and/or missing estimates. A few of the high-profile warnings came from Cummins (CMI) and Applied Materials (AMAT). The exception was JPM and WFC. Investors were very worried about J.P.Morgan Chase's (JPM) earnings report on Friday. Analysts were expecting a profit of 75 cents a share. JPM delivered $1.21 a share. Revenues were down year over year. The market seemed to breathe a sigh of relief that JPM's losses on the "whale trade" were only $5.8 billion (so far). We can all agree that's a huge loss but JPM brings in about $88 billion a year in revenues and a net income of about $16.5 billion a year. The company has more than $515 billion in cash.

JPM CEO Jamie Dimon continues to dig deep into the details of this nightmare trade gone wrong. Several people have already left the company or have been fired. We are also hearing about claw backs on salaries and bonuses from some of the executives involved with this deal gone bad. For the most part this earnings report and disclosure on the whale-trade losses should put this issue behind JPM. The stock rallied +5.9% on the session. Meanwhile JPM's rival Wells Fargo (WFC) had a decent quarter with earnings of 82 cents a share versus the 81-cent estimate. This is up from 70 cents a year ago. WFC's mortgage division seems to be operating at full steam with a very strong quarter. That should be bullish anecdotal evidence for the rebounding real estate market.

Major Indices:

The S&P 500 index eked out a +0.1% gain for the week thanks to Friday's +1.6% bounce. The oversold bounce actually began on Thursday when the S&P 500 started rebounding off the 1325 level. The index had been testing technical support at its 50-dma on Tuesday and Wednesday and dipped to its 40-dma on Thursday before starting to bounce. Looking at the chart below you can see the S&P 500 is in an intermediate trend of higher lows and higher highs while still under the larger bearish trend of lower highs.

There is immediate resistance near 1360 and the 100-dma. Yet the level to watch is probably the early July high near 1375. A close over 1375 could signal a run toward its 2012 highs near 1420. I wouldn't get too excited just yet. A lot of Friday's move looks like short covering thanks to the better than expected JPM earnings report and the not as bad as we feared Chinese GDP number. I'm worried that this bounce will run out of steam and a close under the trend of higher lows will portend a drop toward the June lows near 1275-1265.

I hate to say it but you could argue this entire bounce from the June lows is nothing but a big bear flag pattern.

Daily chart of the S&P 500 index:

The action in the NASDAQ composite looks similar with a big bounce (+1.4%) on Friday. Yet even with the bounce the NASDAQ still lost -0.9% for the week. We have the same conflicting trends of higher lows (bullish) versus the larger trend of lower highs (bearish). I suspect this oversold bounce still has some gas left in the tank. The question will be whether or not the NASDAQ can get past resistance near 2950 and its 100-dma and then the July highs near 2975.

If this rebound fails, then a breakdown under this past week's low (and the exponential 200-dma) would signal a like drop toward 2800 and probably the June lows in the 2750-2725 area.

The technical picture here is very muddy and with so many high-profile tech stocks poised to report earnings this week we could see a lot of volatility in the NASDAQ and NASDAQ-100 index.

Daily chart of the NASDAQ Composite index:

The small cap Russell 2000 index has seen a -4.8% correction with the drop from resistance near 820 to new support near 780. Believe it or not the $RUT looks the most bullish here with the Thursday-Friday bounce. We need to see some follow through on this bounce. The level to watch remains 780. A close under 780 would look very ugly and suggest a much deeper correction to come. On a short-term basis I am expecting a bounce back to 820. A breakout past 820 should produce a rally towards the 840-850 area.

Daily chart of the Russell 2000 index

We are facing a relatively busy week of economic data. The reports to watch are the CPI on Tuesday, the Fed's Beige Book on Wednesday, and the Philly Fed survey on Thursday. We'll also see some housing data. Federal Reserve Chairman Ben Bernanke is going to be in the spotlight with his semiannual testimony on the state of the economy before lawmakers.

Bernanke speaks before the Senate on Tuesday and gets to repeat his performance on Wednesday before the House. Odds are he will continue the line that growth is too slow but it is still growth and that the Fed is ready to act should things deteriorate. Of course the real question will be just what "actions" the Fed can still take since lowering rates any further is not possible and they've already extended Operation Twist, which doesn't seem to be working very well.

The real fireworks will be earnings news. The Q2 earnings season hits full blast this week. Over 200 companies are reporting with a lot of high-profile names making announcements. Tech titans IBM, INTC, and MSFT all report. Financial giants AXP, BAC, and Citigroup (C) also report. With the exception of JPM and WFC this past week, most of the earnings reports have been disappointing and guidance has been terrible. If that trend continues then the market's current rebound won't last.

Economic and Event Calendar

- Monday, July 16 -
Retail sales for June
New York State Empire Mfg survey
business inventories for May

- Tuesday, July 17 -
CPI for June
industrial production & capacity utilization
Fed Chairman Bernanke's testimony before the Senate

- Wednesday, July 18 -
housing starts and building permits for June
Fed's Beige Book Report
Fed Chairman Bernanke's testimony before the House

- Thursday, July 19 -
Weekly Initial Jobless Claims
Existing home sales for June
Philly Fed survey

- Friday, July 20 -
(nothing significant)

The Week Ahead:

Earnings results will be the main focus this week. One year ago Wall Street was expecting Q2 2012 earnings growth to be +14%. Today consensus estimates have fallen to -2.1%. If you exclude Apple (AAPL) and Bank of America (BAC) from that calculation then current estimates are for -5% earnings decline. Almost everyone is expecting disastrous earnings results. That begs the question, has terrible Q2 earnings already been priced into the market? If they have been priced in, then any sort of good news or bad news but not as bad as expected news could actually lift the market.

If analysts have lowered their estimates too much then corporate America might be able to surprise to the upside. We have already seen a lot of warnings about how Europe's slowdown impacted sales. There could be a parade of companies blaming Europe. That's nothing new so it shouldn't be a negative surprise for anyone. That leaves room for a positive surprise. I am not saying that we should bet on stocks to rally because of the possibility of better than expected earnings (correction: not as bad as expected earnings) but it remains a possibility.

I do keep coming back to the concept that everyone is so negative already the contrarian would be betting on the market to rally. Investors pretty much hate stocks right now. You wouldn't know it by the action in the major indices with the S&P 500 less than 5% from its 2012 highs but the latest investor sentiment survey puts bullish sentiment at only 30% versus the long-term average of 39%. Bullish sentiment has been under the average for 15 weeks in a row. That hasn't happened in almost 20 years.

I suspect we are going to be inside a volatile trading range for the next week or two while investors digest the flood of corporate earnings news. It's possible that Q2 earnings headlines will distract us from the almost constant barrage of worries about a slowing China, a slowing U.S. economy, the troubles in Europe, and the fast approaching "fiscal cliff" in the U.S. Until we see the market close at a new relative high, I am expecting this bounce to fail.

I would be cautious when it comes to new bullish trades.

- James