The rebound lacked intensity and shorts loaded up again at the end of the day but it was a rebound. Worries about a drop to S&P 950 or even 900 seemed to evaporate as the day drew to a close.

Market Stats Table

The market rebound from the brink of disaster as reported by the talking heads on TV, was far from miraculous. Every minor dip we have seen since early July has seen buyers jump into the gap. Volume was lackluster and they did try to sell the close so calling the family together for a celebration could be premature.

The market got some good news in the form of earnings but economics turned into a drag. The weekly Chain Store Sales snapshot showed sales fell sharply by -0.9% over the last week. This is disturbing because we are in the middle of the back to school shopping season. However, many states had sales tax holidays the prior week that pushed sales earlier into the month. Still the headline number was a drag on the markets.

The headline number on the July Producer Price Index (PPI) fell -0.9% compared to a rise of +1.8% in the prior month. Analysts were not expecting a rise given the weakness in the global economy. The consensus estimate was for a decline of -0.3% so they missed it by a mile. Wholesale prices have now fallen a record -6.8% over the last year. Core prices fell a smaller -0.1%. The decline in wholesale prices is helping fuel profits for manufacturers if only they could find somebody to buy their goods. These declines mean the Fed should remain on hold for months to come. However, it also shows there are some deflation pressures lingering in the system.

Housing starts fell slightly to an annualized rate of 581,000 in July from 587,000 in June. However, the internals showed that single family home starts rose +1.7% with the decline caused by a -13.3% slowdown in apartment houses. Single-family starts rose to 490,000 and +37% higher then the rate at the January low. However, that is also 37% lower than July 2008. The pace of starts is being impacted by the expiration of the federal tax credit on Dec 1st. Most builders don't want to add to already high inventories when the stimulus is going to dry up soon. There is currently an 8.8-month supply of single-family homes in inventory.

Housing Starts

The July Semiconductor Book to Bill report was released late this evening and the headline number rose to 1.06 from 0.77 in June. Orders rose from $218 million to $570 million. Billings rose to $538 million. However, despite the gains billings for July 2009 are still 50% below July 2008. The headline BTB number means manufacturers are receiving $1.06 in orders for every $100 billed. The low for this cycle was 0.47 in January. There were 29 consecutive months of a book to bill ratio of less than 1. It appears conditions re improving.

Semiconductor Book to Bill

There are no material economic reports due out on Wednesday. Mortgage Applications, Business Employment Dynamics and the Risk of Recession reports are not market movers. Oil and Gasoline inventories could power the energy sector.

Tuesday was a big earnings day despite being late in the cycle. Target (TGT) beat the street by 13 cents but profits fell -6.3%. The earnings beat was credited with a strong focus on cost cutting and controlling expenses and the drop in oil prices from 2008, which lowered transportation costs. The CEO said consumers remained cautious with a focus on necessities like food and avoiding nonessentials like apparel and home furnishings. "Discretionary categories remain a challenge."

At Target 40% of revenue comes from those nonessentials and that impacted revenue. Target also said they were tightening credit standards for their credit card operations and wrote off $304 million in the quarter. Target also said they were forced to expand their "low price" promise to match competitors ads. They said their best customers were visiting less and weekend traffic has fallen off more than weekday traffic. Weekend traffic is "shopping" while weekday traffic is "buying" traffic by housewives. Expectations were so grim for Target earnings that the stock spiked +7.5% to $44.50 on the decent news.

Target Chart

Home Depot (HD) reported profits that fell -7% with consumers staying away from large purchases. The average cash register sale fell -9.3% to $52.25. HD, like other retailers, said they beat the street by +8 cents at 67-cents by increased cost cutting and strong sales in paint and garden items. Those are the cheapest items consumers can implement as they try to sell their homes. There was some good news. Same store sales improved in the U.S. for the first time in five years and its two most trouble markets, Florida and California, improved significantly.

However, their guidance was less than spectacular. They said comparative sales would not be positive until the second quarter of 2010 or possibly even the second half of 2010. Despite the depressing revenue guidance they did raise earnings guidance slightly and that pushed the stock price higher by +3%. Home Depot said they remained concerned about the level of foreclosure activity, which hit a high last month. HD competitor Lowe's reported earnings on Monday and their profit fell -19% and missed analyst estimates. The Lowe's results were a factor in accelerating the market decline on Monday on fears the consumer had completely shutdown their spending.

Home Depot Chart

After the bell Hewlett Packard (HPQ) reported earnings of 91-cents that beat the street by a penny. Hewlett has not missed an estimate since July 2004. Revenue fell -2% to $27.5 billion but still beat estimates slightly. HPQ guided analysts to the midpoint of their prior guidance of $3.76 to $3.88 before items. However, they also said revenue would decline between 4-5%. HP closed at $44 and traded down about 50-cents in after hours on weakness in sales of PCs and printer ink. Sales of PCs declined -18% despite a +2% increase in units sold. There is serious deflation in the price of computers as manufacturers wage a price war to keep market share. The ink business has been taken over by the generic makers and that is also pressuring historical HP profits. On the positive side HP said server sales were brisk. HP avoided calling a bottom in the U.S. markets as Intel did and that was what traders were hoping to hear.

Hewlett Packard Chart

I reported over the weekend that BBT Bank had agreed to acquire the assets of Colonial Bank for $22 billion when the FDIC closed it on Friday. According to the BBT CEO this was essentially a risk-free transaction for BBT. The terms of the deal protect BBT from the first $5 billion of losses and they will only share in 5% in the next $14 billion in losses. The FDIC will bear those risks. The CEO said the most BBT could lose was $500 million over the next few years if the entire Colonial loan portfolio was charged off.

BBT immediately priced a public offering of $750 million at $26 and it was so over subscribed that BBT said it would raise the amount to $962.5 million. Net proceeds would be used for general corporate purposes like changing the signs, letterhead and software at the 346 Colonial branches they are acquiring. BBT also said they were marking down the Colonial loan portfolio by a whopping 37%.

BBT Chart

Shareholders of Pulte Homes (PHM) and Centex Homes (CTX) approved the acquisition of Centex in an all stock deal valued at $1.53 billion. This will make Pulte the largest U.S. homebuilder and they will control 189,452 lots as of July's month end. Pulte said it will save $350 million a year from the acquisition. Despite their $3.6 billion cash in the bank they will need that $350 million savings to pay off the $6.3 billion in bills owed by Centex. Shares of both companies were mostly unchanged.

GM said it was raising production by 60,000 units between now and year-end in order to replenish inventory depleted by months of non-production and the sudden sales surge from the cash for clunkers program. An analyst from said that sales boom had almost completely faded. Based on a survey of trends those intent on purchasing a car over the next four weeks has fallen by 31% in the last two weeks. The government added $2 billion to the program but it appears the pent up demand has faded. 400,000 people who did not have a car payment traded in their lowly insured clunker for a 4-5 year monthly payment and increased insurance costs. This is money they will not be able to spend at Target or Home Depot.

Oil futures hit $65.23 on Monday on fears the global consumer was dying. This afternoon those same futures closed at $69.19 and continued higher after the bell to $70.34 on an unexpected drop in API inventory levels. The better than expected earnings at TGT and HD suggested the consumer was not dead. The rally in the equity market also knocked the dollar index back to last week's levels. Crude futures expire on Thursday and overhead resistance is around $72 and a breakout there could produce a strong rally. Conversely another failure at that level could see a retest of the $60 level. However, with three named storms in the last week there will be a hurricane premium in the price. Ana evaporated along with Claudette but Bill is churning away with winds in the 100-mph range. Fortunately Bill has changed its track away from the gulf and the Caribbean in general and is aiming for Bermuda and possibly New York.

Oil Chart

Natural gas futures have declined for nine consecutive days and the decline has been hastened by the roll out on the UNG ETF. Today was the last day of that futures roll and that means the damage is probably over on the gas futures. With the major producers curtailing production it is only a matter of time before gas prices rise. With the government talking down coal every chance they get the demand for more natural gas electric plants will continue to rise. With the current month futures closing at $3.09 and the next month out at $3.45 you can see the impact of the UNG roll. I suspect Wednesday might be a good time to go long a natural gas stock like Chesapeake (CHK).

Natural Gas Chart

Apple (AAPL) and Research in Motion (RIMM) got a boost from a 92-page report from RBC Capital Mike Abramsky. Mike says revenues for Apple and RIMM could triple by 2012. He said the shift to mobile computing through smart phones was as big a technology shift as mainframes to PCs. He said smartphone penetration is likely to grow by 300% to 504 million users in 2012 from an estimated 165 million in 2009. This 504 million estimate is a 35% jump from his prior estimate. He raised his price targets for RIMM to $150 from $100 and Apple to $350 from $190 and Palm to $25 from $19. Seems Palm just can't get any respect.

Monday's decline was dramatic but unfortunately it came on very light volume for that type of a move. Only 8.7 billion shares were traded. It was a 90% down day meaning declining volume was 90% of the volume. This typically signals a turning point in the markets to have a 90% up or down day. However, for that to happen there needs to be a significant volume increase to accompany the move. Without any material volume it is just a surface move.

That means we can't apply too much credibility to Monday's drop. However, it also means we can't apply any credibility to Tuesday's rebound since that was the lowest volume day since July 14th. To make converts of anyone still sitting on the sidelines you would have wanted to see an 11 billion share day or better and a strong imbalance in the A/D line. The 3:1 advancers to decliners was decent but nothing like the 10:1 we want to see to really cement the sentiment.

Also the new 52-week highs have been slowly declining since their high of 329 back on August 3rd. We had new market highs on the 7th, 12th and 13th with no corresponding spike in new individual highs.

Market Internals Table

I keep hearing more every day about how this is a bear market rally. It is getting more and more press every day and yet the dips are still bought. Louise Yamada made a point today saying the eventual top in this rally will not be when the sellers finally gang up on the bulls but when the last bull enters the market. Once you vote with your money there is nothing else you can do to stimulate the market higher.

Another small cap strategist was spinning her tale today about why the rally has further to go. Reportedly we are exactly at the same point 200 days into the rally and a +60% rebound on the Russell as we were in the 1982 rebound. That rally went on to see a 98% rebound in the Russell. This is not 1982 and the recovery this time around may be a little slower. However, we are still expected to recover even if you discount Home Depot's Q2 2010 remarks.

There is still $3.5 trillion in cash on the sidelines. How market analysts arrive at that number I don't know but it seems to be repeated a lot. That is down from $4.5 trillion about 3 months ago. According to one analyst that is $16 trillion of buying power so if only half of that money was invested we should see a big market move.

The "retest the lows" crowd believes the consumer is going to go into hibernation and everyone will get coal in their stockings over the holidays. Louise Yamada believes we are at the same place as the rebound in 1938 with a +60% gain. This is where the rally failed and the market fell -82% from there to the 1942 lows. Get a life Louise. I don't care if GM has to give away its cars, the government will devise a program to subsidize them along with stoves, dishwashers and big screen TVs. The Fed will not allow the market to implode again. We have gone from Oct/Nov when three major financial institutions collapsed and the economy is still functioning. We are not going to retest the lows. (Sure hope I don't have to eat those words)

On the bearish side there are plenty of factors in their favor. The market has run ahead of reality. I have said that many times but that is what markets do. They are always focused on the future. Yes, we are due for a correction. Art Cashin said it best. "You can't live by inhaling alone. Eventually you have to exhale." We did exhale in late June and early July before moving higher. I could easily see another exhale coming.

Earnings are basically over. Economics are slipping slightly and August/September are the two worst months of the year historically. Add in a 60% rebound on the Russell and we are at risk. Cashin also warns that Ramadan begins on August 22nd. That is the month long Muslim fasting period. He fears there could be a terrorist event somewhere to "test" the new administration as Joe Biden claimed would happen. That may happen or it may not and I doubt millions of investors are worried about that potential tonight. Most have never even heard of Ramadan.

There are three levels we need to watch to tell us what is happening to the markets. The first is S&P 980. This is initial support that was tested on Monday. That may or not fail and it would not be a big deal if it did. S&P 970 is the next and more critical level. That would be roughly a 5% correction from the 1018 S&P high on August 7th. I would like to believe it will hold and I do believe it may be tested. That would be as teddy bear correction and should be enough for buyers to feel more comfortable about coming into the market.

However, if support at 970 breaks we could easily test 905 again. That would be a full papa bear correction of -10%. If it happens remains to be seen. What I do believe is that funds are still under invested. Retail traders are getting back into the markets on dips and Q3 earnings will be better than Q2 and Q4 will be better than Q3. The economy is pulling slowly out of the quicksand and the market should continue to focus six months down the road rather than six months behind us.

If we sit in cash on the sidelines then we are no better than the fund managers who are chasing performance today because they were afraid to buy the market back in March or later. I prefer to buy the dips until proven wrong. I realize I will eventually be proven wrong and that is why they have stop losses. My dip buying stop loss will be 965 then I will begin looking for 910 as an entry point. It is entirely possible a drop to 905 could overshoot and go all the way to 880 based on the chart. I don't need to worry whether it is going to be 940, 905 or 880 because I will be flat or short at 965. That is how you solve all that worry about a real market correction.

S&P-500 Chart

The Dow chart shows the 10% correction level at just below 8500 with stronger support at 8275. What is not clearly visible is the initial support at 9000 that corresponds with 970 on the S&P. Nobody can look at the Dow chart for July and not believe we are overbought. In fact the rounding top at the 38% retracement level of 9422 has all the signs of a topping action, which suggests a further decline. We can drive ourselves crazy trying to filter out all the different biases of the market reporters and analysts with decades of experience or we can just go flat with a break of 9000 and sit back and watch. That will be my choice but I am using the S&P 970 instead of the Dow since the Dow is so volatile to individual events.

Dow Chart

The Nasdaq scares me. The drop below 1950 was a critical failure. Tuesday's rebound back over that level was not convincing. If 1950 support breaks again I believe we are going to 1875 or even 1775. If you wanted to use a different index for a stop loss I would key on another break of that 1950 support. It is possible the Nasdaq could pause at 1900 but 1875 is stronger support based on the Fib chart and the June highs. Like I said the chart scares me because the potential for a breakdown here seems more likely than the S&P chart. Plan accordingly.

Nasdaq Chart 120 Min

Nasdaq Chart - Daily

For the rest of the week there are a lot of economic reports but none that are critical. The Hewlett Packard, Home Depot, Target earnings today should take precedence over any to follow later in the week. The market is all dressed up and has nowhere to go unless something happens unexpectedly to push it higher. I want to believe the bulls will buy future dips but we need to prepare out exits in case they don't show up when the bell rings.

I apologize for the You Tube video confusion last weekend. If you still want to see the videos in context please view the weekend market wrap on the website. Click here

Jim Brown