Expectations appear to be fully priced into the market and every event seems to attract sellers rather than buyers.

Market Stats Table

It seems that every news item either positive or negative is being sold. Not heavily but just enough to suggest the bulls are becoming less interested in remaining long. This morning's economic reports were an example. Consumer Confidence rebounded from last month's 10-month low of 46.0 to 52.5 and the market hit the high of the day on the news then immediately dropped sharply to the low of the day. That +6 point rebound in the headline number came after a -10 point decline in February.

The dip in confidence in February is now being blamed on the weather, a convenient excuse that has been used for every unpleasant report for the last month. For March the expectations component rebounded from 62.9 to 70.2 to lead the rebound. The present conditions component rose from 19.4 to 26.0 in March.

However, buying plans saw a sharp drop. Those planning on buying an auto fell from 5.3% to 3.8%. Those planning on buying an appliance fell to 25.8 from 27.8. Those thinking about buying a home rose minutely from 2.7% to 2.8%. My question is this. If the weather was the reason for the February decline then why did buying plans for major purchases decline in March? I believe consumers are starting to worry about what the future actually holds and that is why we are seeing confidence moving sideways rather than actually advancing. I am also surprised that home buying plans only increased by 0.1% despite the current homebuyer tax credit.

The survey showed that more than 25% of consumers still expect a market decline over the next year. Gasoline prices are more than 75-cents higher than last year, consumer credit is still very hard to get and unemployment is very high.

Consumer Confidence Chart

The Case Shiller Home Price survey for January showed a minor +0.3% increase. The street was expecting a minor decline. This was the eighth consecutive month of existing home price increases. On a year ago basis the composite index fell only -0.7% and the smallest decline in almost three years. Home prices in the ten largest cities rose by 0.4%. This trend should reverse in May when prices are expected to begin declining again.

In other economic news Elizabeth Warren, chairperson of the TARP Congressional Oversight Panel, said the next major problem for the economy was the dangerous concentrations of commercial real estate loans. She said 2,988 banks, mostly midsized, hold the majority of these loans. She said these are the same banks that should be lending to businesses in order to rebuild the economy but they can't today because of their rising delinquencies in commercial real estate loans. She said more than half of all these loans would be underwater by year-end.

Wednesday is a big day for economics with the Mortgage Applications, ISM-NY, ISM-Chicago, Factory Orders, Wholesale Trade and Oil & Gas Inventories. I am not sure anyone will be around to react to any of those reports given the low market volume for this holiday week. Monday only saw 7.4 billion shares traded and that is likely to be the heaviest volume for the week.

Thursday has the largest volume of economic reports led by the national ISM manufacturing index but Friday has the biggest report for the week in the Non-Farm Payrolls. The estimates are actually declining somewhat and that it good news. The expectations were exploding beyond any hope of being met and it appears common sense is returning. The consensus today is for a gain of 190,000 jobs with Moody's claiming a gain of only 175,000 jobs. With whisper numbers last week as high as 500,000 jobs the market was setting up for a major sell the news event. With estimates coming back to reality where there is actually a chance for a positive surprise and the market is even more confused than it was last week.

The tortoise rally has pulled near to Dow 11,000 on the expectations for a strong jobs gain but where does it go from here? If we get a good but not overly strong jobs report then the market has nothing to look forward to until the beginning of May. The earnings cycle is due to start in three weeks and earnings are expected to rise +37%. Unfortunately this is already priced into the market as well. Traders will have to depend on stronger earnings guidance and upside surprises for trading ideas.

There are events that traders can look to for hope. For instance Applied Materials (AMAT) said this afternoon that sales for 2010 are now expected to grow by 60% rather than the prior forecast of 50%. Their various component divisions were upgraded as well. Sales in silicon are expected to rise 120% compared to the prior estimate of 100%. Applied Global Services up 35% instead of 30%. Display components up +50% compared to prior estimates of 30%. The AMAT CEO Mike Splinter said AMAT is seeing the early stages of a multi-year growth cycle. AMAT rallied on the news but the move was miniscule given the strong gains over the last three weeks and the expectations already in the marekts.

AMAT Chart

Apple (AAPL) continued to push the Nasdaq higher with another gain of +3.46 to another new high. Canacoord Adams analyst Peter Misek predicted this morning that Apple would announce the Verizon iPhone next week at the iPad product launch event. He said it has become typical for Steve Jobs to end the events with the phrase "one more thing" where he teases the audience with news of an upcoming product. Peter thinks there will be "two" more things next week.

One will be a new iPhone OS 4.0 with multitasking, simplified navigation, new multi-touch gestures and a new way to sync contacts. The second thing will be the CDMA iPhone for Verizon. He expects that phone to also have support for European GSM and HSPA standards. He expects the new phone to be available in June. It may even have a front facing camera for video chats.

The consumer population was expecting a 4G iPhone announcement for June. Peter does not expect the 4G phone until June 2011. The lack of a comprehensive 4G network today means there is no rush to market the phone. There is also a rumor that Apple will announce a new iPhone with a different size/shape in June.

Most analysts believe the announcement of a Verizon iPhone will be the death of Palm and severely cripple Google's smart phone sales. Analysts believe there could be as many as ten million Verizon users that have been patiently waiting for an iPhone that runs on the Verizon network. Once announced the other smart phones marketed by Verizon will be kicked to the curb with Verizon spending its marketing dollars on the leading smartphone rather than on a collection of misfits and oddball phones. RIMM and PALM both declined on the news. Analysts point out that Apple only has penetration in about 24% of the global market, 40% of the carrier base and they could increase their sales 700% over the next three years by striking deals with Verizon, China Mobile and NTT DoCoMo. Deals with those carriers would increase their addressable market by 65%.

Apple is also in rally mode because the iPad will finally be available on Saturday. The countdown clock is ticking and Jobs had better pull a rabbit out of his hat next week or the normal post delivery sell off on the iPad could be huge. The expectations for the iPad debut are strong and any news that buyers were NOT lined up around the corner at the Apple stores could be harsh news to those long the stock.

Apple Inc Chart

Intel announced a new eight core, sixteen thread, processor that can run in two processor configurations or up to 256 processors in one system. The new processor boasts an 800% increase in memory bandwidth with up to one terabyte of addressable memory in a four-processor configuration. The new Intel 7500 series processors claim over 20 new world records for speed. Intel claims one server with the 7500 processors can replace 20 older single core servers and reduce datacenter power requirements by 92%. Intel gained a penny on the news.

That last sentence should be a clue to the market. Intel gained a penny after announcing another revolutionary new processor. Applied Materials gained 14 cents after significantly raising earnings guidance. Either there is nobody paying attention to the market this week or every possible expectation is already priced in.

Those stocks are already expected to be doing better so no real excitement on the news. One company that did rally significantly on an unexpected guidance upgrade was Danaher (DHR). Medical device maker Danaher spiked +3.51 after raising earnings guidance to "at least 90-cents" from their prior guidance of 77-82 cents per share. Analysts were expecting 83-cents.

Danaher Chart

After the bell Honeywell (HON) raised its guidance to 45-49 cents per share from 40-45 cents per share. Analysts were expecting 44-cents. Honeywell said full year earnings would be near the high end of its prior forecast range. Honeywell said they continued to see signs of recovery throughout their business and were encouraged by improving customer order trends in the first quarter. On the downside Honeywell said health care reform charges could cost it 5-cents per share. HON jumped +1.25 in after hours.

Prudential (PRU) added their name to the list of companies warning about the impact of the healthcare bill saying they would take a $100 million charge. Other companies included ATI for $5 million, ITW $22 million and AKS $31 million.

3M (MMM) was the largest gainer on the Dow (+2.92) and single handedly kept the Dow from closing negative. 3M's gain represented nearly 24 Dow points and the Dow only closed 11 points higher. The 3M gain came after a Morgan Stanley analyst said he is "almost certain" MMM stock will rise over the next 30 days. The analyst, Scott Davis said the possibility of stronger than expected quarterly earnings would boost the share price, which has been lagging in recent months. 3M is a competitor to Danaher and the raised guidance from DHR suggests MMM should be seeing the same business metrics. Plus 3M has a strong LCD TV/graphics business. It will be interesting to see if Scott's "almost certain" call is career ending or career building a month from now.

MMM Chart

Market analysts claim the market is setting up for a scary summer. Art Nunes, portfolio manager at IMS Capital Management said individual investors in March were putting $4 into bond funds for every $1 they put in stock funds. Charles Biderman from TrimTabs.com said they were seeing "very little" money entering equity funds. Up until last week they were seeing near record flows of cash into bond funds, which he called scary. He also said short interest in mid March was the highest since July. He said there was also very high buying of leveraged short ETFs and heavy selling of leveraged long ETFs. He called that bullish on a contrary basis.

I agree to some extent. If the market manages to move higher over the next couple weeks there could be a huge short squeeze as everyone expecting an April decline is forced to cover. However, not everyone believes the market is going down. There is a rumor in the market that Goldman is buying up thousands of S&P futures contracts worth billions in expectation of a continued rally. Of course Goldman could create their own rally once they were positioned properly. The Commitment of Traders report showed a massive reduction in short positions in S&P futures. We don't know if this was capitulation by a major fund or everybody getting ready for a big move higher.

Open interest in S&P futures (large contract) declined by -171,375 contracts to 309,880 contracts. That is a 35% drop in open interest. The E-Mini S&P open interest fell by 1,229,912 contracts to only 2,348,917 contracts for a drop of -34%. The open interest in the Nasdaq 100 futures fell 45%. The majority of the drop in OI was of course due to the quadruple witching expiration on the 19th.

The problem for the over extended market is the lack of a real catalyst. Yes, earnings should be good but that is priced in. Yes, the jobs numbers should be good but they are priced in. Everything good is already known and priced into the market. There are still problems popping up daily like the returning Greek debt crisis, higher taxes due to health care, home prices about to decline, commercial real estate loan defaults, weak bond auctions, etc.

The market can still move higher because economics and earnings are positive. It just can't continue to move higher without a rest. It has been 38 trading days since the Dow declined more than 1%. It has gained +700 points in that span of time. In March there have been 21 trading days with 17 positive and 4 negative and none of those negative days were back to back. The unloved tortoise market has been inching up 20-30 points per day very steadily. Volatility has hit multiyear lows.

In short the markets are on autopilot and the captain flying the plane has been taking advantage of the drink cart. If turbulence develops it could be a bumpy ride ahead.

I believe Monday and Tuesday were picture perfect examples of end of quarter window dressing. We had the strong ramp last week to nearly Dow 11000 but the funds lost traction and could not cross the finish line. Now they are trying to run out the close as close to Dow 11,000 as possible as they target it for Wednesday's close. Just holding the markets in the green one more day will be a big win for fund managers regardless of what happens in Friday's jobs report.

Volume on Monday was 7.4 billion shares and today it was 7.2 billion. Wednesday could be a little higher as the bears take positions to short the close but it should not be heavy. There is no conviction either way and this is a holiday week.

Discussing the indexes is almost a waste of time because nothing has changed in a week. We are just hanging here in anticipation of month end. The Dow closed at 10,906 with a gain of +11. Are you excited yet? Dow 10,880 appears to be support and 10,950 resistance. Perfectly range bound, very low volatility. Support and resistance are converging but the only thing moving is the second hand on the clock as the quarter ticks away.

Dow Chart

The S&P has been moving in a little more than a 20-point range since March 17th. The 1170 level has become a price magnet that is now acting as support but the S&P can't seem to move far enough above it to break the bonds of attraction. S&P 1180 was the high last week and will probably remain the high for March.

If you think back to the beginning of the year the general range of estimates for the S&P for the end of 2010 was 1200-1250. We came within 20 points of hitting the low end of that range last week and we still have nine months to go. That means we are either going to have a very boring rest of 2010 or there is some huge volatility in our future. The third option would be that everyone was wrong and we are headed a lot higher. It would have to come on a significant increase in economic activity but that is also a possibility. For today the S&P is pinned to 1170 and will likely trade lower by the end of the week.

S&P-500 Chart

The Nasdaq is no different than the other big cap indexes. There have been breakout tests to the upside and downside but it is only trading ten points higher than it was on March 17th. If it were not for Apple the index would probably be trading down for the month.

There is no joy in tech land despite good news from the chips and decent forecasts from the computer companies. Stocks other than Apple are basically stagnated from their February rebound. I doubt there will be a higher high for March but there may be some higher numbers before the summer doldrums begin. Resistance is 2420 and support 2400. Fund managers just want to keep it pinned in that range for at least one more day.

Nasdaq Chart

The Russell 2000 chart looks exactly like the Nasdaq with no material gains since March 17th. It gapped open on the 17th to 684 and closed today at 684. This is another case of running out of conviction. Managers are just hoping for no decline until Thursday.

Russell 2000 Chart

In summary, I think we have one more day of peace and quiet. There could be some volatility if the bears want to try and hedge the close while fund managers try one more burst of window dressing. The low volume could accent any moves. The wild card here is the ADP payroll report on Wednesday. This is seen as a preview of the Non-Farm Payrolls and an unexpected number from ADP could wreck the carefully laid plans for a quiet quarter end.

I believe Thursday will probably be a volatile day as fund managers cash their bets ahead of the Non-Farm report on Friday. Since Friday is closed for Good Friday holiday they risk a negative risk for Monday. Managers do not want to try and unload positions on a gap down open. This should cause some to shed positions on Thursday or at least hedge against a negative jobs surprise.

I mentioned on Sunday I thought June puts on the Russell ETF (IWM) would be a good play over month end. Unfortunately I pulled that time frame out of my head without actually looking at the option chain. The June cycle has not yet been added to the available options. That makes May and August the potential candidates. The IWM closed at 68 today and we really want to be able to take advantage of any "sell in May" sentiment so I would opt for the August $65 puts with a target of $60 on the IWM. This is a risk trade and the risk is that we explode higher after a short dip in early April. To cut the risk you could use the May $67 puts and look to bail quickly on any dip.

Jim Brown