The daily gains have not been spectacular but so far September has far exceeded trader expectations. The problem with fairy tales is that they always end.

Market Statistics

The gains for the week were deceptive. We really did not have a day with a big gain but the trend continued to creep slowly higher. Negative economic reports, guidance warnings, estimate cuts and broker downgrades kept the bulls from running but the bad news could not keep them down.

Some of the bad news on Friday came from the Consumer Sentiment report for September. The preliminary number declined to 66.6 from 68.9 and the lowest level since August 2009. The decline came exclusively from the expectations component, which fell from 62.9 to 59.1. The current conditions component actually gained .1 to 78.4 from 78.3. The -3.8 point decline in the expectations is a material decline and suggests the short term rebound from the back to school season has faded.

Consumers claim they are worried about the economic outlook. This report is at odds with the recent retail sales reports from last week, where companies like JC Penny, Best Buy and Macy's said spending was improving. Some companies said it was the best back to school season in years.

For the period covered in this report there was a lot of chatter in the news about the potential for a double dip recession. We also saw gasoline prices rise and another drop in headline employment. Home sales fell off the cliff and home prices are declining again. Politicians are talking down the economy in order to explain how they would fix it.

All of these things weigh on sentiment but a continued rally in the stock market would go a long way towards improving the consumer outlook.

Consumer Sentiment Chart

Also weighing on sentiment is the drop in their net wealth over the last year. The Federal Reserve said on Friday that household debt declined by -2.3% in Q2 and the largest decline on record since tracking was initiated in 1952. This is a combination of paying off debt and defaulting on debt. Consumers who can have been deleveraging as quickly as possible and paying down balances in case the economy does get worse. Also, if you file bankruptcy your debt is erased.

Household net worth declined by $1.5 trillion in Q2. That was driven by declines in stockholder equity and mutual funds, which declined by $1.3 trillion accounting for the majority of that number.

Real estate values were slightly higher in Q2 but the ratio of debt to equity rose to 40.7%. That could be a combination of a lower valuation and/or a refinance to garner a lower interest rate. The majority of refinancing loans include the fees as new principal and quite a few have cash back at closing, which raises the amount owed.

Federal borrowing rose by 24.4% while state and local government borrowing declined. State and local governments are held to a tighter standard in most cases with the voters and local oversight groups leaning on lawmakers to limit spending and taxes. When politicians are elected to a Washington post they become insulated from the local process and tend to get caught up in the attempt to improve the bigger picture and increase pork barrel spending for their home state.

Unfortunately Q3 results are expected to be worse on all areas mentioned above.

The Consumer Price Index was also released on Friday and the headline rate rose +0.3% but it was all due to spikes in food (+1.2%) and energy (+3.8%) prices. The core rate was flat at 0.0% after three months of minimal gains. Analysts claim the "shelter index" restrained the core rate. The rent on primary residences fell for the first time since November 2009. That was probably due to the summer rental window closing and landlords reducing rent to avoid having a vacancy over the winter. There is no inflation in the economy and the Fed will have no reason to change their bias at next Tuesday's meeting.

Food prices were up due to the droughts around the world and the fires in Russia. That spiked U.S. grain prices due to export demand and raised prices for that grain in the USA. Energy prices were up because of increasing demand in Asia, the Middle East and Latin America.

Next week is housing week for economics. There are four major housing reports and they should all be negative. Expect a decline in prices and a rise in inventories. This will test the resolve of the stock market bulls unless there is a very unexpected improvement in sales.

Real estate analysts have been lowering numbers almost weekly for the last month in order to remove the optimism from their prior estimates. Even with the downgrades existing home sales are projected to have risen slightly in August but it is only a calendar blip as the last rush of home sales to close before school started. If housing numbers came in better than expected next week I doubt there would be a major rally on the news because of the negative longer-term outlook.

Moody's is predicting another 8% decline in home prices because of the number of pending foreclosures. They expect the market to bottom in Q3-2011. I heard another bank analyst last week claiming a -10% decline but I can't remember which bank.

The most important event next week is the FOMC meeting on Tuesday. There are conflicting expectations for another quantitive easing announcement. Some believe they will announce it to start after the elections in November and others believe they won't announce until after the elections so there won't be any claims of politics involved in their actions. I believe if the Fed believes there is enough justification for a new QE program to provide additional stimulus for the economy they would also believe it best not to wait for two months to start.

This QE2 conundrum will be the focus of commentators on Monday. Analysts will also be waiting for the Fed's outlook on the economy in order to compare it to their outlook from the August 10th meeting.

The Tuesday FOMC meeting will be a pivotal event for the market and the rally could end there if the FOMC statement is bearish.

Economic Calendar

The Jobless Claims on Thursday will be the key to watch for an uptick in claims. The next reading is the one that will correct for any abnormalities in the Labor Day reporting cycle. Moody's is saying it would take a +2.9% GDP rate to produce a positive jobs picture. Anything under 2.9% would result in a net jobs drain. Based on current estimates our Q3 GDP should be something in the 1.3% growth range or less than half what it would take to actually grow jobs. That suggests negative net employment should be with us for several quarters to come.

In stock news FedEx was still declining and holding down the transportation index after saying on Thursday it was closing 100 of its trucking terminals and cutting 1,700 jobs because of the problems in the economic recovery. The closures will come on Jan-30th after the busy holiday shipping season. FedEx reported earnings of $1.20 per share for Q2 and that missed analyst estimates by a penny. The FedEx freight division has been a drag on profits because the demand for shipping items like refrigerators and washing machines continues to be weak. FedEx Freight collects single lot items or less than truckload lots from many manufacturers and consolidates them into single loads for delivery. FedEx Ground ships small packages up to 150 pounds. Under the new plan FedEx is going to consolidate Freight and Ground with FedEx Ground the surviving name.

Oracle (ORCL) reported earnings of 42-cents compared to analyst estimates of 37-cents. Revenue was $7.5 billion, up +48% from the $5.05B in the comparison quarter. Oracle revenue rose on the inclusion of Sun Microsystems into Oracle results. Oracle license fees also rose about 25% while maintenance and support rose +12%. Oracle shares jumped +8% on the news.

Oracle Chart

Research in Motion (RIMM) also reported earnings and raised guidance but the market was not as kind to RIMM shares with a barely positive finish. RIMM said it added 4.5 million new subscribers in the quarter, which was slightly less than their own guidance. RIMM said the new BlackBerry Torch model was finding broad market acceptance even though it was only available through AT&T in the USA. It will be rolled out to 75 other countries this quarter. RIMM showed that sales of BlackBerry phones in the rest of the world were still hot although RIMM is up against some stiff competition in the U.S. with the iPhone, Droid, EVO and Galaxy. Several analysts cut estimates on earnings for future quarters. At one point RIMM had a near monopoly on smart phones but that has changed dramatically in the last two years.

RIMM Chart

Texas Instruments announced a $7.5 billion stock buyback and raised its dividend by 8%. This helped push the semiconductor index higher even though it really did not impact the future sales for the sector. TXN shares jumped +3% to $25.73.

TXN Chart

BP entered the final chapter on the Horizon disaster on Friday when it began pumping cement into the bottom of the Macondo well. The relief well that has taken three months to drill using the Transocean Development Driller II finally received approval to intercept the Macondo well nearly 3.5 miles beneath the surface, which it did early Friday. At 1:30 ET Friday it began pumping cement into the broken well. Once the cement cures and BP completes a pressure test the relief well will also be plugged and abandoned. BP has completed pumping the cement and the final pressure test is scheduled for 11:PM on Saturday.

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That will end this chapter in the Horizon disaster. The three rigs holding position above the well will head off to wherever they anticipate working next and the appointment calendar for BP will be endless courtroom appearances with their lawyers. BP saw about $70 billion erased from their market cap and they have spent close to $10 billion to date on the well and the cleanup. They have another $20 billion committed to the fund for people harmed in some way by the disaster.

When the well was flowing unobstructed into the sea there were estimates from major analysts with gigantic numbers for a final bill for BP. Goldman at one point mentioned $125 billion as the price tag. Now that the oil has all but disappeared from the gulf the estimates are coming back to earth and I have not heard one in weeks over $50 billion. The consensus seems to be in the $30 billion range today.

That does not mean that BP is suddenly a buy. There are a lot of legal attacks still to be launched and depending on the outcome of various investigations BP could still be looking at another $18-$20 billion in fines and penalties. That would be worst case and require them being found "grossly negligent." Once the well is closed this weekend the future news will be all bad. The news will be focused on monster settlements, court awards and findings towards that eventual negligent ruling. The administration no longer appears to be trying to put BP out of business so that is an improvement. It does not mean they won't try to extract the biggest fine possible in order to be seen as tough on big oil. BP may be closing the book on the well but the book they are opening as a sequel is going to be just as painful.

BP Chart

Gold made another new high on Friday at $1,282 intraday on multiple reasons. Investors are expecting further quantitive easing by the Fed that will further devalue the currency. They are also worried that the U.S. debt load is going to push us into a severe problem in the years ahead and it is a currency play given the monster moves in the dollar, yen, yuan and euro over the past weeks. In times of currency stress the yellow metal seems to find a flood of willing buyers.

The obvious question would appear to be "is the move over?" The rally in gold has brought the gold bugs out of the woodwork and the gold scams onto the cable TV airwaves overnight. Real gold analysts claim we could easily hit $1500 before year-end if the Fed goes on another easing binge. Others believe anything over $1,260 is a sell signal because the gold carry trade is running on empty. There are too many points to cover here but basically those analysts expect an implosion in gold prices as changes in currency valuations make it less profitable to do things like borrow yen to buy gold. Of course the bears have been claiming the trade was over for the last $50 of the move and they have been wrong. I personally would not want to chase it at this level.

Gold Chart

The tone on Monday is going to be set by President Obama. He is going to hold a quasi town hall meeting on CNBC at noon. This is a real coup for CNBC for ratings but I wonder if it will drive conservative viewers away. CNBC Washington reporter John Harwood, will be doing the interview and based on his past reporting style he will be lobbing pre-scripted softball questions at the president so all the right answers are produced.

The question is really "which president will show up." Will it be the president advocating class warfare, tax the rich, I want to make it perfectly clear it is Bush's fault. Or will it be a new kinder to business, gentler to entrepreneurs, non teleprompted merchant of hope and change? This would be a real opportunity to steal some of Fox's thunder if Harwood would ask some real questions that real voters want to know. I am sure because this is the president he will get preferential treatment and it will end up being a dog and pony show rather than a hardball interview.

If he dashes hopes for the extension of the tax cuts or appears to be anti business the market could head south quickly. Businessmen and investors are not gullible people and any attempt to turn this into a political lecture may not end well. Several times recently the market has tanked while president Obama was speaking. Hopefully whoever organized this performance understands that CNBC is a direct line to business and the market and scripted it accordingly.

The Dow and Nasdaq ended with gains on Friday that put them on a streak of 11 wins out of the last 13 trading days. The S&P has been up 10 of the last 13 days. That is an extremely overbought scenario even though the daily gains have been minimal. Art Cashin used the analogy the markets were sleepwalking at resistance. The Dow and S&P are scratching out a handful of points every day but unable to manage a breakout. Dips are being bought but breakouts have been hard to find on the Dow and S&P.

Art Hogan at Jefferies is predicting an upside breakout for the market because it is counter to the consensus of a decline into October. He said fund flows were improving and domestic ETFs were seeing positive money flows. He said Jefferies has been waiting for this to happen for six months as a sign investors are moving back into the markets. This news is contrary to the actual $10.7 billion in outflows from ETFs in August. Morningstar said $6.6 billion flowed out of the SPY or S&P-500 SPDR. Year to date $19.1 billion has moved out of the SPY. Meanwhile $4.2 billion flowed into emerging market ETFs in August. Hogan claims that has reversed over the last couple weeks to inflows in domestic funds and that would be bullish.

The market has been getting progressively stronger as evidenced by the internals. The new 52-week highs hit 366 on Friday compared to 81 new lows. However, that was the most new lows since August 31st so there is still an undercurrent. Sectors losing ground on Friday included banking, housing, HMOs, brokers, airlines and energy.

The S&P finally rallied to test strong resistance at 1130 on Friday and it was a very quick test. The index was immediately slammed back to 1122 and it traded sideways the rest of the day. The opening spike to 1131 was a result of the quadruple witching. The closing value on the S&P options are determined by the opening print on the S&P on Friday. Tape jamming was active at the open to pin the index at that 1130 level for expiration. The rest of the day was a non-event.

The key to a stronger rally next week will be that 1130-1133 resistance level. If it can't be pierced then the rally will eventually fail. We can't levitate at 1125 for the rest of September. The bulls will eventually tire of the lack of progress and pull the bids to allow a market reset. I am surprised the bears have not been more effective at this strong resistance. The dips have been shallow and lackluster. Volume on Friday was over 8 billion shares so they had plenty of opportunity but could not do anything with it.

Support is currently 1120 with resistance 1130. That is a very narrow range for a market with all the conflicting drivers we have today. I suspect we are about to see a major breakout but in what direction? I would like to believe it is higher because the technicals point to a test of 1240 if the S&P can move over 1133 on volume. That would be a huge run ahead of the election and makes me wonder what would then happen after the election when the rally is "supposed" to occur.

Fortunately the narrow range will give us a clear signal when the move begins. A break to either side should be strong enough for a decent trade. I am still in buy the dip mode but a break below 1120 could signal a change in the trend rather than just another dip. I would love to remain bullish but we are still seeing earnings warnings and downgrades so there is no guarantee the rest of September will be like the first half.

S&P-500 Chart

Unlike the S&P the Dow has not yet reached the August resistance highs at 10,700. The Dow spiked to 10,567 at Monday's open and closed at 10,604 on Friday. That means it spent all week fighting to gain another +37 points. That is not very awe-inspiring but the trend is still up. Slowly up but still up. One has to wonder what will happen if it actually makes it to 10,700 next week. Will it have the strength to power through or spend the next couple weeks chipping away at resistance 10-12 points a day?

Fortunately by the time the Dow gets to 10,700 the S&P, if it continues leading the Dow, will have broken through the 1133 resistance and be targeting much higher levels. The Dow would likely be drug across 10,700 rather than be leading the charge. The Nasdaq already broke through its corresponding resistance at 2300 so a confirmation move by the S&P next week makes the Dow's attack on 10,700 only a footnote. If the broader indexes can move past strong resistance then the Dow does not matter. It should follow obediently in due time. That just makes SPX 1133 even more important.

Dow Chart

The quadruple witching expiration plus the boost from Oracle's earnings and Texas Instrument's $7.5 billion buyback combined to push the Nasdaq over strong resistance at 2300. The $64 question is can the bulls hold it above 2300 when the opex excitement fades?

Thank you ORCL and TXN but now that is old news. What new event is going to maintain the forward momentum on Monday? There are no material tech earnings on Monday although Adobe reports on Tuesday. The economic report on Monday is the Housing Index and not likely to boost tech stocks. PC sales estimates are still being cut with FBR cutting Microsoft estimates and targets on Friday on falling PC sales. Personally I don't see what has been pushing techs higher since most of the tech news is negative.

How long can this continue? How much longer will the bad news bulls keep buying tech stocks in the face of guidance warnings and downgrades? This is the question that will be weighing on techs next week. I would love to see them retain their leadership role but unless some new tech company announces another multi billion dollar stock buy back or multiple acquisitions I believe we could be in trouble.

Fortunately a constant steady rise in the stock market is like the tune from the Pied Piper. Investors can't seem to resist a slow methodical rise in the markets. The look at the charts and their mind is clouded by the hypothetical projections of trend lines moving higher. That has an even greater pull on trader sentiment than an earnings beat by Oracle. When it comes on the backs of shorts forced to cover the gains are even sweeter.

I am not going to tell you the Nasdaq is going higher. I believe it will over the next couple months but not necessarily over the next week. If it does move higher next week I will be the head cheerleader. Personally I am in buy the dip mode instead of running with the bulls. Support is 2290 followed a long way off at 2230. If 2290 breaks I would immediately start thinking "October correction" and be looking for shorts rather than an entry point for longs.

Nasdaq Chart

The Russell 2000 gained +14 points for the week and it was all on Monday. The close on Monday was 651.89 and the close on Friday at 651.40. There were four dips in the Russell, three to 643, and all were bought but nobody chased the index higher.

This appears to me to be a lack of fund participation and a lack of confidence in the rally. Small caps were just along for the ride and not a favored asset class. That suggests fund managers are still stashing money in liquid large caps where they can exit quickly if the September's Dr Jekyll suddenly turns into Mr. Hyde.

The Russell broke through the 200 day average on Monday at 645 then used that level as support the rest of the week. The Russell is well below critical resistance at 670 and showing no leadership qualities. Until those qualities surface I remain cautious on the market rally.

I mentioned last week that Russell 650 was going to be a major test and that is exactly where it stopped last week.

Russell Chart

In summary, like a lot of traders I am skeptical of this rally and remain in "buy the dip" mode rather than chase the winners mode. Option expiration was a major factor in last week's "pin" on the numbers. (10,600, 1130, 650) The Nasdaq was pinned to 2300 until the ORCL/TXN news ruined the plans of the market makers.

The President's town hall on Monday, the FOMC on Tuesday and four housing reports should be a blanket of bad news that depresses investor sentiment. If we survive next week without a material dip I will be a stronger convert to the bullish case.

Jim Brown