The Dow struggled but managed to close over 11,000 on Friday. The first time the Dow closed at this level was May 3rd 1999.

Market Statistics

More than a decade has passed since the Dow first traded at this level and millions of investors have given up on the market over the years. Fidelity just completed an investor survey and 55% of respondents said ANY gain in their positions this year would be viewed as positive. More than 23% said they would be thrilled just to breakeven. More than 20% have pulled out of the market and gone to cash. Over 57% said they lack confidence to make accurate decisions in the current market. Forty percent said they were looking for ways to lower risks.

Their biggest fears about the year ahead were economic problems (31%), unemployment (28%) and year-end tax increases (15%). Fidelity said volatility had doubled since 2008. The number of days with a better than 100 point range on the Dow had gone from an average of one per week in 2008 to two per week today. We have been talking for years about Japan's lost decade but the U.S. just experienced one as well.

Fortunately moving over 11,000 on the Dow will help bring investors back into the market. Investor flight is a critical problem today. There have been fund flows out of the equity mutual funds every week since the May 6th flash crash. Investor confidence is broken and seeing the markets move back over the 11,000 level should help restore that confidence. In the Fidelity survey investors who fled to cash said they wanted to see six months of market stability before moving back into equities. Their average account value had shrunk -21% in the last two years. For the 74 million baby boomers who will be retiring soon that was a major hit. They spent decades building up their accounts only to see a 21% drop just a couple years before retirement. That is traumatic for people counting the weeks until they walk out the employer's door for the last time.

One economist said the U.S. economy was in a negative feedback loop. Employers don't want to hire or expand because of the weak economy. Consumers are not spending because of employment fears. The weekly economic reports reinforce those fears on everyone and force a continuation of the loop.

Friday was a prime example of those problems. The NonFarm Payrolls showed a headline loss of -95,000 jobs when almost everyone was expecting a minor gain. This was the largest loss of jobs in three months. July and August were revised lower by a total of 15,000 jobs. The preliminary benchmark revision for the prior 12-month period was an additional loss of -366,000 jobs.

Seeing a job loss number in the headlines is depressing to consumer sentiment as well as investor sentiment and dims corporate expansion plans. Corporations, like individuals want to see several months of improvement before they take on new obligations. For a corporation to add a $50,000 per year salaried employee it costs them over $90,000 in salary, taxes and benefits. Once the government healthcare program kicks in that number will be over $100,000 per year. Corporations are thinking hard before they add employees in this environment.

The government was the biggest drag on employment last month with 159,000 job losses compared with a +64,000 gain in private payrolls. Private job creation declined slightly in Q3 to +274,000 from +353,000 in Q2. That trend is heading in the wrong direction. Federal payrolls declined -76,000 while state and local governments cut 83,000 jobs. I have mentioned many times about the serious budget shortfalls at the local government level. Property values are down, which leads to lower taxes. Payrolls are down leading to lower income taxes and unemployment taxes. Sales are down and sales tax revenue is shrinking. States can't just throw on a new tax or sell another $10 billion in treasuries to fund the deficit. They are forced to cut employees and services and that reinforces the negative feedback loop.

The unemployment rate was unchanged at 9.6% but the U6 unemployment rose to 17.1% and the highest since last December. The U6 number includes those without jobs and those who are working part time to pay the bills while searching for a job in their field. That means engineers, accountants and bankers are waiting tables or stocking shelves at Wal-Mart until a job appears. Instead of employment improving it is still getting worse. Those out of work for more than six months were 41.7% of the total. Those out of work for less than a month rose to 19.1% and again that trend is moving in the wrong direction.

Not shown in these employment numbers are the 250,000 workers in 37 states that lost their jobs on October 2nd. The jobs were part of the $5 billion in stimulus for the Temporary Assistance for Needy Families program. Tens of thousands of these workers lost their jobs when the program ended on October 1st. The exact count is unknown because each of the 37 states configured the programs differently but many states told the workers not to show up for work beginning on October 2nd. These layoffs were not included in the September payroll report because the program conveniently ended a couple days after the survey period for the last jobs report before the elections. The TANF was only one of the stimulus programs ending on October 2nd. Also ending was a $2 billion subsidized childcare program and a $2.1 billion boost for Head Start. Jobs will be lost from both of those programs as well.

The Job Openings and Labor Turnover report earlier this week showed there were more job openings but fewer actual hires. Employers are dragging their feet on filling those positions until they see what is going to happen to the economy and in the election. The outcome of the election will have a dramatic impact on the costs of doing business, adhering to new regulations and adding employees. I believe they are waiting to judge the post election business climate before committing to new employees.

Payroll Chart

The markets were trapped between two ideas after the payroll report on Friday. On one hand investors were worried that weaker than expected job creation meant the economy was barely crawling forward and there was still risk of continued economic weakness. On the other hand the weak jobs seemed to indicate the Fed would step up plans for a new round of quantitative easing. That would push the dollar lower and stocks higher. In their best "don't fight the Fed" style traders bought the dip and the market moved higher.

That was a real test of faith because early Friday morning St Louis Fed President James Bullard dampened expectations when he said "policymakers could wait until December if they felt the need for greater clarity on the economic outlook." Also, "this upcoming FOMC meeting is going to be a tough call, because the economy has slowed but it hasn't slowed so much that it's an obvious case to do something." However he also said, "It does not seem like inflation is going to hit our target unless we take further action."

Dallas Fed President Richard Fisher cautioned about assuming the Fed would enact QE2. "The markets have drawn too quick a conclusion that this is a likely event. If it is to occur it will only occur after thoughtful discussion." He also warned that is is not clear if the benefits of further quantitative easing outweigh the costs.

The markets have clearly priced in a move at the November 3rd FOMC meeting but Fed heads are going out of their way to caution against considering it a done deal. This growing wave of caution could weigh on the markets for the rest of the month. If they don't move in November it would most certainly depress the markets because the dollar would rebound sharply and depress commodities and stocks. They would have to say the economy had taken a strong upside recovery in order to prevent a negative market reaction to a lack of Fed action.

In other economic news Wholesale Trade in August rose by a stronger than expected +0.8% but lower than the prior months +1.3% rate. This is a lagging report and we already knew that August saw a deceleration in the economy. The report was ignored.

Next week has a thin economic calendar. Monday is a government holiday and the bond markets are closed but the stock market will be open. Tuesday is the most critical day of the week with the FOMC minutes of the meeting that suggested a new quantitative easing program may be headed our way. Those minutes will be critical.

Thursday and Friday have the Price Index reports that show how much inflation is in the current economy. Since inflation is close to zero in all but the commodity space these reports will have little value.

Economic Calendar

The focus next week will shift to Q3 earnings as Intel, JP Morgan, Google and GE headline the earnings calendar. Intel on Tuesday will be critical since the chip sector has been receiving almost daily downgrades due to lower than projected PC sales. If Intel lowers guidance again on Wednesday could be a bad day for the markets. Despite the highlighted stocks below there is really very little earnings activity next week. That will produce a more volatile reaction because of the fewer reports. The following week there are hundreds of stocks reporting.

Earnings Calendar

Casino stocks won on Friday after the Nevada Gaming commission reported that revenues in Nevada jumped +11.5% in August and casinos on the strip saw revenues spike +21% on increased betting on table games. High dollar gaming activity rose the most with bets on baccarat jumping +87%. The commission also reported the slide in slot machine traffic continued but the decline has slowed. The casino stocks exploded higher with MGM gaining +16%, BYD +10%, WYNN +5% and LVS +4%.

Fertilizer stocks also won big after the USDA cut their estimates on corn production for the second time this year. The USDA lowered the expected yield per acre to 156 bushels from 162.5 bushels. To put this in perspective Iowa farmers produced an average of 182 bushels per acre in 2009.

Corn prices limited up on the news along with wheat and soybeans. The decline in yields was attributed to the weather and to the lower use of fertilizer to save money during the recession. The news caused the fertilizer stocks to surge higher along with companies like CAT and Deere. Cattle prices dropped sharply because of the expected higher costs to fatten them up at feedlots ahead of slaughter. Potash shares gained +3%, Mosaic +7%, Intrepid +8%, CF Industries +11%, CNH Global +8%, Agrium +7%, Monsanto +4% and Deere +5%. Food stocks like General Mills and Kellogg declined but to a smaller extent. Tyson Foods was the biggest loser at -8% followed by Smithfield -7% and Sanderson Farms -5%.

Tyson Foods Chart

Commodity Index Chart

Despite the continued decline on the chart below the dollar may be trying to find support at 77.00 on the dollar index. Thursday saw the low of the week at 76.90 where it was quickly bought. The long-term outlook is still down but analysts believe it is far too oversold to continue lower without a rest. The payroll report hurt it but the contradictory comments by Bullard and Fisher helped to provide support.

When you compare the charts on the dollar, metals and commodities in general they are begging for a reversal of the recent trend. Nothing goes up or down in a straight line forever. The potential for a major short squeeze has been building for weeks because of the outlook for future policy action. Shorting the dollar and buying commodities give institutions some serious leverage but that leverage will work against them when the trade breaks and it is a very crowded trade. This could be a historic short-term move when it occurs.

Dollar Index Chart

Bank of America (BAC) announced a nationwide moratorium on foreclosures and the sale of foreclosed homes after Freddie Mac pressed them to do a documentation check. BAC had already checked the process in the 23 states that require court approval to foreclose a home. At the urging of Freddie Mac they announced a halt in all 50 states in order to check it one more time. Most major loan servicers employ robo signers or employees whose only job is to sign thousands of documents every day that are required to complete a foreclosure. Reportedly the volume is so high they cannot carefully review their contents before signing and moving the file to the next station.

BAC CEO Brian Moynihan said Friday the bank had not found any errors in the process but they halted sales in all 50 states to check one more time. BAC has 14 million mortgages or one of every five mortgages in the country. That equates to a $2.1 trillion portfolio. JP Morgan and Ally Financial have also agreed to examine their documentation process. There are currently more than 4.4 million homes in the foreclosure process nationwide. One third of all home sales in August were foreclosed or distressed home. By halting the foreclosure process and allowing buyers to opt out of the deal while the banks review documents will stall the housing sector once again. Every home sale is dependent on another sale, which is dependent on another, etc. People can't move until they close and some of these closings have already been postponed for 3-6 months by the foreclosure backlog. Some realtors will not even accept a short sale contract for some lenders.

In the tech sector another chip company warned Thursday night and their shares fell -10% in trading on Friday. Kulicke & Soffa (KLIC) warned that revenue for the current quarter would be "significantly below" Q3 due to softening industry conditions. The company designs semiconductor assembly equipment and is sometimes seen as the canary in the chip mine. A slowdown in KLIC business means a future slowdown in the chip sector in general. This makes Intel's earnings on Tuesday even more critical for the tech sector.

The big tech news last week was the leak of an impending deal for Verizon to begin selling the iPhone early in 2011. This has been rumored in the past but lacked substance. This report is suspected to be correct. Apple is struggling to fend off the onslaught of the Android and the biggest thing they can do to increase sales is offer it on Verizon.

Neilsen reported that Android accounted for 32% of smartphones sold in the U.S. in the last six months. The iPhone only accounted for 25% of sales. The Android operating system is expanding its reach very rapidly with 2-3 new phone models announced every week. A Verizon iPhone could tilt the percentages back into Apple's favor but only temporarily.

On Monday Microsoft will make an announcement about the new Windows Phone 7 operating system. They will announce three phones with one each from HTC, Samsung and LG and run on the AT&T network. Reportedly Microsoft will offer these at a price point that will be significantly below the iPhone and Android models. Early reviews have been positive and that is one more competitor chipping away at Apple's market. Apple is being forced to offer a CDMA phone on Verizon in order to remain competitive.

The Android phones are dropping in price because of the competition between models and this will impact Apple's margins as they lower prices to compete. Apple is expected to sell another 10-12 million iPhones per year by providing a Verizon model. How many $299 iPhones can Apple really sell if the Android and Windows phones are priced at $99? Getting hammered on price is going to hurt Apple margins but in reality most iPhone buyers are already Appleholics anyway. Apple will have to cut prices but probably won't give up their prestige pricing position entirely.

Apple Chart

Research in Motion (RIMM) reported Friday that UAE canceled a proposed ban of BlackBerry devices that was to go into effect on Monday. The ban was creating a serious civilian backlash against the UAE government and it is unclear whether RIMM came to some kind of technology sharing agreement with the UAE or the government gave in to the rising public pressure. Saudi Arabia also dropped its threat of a ban and India backed off its plan in order to study the problem for two months. RIMM may be losing market share to Apple and Android but it is far from out of business.

The Dow closed over 11,000 for the 37th time in history on Friday. It remains -22% below it's all time high set in October 2007. Is this move higher for real? As I stated earlier the market has already priced in a second quantitative easing program that could include the Fed buying equities yet two Fed heads are warning it is not a done deal. There will more than likely be some kind of further Fed stimulus but the market is making the broadest assumption and the least likely to come to pass.

Of course irrational exuberance is a recurring theme in the markets and it is certainly with us today. I keep hearing stocks are undervalued and they may be but this earnings cycle is not shaping up to be a barnburner. S&P earnings are expected to increase from 8% to 10% and revenues increase by 2%. Those are not blow out numbers by any stretch of the imagination. The market is trading on expectations and completely ignoring all the negativity from places like the chip sector where earnings warnings are becoming an art form.

You would think from the exuberance that every stock was making new highs. There are quite a few but it is far from unanimous. There are 35% of the S&P 500 stocks trading at or near a new 52-week high. There were 41 S&P stocks that made new highs on Friday. However, of the 30 Dow stocks there are only four that have returned to their highs since the Dow's top in Oct-2007. Those are MCD, IBM, WMT and KO.

The Dow last closed over 11,000 just three days before the flash crash on May 6th. There has been a lot of volatility since then but the last six weeks have been very bullish despite outflows from stock mutual every week since the crash. The flows have been so strong it suggests quite a few people missed the recent gains and this includes mutual fund managers as well. Those managers now appear to be grasping at straws to try and capture some of the current gains because cash on hand has fallen to barely over 2% according to ICI.

The Investment Company Institute also said U.S. equity funds saw outflows last week of $4.15 billion while bond funds saw inflows of $5.42 billion. Investors are still running from the equity market to the "safety" of bond funds despite the biggest bond bubble in decades.

This is a contrary indicator. Just like investors are moving to bonds at precisely the wrong time they will move back to equities once we surpass the May highs at 11,258. The herd is always wrong and that will power the equity markets higher eventually. Whether it will happen next week is a different story.

Funds have spent down their cash over the last several weeks in what we know as window dressing. Their fiscal year end is in three weeks so any changes in that position will have to be done quickly. Next week is option expiration week along with earnings from Intel in a depressed sector, JPM with banks also under pressure and Google, a company that can't seem to please traders with earnings. Unlike the S&P and Dow the Nasdaq is NOT breaking out. The stage is set for one more volatility act between now and the elections.

I said last week that although I don't believe in the rally we have to respect it above 1150. Whether it has the momentum to continue higher is debatable but I for one don't want to short it. As long as the dollar is declining we should see equities rising. That assumes Intel does not stink up the place on Tuesday.

The S&P closed at 1165 on Friday and what had been resistance all day. After Tuesday's short squeeze over 1150 it has been stuck in a narrow range between 1155-1165. There is a strong possibility it is running out of steam but some analysts have been saying that since the September 1st rebound from 1050. Even a broken clock is right twice a day and eventually they will be right as well. I remain skeptical of a continued rally but I am not going to fight it. We need to stay long over 1150.

S&P-500 Chart

The Dow may have closed at a new five month high but there was no conviction. Volume for each of the last three days was barely 7.0 billion shares. This is a reluctant rally but one that refuses to die. The negative jobs report should have derailed it but the promise of QE2 kept it on track. If the Dow can move farther over 11,000 and hold it the next target is 11,200 and the real starting line for year-end. Forget 11,000. If we could move over 11,200 there would be no more skeptics.

But, for next week I remain a skeptic. Initial support is 10,925 and a break below 10,900 could trigger a new dog pile by the shorts. Maybe what we need to create a new short squeeze that pushes us higher is a sharply negative day to tease the shorts to jump back in. Just remember we have three Dow components reporting earnings next week in Intel, JPM and GE. Intel is the most dangerous and the one traders will probably be watching most.

Dow Chart

Nasdaq 2400 has proven to be a solid wall that cannot be crossed. The Nasdaq closed at 2401 on Friday but that was short covering in the last hour of trading. That end of day short covering produced a move over 2400 to 2406 at the close but a sell program in the last four minutes ended it. We need a big gap open on Monday to push the Nasdaq higher and force the shorts to cover and provide support. Apple is back in rally mode but is getting no support from Amazon or Netflix. I am not sure Apple can move the index higher on its own with the Intel earnings only a day away.

If we do see a pullback on Monday there is decent support at 2370 so there is not likely to be a major decline.

Nasdaq Chart

The Nasdaq 100 ($NDX) is a better chart and appears to be coiling for a move higher. The resistance at 2025 has been solid but so has support at 2000. This is because of the liquidity of the large caps. Funds were stashing money there as they waited out the month. If the NDX could mount a drive over 2050 the race would be on to higher ground across all the indexes. That is resistance dating back to May of 2008.

Nasdaq 100 Chart

The Russell continues to suggest the rally has legs. The breakout over 670 is picking up speed and Friday's +1.4% gain was double or triple the gains on the other indexes. This suggests the fund managers are moving some money from large caps to small caps and setting up for year-end. If that is the case this is very bullish.

Continue to watch the Russell intraday for confirmation of any large cap gains. As long as the Russell percentage gain is larger than that of the blue chips the rally has farther to go.

Russell Chart

In summary I remain skeptical of the rally but I suggest going with the flow. The Russell is confirming an increase in longer-term bullish sentiment. As long as the Russell continues to move a larger daily percentage than the other indexes I would remain long. If it begins to falter I would quickly become worried.

Earnings by Intel, JPM and Google are going to be a problem along with the FOMC minutes on Tuesday. The dollar is seriously oversold on a temporary basis and a short-term rebound could pressure the equity markets. This is expiration week so volatility should increase. This is October so keep those seatbelts fastened.

Jim Brown

Don't sweat the petty things and don't pet the sweaty things. - George Carlin.