The markets stagnated on Thursday as traders waited on the Non-Farm Payroll report on Friday.

Market Statistics

Even though the ADP report on Wednesday was very positive it was really weighing on the markets today. The +297,000 jobs it said were created in December really upped the ante on expectations for the Non-Farm Payrolls on Friday. Last week the expectations for the payroll report were for a gain of 125,000 jobs. Since the ADP report some analysts are now expecting upwards of 200,000 jobs on Friday.

That is a big jump when analysts were expecting such a mediocre report just a month ago. It would mean employment has turned the corner and a real recovery is beginning. Unfortunately the increased expectations bring with them increased concerns that the ADP report was the result of a some body data and reality could be much lower on Friday.

This worry along with a negative surprise in retail sales kept the lid on the market on Tuesday. The Chain Store Sales for December came in at +3.1% and a sharp decline from the 5.8% in November and the 5+% analysts were expecting. The big decline came as a result of the blizzard that shutdown sales in the important after Christmas week. Analysts estimate up to $1.5 billion in sales were missed because consumers were snowbound. Many of those sales will occur in January as those gift cards begin burning a hole in consumer pockets.

Despite the lower than expected sales it was still the best holiday season since 2006. Department stores saw a 4.6% increase and luxury stores saw an 8.1% increase in sales. Wholesale clubs rose +5.7%. The ICSC is predicting slower growth in January of +2.5% but that is still a decent gain. The sector that lagged was electronic sales but there were no specific details in the report.

Retailers were pummeled by the drop in sales with Abercrombie & Fitch (ANF) losing -2.05 and Gap (GPS) dropping $1.57. Target (TGT) lost -7% or -$4 and Kohls (KSS) -$1.67. Even the luxury retailers that posted strong sales lost ground but the selling was less intense on stores like Tiffany (TIF).

Weekly Jobless Claims rose by 18,000 to 409,000 but this week's data is full of noise and is not followed closely. This data was for the week ended on December-25th. Many people hold off filing claims until after the holidays and there will be a large number of seasonal temporary workers going back into the unemployment lines so the number two weeks from now is the one that matters.

The big mover today was the dollar and the Euro. The dollar rallied over the last two days to six-week highs. Pushing the dollar higher was better than expected economic news on Wednesday and growing worries over European debt. Even with out $14 trillion of recognized debt on the books the dollar is still seen as a safe haven currency.

The Euro plunged -1$ to $1.301 after Portuguese and Spanish bonds declined over auction fears. The European nations will hold debt auctions next week and analysts believe investors will demand higher yields to purchase the risky debt. The yield on Portuguese rose 26 basis points to 7.17% ahead of the auctions to the highest level in a month. Portugal plans on selling 20 billion euros in bonds in 2011 to finance its deficit. Spain will attempt to sell debt on Jan 13th, the same day Italy auctions debt for 2015 and 2026 maturities. Belgian bonds sold off after the nation's political leaders failed to restart seven party negotiations to form a government.

The massive amounts of sovereign European debt coming to market is weighing on the Euro and pushing the dollar higher by default.

The sharply rising dollar crushed commodity prices with corn dropping -3%, wheat -3% and sugar -6%. Oil lost -2.3% and copper -2%. Anyone who hoped the commodity rally would continue into 2011 has been seriously mistaken. However, we know this is temporary. The dollar is basically back to where it was three weeks ago and metals like gold and silver are back to levels they were in the same period. This is the buying opportunity many investors were waiting for. The only challenge is waiting for a bottom to appear. Remember, the Fed is still in QE2 mode and over the long term that will force the dollar lower and lift commodities. The counter balance to that is the improving economy. That will push the dollar higher. It is going to be a battle and the economy and strong dollar will eventually win but the near term could see the dollar strength ebb once the European debt auctions are over.

Dollar Index Chart

Euro Chart

Another reason for the weakness in commodities is the Commodity Futures Trading Commission (CFTC) meeting next week. At that meeting they will again discuss position limits in commodities to prevent large funds and investors from pushing prices around with large positions. This is a very thorny topic and there are many advocates and opponents to the various types of limits they are proposing. Once they agree on a plan they still have to go out for public comment so changes are not imminent but they are coming. They are going to try once again to get a position limit of 10% in any commodity. They have tried to pass this in recent meetings and could not get enough votes. They will vote again next Thursday.

In stock news Goldman Announced it was being sued by ACA over the Abacus synthetic CDO. This is the same one the SEC sued Goldman for and reaped millions in fines. ACA is claiming now that Goldman did not disclose Paulson's true role in selecting the mortgages that went into the product. They are suing for $120 million for "unjust enrichment" in the joint venture. ACA is claiming it was misled by Goldman. Goldman shares fell -1.79 to close at $172.

Borders (BGP) rallied +21% in after hours after news broke they were in talks about refinancing their debt and staying out of bankruptcy.

Borders Chart

After hitting a new high this morning Apple ended with a minor loss after Motorola and Verizon officially announced the XOOM tablet at CES. I included a link last week for the innovative video ad for the XOOM and it appears to deliver on all accounts. The tablet has HD video at 1080P on a 10.1 inch screen, HDMI output, dual core 1Ghz processor, front and rear cameras that shoot HD video in 720P, flash is supported as is a gyroscope, barometer, compass, accelerometer, adaptive lighting and Verizon's high speed network. The XOOM has the new Honeycomb OS from Google specifically designed for the tablet. It is not a smartphone OS running on a tablet.

The sheer quantity of products being released is tough for Apple lovers to overcome. Sony released 60 products at the CES show. So far there has been over 200 new product announcements. None of those products were from Apple since Apple does not participate in CES. Since many of those products have some component from Google it was a good day for Google shares with a $4.43 gain while Apple shares ended fractionally lower.

In an online survey connected to a news story about the XOOM tablet it appears Apple will still be the favored tablet supplier in 2011 but the year is still young.

Tablet survey:
Which tablet will you buy in 2011?

Intel released a picture of its new 2nd generation Core processor with one billion transistors and highly enhanced video capabilities for laptop PC users. Shrinking processor sizes is a big deal because the signals don't have as far to travel, power consumption is lower and they can pack more components into the limited space. The picture below shows a Core processor, Reese's Peanut Butter Cup and a dime. That is pretty dang small for a one billion transistor chip.

Intel 2nd Generation Core Processor

Other than CES news and retail sales there was not much happening in the market today. As I said earlier everyone was just passing time until the Payroll report on Friday. The S&P declined slightly to 1273 but you would be hard pressed to draw any material conclusions about market direction from today's action. Volume was decent at 8.2 billion shares with decliners about 2:1 over advancers. If I had to put a label on today's market I would call it distribution rather than consolidation. Just wanting a profit taking dip does not make it happen. We can't "hope" the market into a buying opportunity any more than we can wish it higher when we are long. The market will do whatever it wants and we have to follow the trend not fight it.

The support on the S&P is 1258, a level we grew very accustomed to seeing in late December. That would be a 15-point decline from todays close and without some event to trigger profit taking we could just continue to melt up. Resistance is 1275-1280 followed by 1290.

S&P-500 Chart

The Dow is following the same trend higher and despite the minor loss there was no change in direction. The trend since December 1st has been slowly higher and for investors this is a perfect environment once they are long. For those not long it is very frustrating as they wait for an entry point.

Current resistance is 11,700 dating back to August 2008. This could be a tough level to cross without a major news event. That event could be the Payroll Report on Friday if the numbers come in much better than initial estimates. Support is 11,600 followed by 11,445.

Dow Chart - Daily

The Nasdaq broke above the early resistance at 2700 and closed at a new high. What else can I say? Strong gains in Google, Priceline and First Solar overcame minor weakness in Apple and the Nasdaq moved over its consolidation range from early in the week. This is a bullish chart. Of course the CES show in Vegas is normally positive for tech stocks.

Support is well back at 2660 and resistance continues to evaporate as the index marches steadily higher. I don't know what it is going to take to produce profit taking in the Nasdaq with major tech earnings only two weeks away.

Nasdaq Chart

The Russell is not giving any clues to direction other than it did NOT make a new high on a day when the Nasdaq was positive. The Russell seems to be either consolidating or distributing at the 790 level where it has held since Dec 22nd. We had the two days of deviation but the price quickly came back to neutral. Relative strength is getting weaker so I continue to warn this is the canary in the coalmine. If the Russell retests 780 support and fails we could be in for a decent dip. My guess is that 780 will hold on the first test assuming there is not a major news event providing directional force.

Russell Chart

In summary I believe the markets are just passing time while we wait for the Payroll Report on Friday. Assuming the report passes muster and shows enough job gains to avoid a sell off then we could continue this holding pattern until earnings begin the following week. However, options expiration is only two weeks away so next week is normally our volatility week ahead of expiration. Funds move out of option positions the week before expiration. Are they net long or net short in their option positions? If we knew that we could pick a market direction a little more accurately.

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Jim Brown

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