The bad news bulls had a full dose of economic challenges to over come today while they waited on earnings from Intel.

Market Statistics

The weekly jobless claims spiked to 445,000 for the week ended on January 8th compared to 410,000 the prior week. This was the highest level since October. Officially the consensus estimate was 404,000 but we were not even close. Everyone expected claims to rise next week as the workers terminated after the holidays filed new claims. That suggests next week could be high as well. The rise in corporate profits should slow the pace of terminations. Those who needed to trim the workforce have had plenty of opportunity over the last year. Once the New Year spike in claims passes we should expect the new claims to decline.

Producer prices rose +1.1% in December and inline with analyst estimates. The spike in crude prices and food commodities are inflating prices in nearly all consumer products. Excluding food and energy the core rate of inflation rose only +0.2%.

75% of the rise in the headline number came from a spike in energy of +3.7% with gasoline prices up +6.4% and diesel +8.6%. Home heating oil rose +12.3%. Combined fuel prices are up +28% over December 2009. The price of fresh vegetables rose +22% and +15.4% for fresh fruit. The various weather disturbances around the globe are tightening food supplies and pushing commodity prices higher. The Fed will take these things into account when they review their rate decisions but even with those gains above the actual inflation rate is still low.

The headline number on the Manufacturers Alliance Survey declined -2% to 75% but remains well into expansion territory. The optimism for 2011 is rising with the internal components for orders and shipments ticking up slightly. The period covered in this report was Q4 so it is a lagging report and was ignored.

Economic events on Friday include the Consumer Price Index, which will show how that producer inflation from today is filtering down to the consumer level.

Economic Calendar

The big report for the day was not economic. It was the Intel earnings after the close and the elephant in the room everybody was ignoring all day. After the bell Intel reported earnings of 59-cents on $11.5 billion in revenue. That was well above estimates for 53-cents and $11.37 billion. Gross profit was 67.5% and also higher than estimates. Intel also raised estimates to $11.1-$11.9 billion from $10.74 billion for Q1.

There was a catch. Intel said the quarter beat estimates because there was an extra week in the quarter but that was not the only reason. They said the ramp in to the Sandy Bridge processors with integrated graphics was strong. Sales of server processors were "particularly strong" and there was "strong growth" in both business and consumer PCs. Intel said 2010 was the best year in the company's history and 2011 would be even better.

Intel did lower the gross margin estimate for Q1 to 64% and closer to the 63.5% analysts had been projecting for Q1. Intel expects sales to increase by 10% in 2011 compared to a 24% rise in 2009. Despite the slower growth Intel shrugged off reports that PC sales are under pressure from tablets and smartphones.

The Gartner Group reported on Wednesday that worldwide PC shipments grew less than expected in Q4 due largely to the Apple iPad. Gartner said PC sales grew by 2.7% compared to earlier forecasts of 5.5%. Intel brushed off those reports saying strength in the enterprise market led to record processor revenues.

The good news was the forecast of a relatively flat Q1 compared to the normal seasonal decline. That is the real insight into the health of the tech sector. Intel shares rose 50-cents in after hours trading.

Intel Chart

The Dow was down around 50 points intraday and driven lower by a -7% drop in Merck. The company announced it had halted clinical trials on Vorapaxar, an anticlotting pill that had the potential for $5 billion in annual sales. They also narrowed the scope in a second trial. All participants in the initial 13,000 patient study will immediately quit taking the drug. The 26,500 patient study will be stopped for those with a prior history of stroke. The change in study parameters means Merck may not be able to file for approval without initiating and completing a new study. Vorapaxar was the highest profile drug in the Merck pipeline.

Merck Chart

Whole Foods Market (WFMI) jumped +5% intraday after Jefferies raised its 12-month target price to $60 a share from $47. The analyst cited improved store traffic and their big push into healthier foods. WFMI gained +84% in 2010 and it off to a good start in 2011. The analyst said customers appear to be accepting the higher priced offerings now that the recession is over.

Whole Foods Chart

In a prime example of how not to report earnings after a new IPO SemiLEDs Corp (LEDS) reported nearly doubled revenue and reported a strong increase in earnings. All right so far but then they warned pricing pressures over the next three months would lead to lower revenues and profits. The company went public on Dec-9th at $24 and traded as high as $32 in late December. After today's earnings warning they declined -34% to $18.75. Welcome to the reality of corporate earnings.

LEDS Chart

ITT Corp reported on Wednesday it would spin off two separate companies to focus on water management and defense while the parent company would remain in aerospace, transportation, energy and industrial engineering. Shares rose +16.5% on Wednesday. On Thursday shares fell more than 3% after two brokers downgraded the company. How fast the bloom fades after a favorable announcement.

ITT Chart

Marathon Oil (MRO) also announced a plan to split itself into two companies. One will focus on exploration and one will focus on the refining business. Marathon is considered the fifth largest U.S. refiner of gasoline and other fuels. This is an old plan that has resurfaced. They originally discussed it in 2008 but shelved it during the financial crisis. Analysts at Tudor Pickering Holt felt it was the right move and would free up Marathon to become a more aggressive exploration company. The new company would be called Marathon Petroleum Corp and trade on the NYSE under the symbol MPC. The division had revenues of $45.5 billion in 2010. The tax-free spin off is planned for June 30th. Marathon shares rose +6% on the news.

Marathon Chart

After the bell today Coinstar (CSTR), operator of Redbox DVD vending machines, warned is would miss profit estimates because of delays in access to Hollywood's newest movies. The company has agreed to a 28-day delay in receiving the latest DVD releases and giving studios a four-week window to sell their latest movies before offering them for rental in a Redbox. Coinstar projected Q4 profits would be in the range of 67-cents compared to prior estimates of 82-cents. This drop came despite a 31% rise in revenues. Analysts were expecting 86 cents. Shares of Coinstar fell as low as $38 in afterhours after closing at $56.91.

Coinstar Chart

Goldman Sachs created some currency excitement today with their call to go long the euro against the dollar. Goldman believes the European debt problems will eventually be solved and the euro will rise again. The bank feels the resolution will provide the economic stability to produce an even stronger Eurozone and euro. Pledges by China and Japan to buy Eurozone debt will help reduce the risk premium on those countries. Goldman also believes the current U.S. economic policy will push the dollar lower and become an obstacle to investment inflows into the USA.

The positive debt auctions by Portugal and Spain this week have gone a long way towards proving Goldman's forecast. The dollar index dropped a full two points this week for the sharpest decline in months. A three-day, two-point decline in a currency is like an earthquake registering an eight on the Richter scale. The dollar index has returned to support at 79.0 and a break there could see another three-point decline.

Dollar Index Chart

Euro Chart

Noted bank analyst Richard Bove was out pounding the table on the financial sector today. He claims the next two years will be the new golden age of banking. He bases his views on the monstrous cash hoards held by many banks. During the crisis banks were told to raise cash. When the worry over a double dip and the financial stress test was rampant they were told to raise cash again. Now that conditions have improved significantly they have all this cash and nothing to do with it. Loan demand is still very low but improving as is credit quality. Bove claims Citigroup, Bank America, Bank of New York, State Street and Northern Trust have so much cash their shares are selling for less than their cash position. He said buying banks with that much cash is easy justification. They will eventually put that cash to work and he expects 20% to 25% earnings growth over 2011 and 2012.

Up until late November the financial sector was lackluster at best. The XLF flat lined from May through October before finally beginning to move higher in December.

XLF Chart

The markets rallied strongly on Wednesday thanks to a monster short squeeze prompted by a successful debt auction in Portugal. Despite the minor declines today they held their gains even though the economic news was bad. The falling dollar should have pushed equities higher but the fear of Intel releasing a negative surprise kept the markets in check. The bad news bulls had a full buffet of sound bites to swallow as the climbed the wall of worry and apparently they needed a siesta before continuing their journey.

A couple weeks ago I theorized if January was going to follow historical norms that the 13th would be my target for a market top. Over the last ten years the average date is the 12th, which would fit nicely with Wednesday's spike and fade, but I thought funds would want to see how Intel reported before making a buy/sell/hold decision. Tomorrow will be the day of decision. I will be proven right or wrong but that is of no consequence. The important part of that discussion is that unlike most of the bears I remain bullish. I believe any January dip will be a buying opportunity and I am looking forward to it.

The S&P rallied to 1287 on Wednesday and closed at 1283 today. That short squeeze pushed the S&P over resistance at 1278-1280 and today's failure to drop back below those levels on bad news is encouraging. There is always the possibility we will see a continued pattern of two steps forward, one step back that will frustrate the bears tremendously. Bull markets can remain overbought for a long time even when the technicals are suggesting a pause. The S&P is WELL ABOVE decent support at 1258-1260 and it would take a major change in sentiment, even temporarily, to break below those levels.

S&P-500 Chart

The Dow rallied to 11,782 on Wednesday's short squeeze and only gave back 50 points from that intraday high. With Dow component MRK down -2.46 today and responsible for all of the Dow's point decline I would say the staying power was excellent. The Dow has decent support at 10,600 that is sure to produce a bounce should we test that level again. The volatility is returning but the dip buyers are alive and well.

Resistance at the 2008 highs in the 11,700-11,750 range appears to have slowed the advance and a move over those levels would be strongly bullish. The three-day decline starting last Thursday was minimal and the intraday lows were bought. Nothing has really changed on the chart/trend other than the battle at 11,750. The outcome of that battle will likely be decided on Friday.

Dow Chart

The Nasdaq chart turned more bullish this week after it broke over the 2720 level on Wednesday. Today's -2 point decline was noise and I consider it bullish given the Intel event risk traders were facing. The Nasdaq has gone almost two months without a decent bout of profit taking so we need to keep that possibility in the back of our mind.

Decent support is 2675 and quite a ways below our current level. It will be interesting to see if the breakout line at 2720 will reverse to support on the next decline.

Nasdaq Chart

In summary the short squeeze on Wednesday changed the flavor of the market somewhat to push us over resistance that had held for a week. The lack of a significant decline on the Nasdaq today ahead of Intel's earnings is bullish for sentiment. The indexes continue to creep higher and even though the indicators are overbought this could continue if frustrated buyers fail to wait for a meaningful dip before jumping in. Every short dip that is bought increases the frustration of those waiting for a meaningful dip as a buying opportunity. I know this for a fact because I am one of them. Watch for Friday to be a pivotal day in the market. With expiration only a week away we could see some increased volume as funds exit option positions.

Jim Brown

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