The Dow rebounded from a -93 point decline to close +66 points higher but there was still a failure of the trend. Giving up -120 on Wednesday and gaining +66 today is a losing proposition on a repetitive basis.

Market Statistics

The markets opened in distress this morning thanks to currencies, commodities and concern over inflation. Futures were severely negative ahead of the open and led by another implosion in commodity prices. Oil declined to $95.26 before the rebound began. The daily changes in margin requirements for the various futures products is creating some intense volatility.

There was some worry over the Jobless Claims report due out at 8:30 after the big spike last week. When the claims were released they had fallen to 434,000 from last week's 474,000. Continuing claims fell to 3.688 million from 3.77 million the prior week. This is positive as long as they finding work and not just falling off the rolls because their benefits have expired.

New York, Wisconsin and Michigan led the group in reporting more than 1,000 in new claims each. California, New Jersey and Massachusetts reported a drop in claims of more than 1,000 each.

The Labor Department said the sharp spike in the prior week was due to a spring break holiday in New York that was not accounted for in the department's seasonal adjustments. The information from the states normally comes in a week later than the national data. New York was the biggest addition to claims in the prior week with Michigan, Indiana and Ohio the next three highest new claim states. Those last three states were more than likely impacted by parts shortages from Japan and temporary layoffs by the automakers until those parts arrive.

Jobless Claims Chart

The first of two inflation reports this week showed a slight uptick in inflation at the producer level. The Producer Price Index (PPI) headline number showed a rise in prices of +0.8% and only a tenth of a point over the estimates. Excluding food and energy prices the core rate showed a rise of only 0.3%. That was the second month at +0.3% after a +0.2% rise in February and inflation is now at +2.1% over the last twelve months.

The big increase in all components in the PPI was due to the rise in energy costs. Also pushing up the core rate were increases in passenger car prices (+0.5%), light trucks (+0.6%) and civilian aircraft (+1.2%). Prices for metal products also rose thanks to higher prices for raw materials due to global demand.

The sustained rise in prices appears to be suggesting the economy is recovering and producers are able to pass through some of the costs to buyers. It will be welcome news to the Fed but only as long as it stays under +2.5% or the Fed will begin to remove stimulus.

Retail sales for April rose by +0.5% and below the +0.9% gain in March. Sales typically moderate in April as a result of those tax checks being written to IRS. As refund checks trickle out in May the rate of sales should increase. The biggest declines in April were electronics and appliances at -2.2%, sporting goods -1.9% and home furnishings -1.1%. Not surprisingly gas stations saw a sharp increase of +2.7%.

If you subtract gasoline sales the core rate of retail sales only rose +0.2% and at a disappointing level. Building supply stores and department stores reported year over year declines in sales while electronics retailers were flat. The slowdown in electronics sales was surprising given the number of tablets and smartphones flying off the shelves.

High unemployment continues to be a drag on the retail sector since a lack of regular paychecks severely restricts discretionary spending.

Reports out on Friday include the Consumer Price Index and Consumer Sentiment. This consumer sentiment report was completed before Osama was killed and before gasoline prices temporarily declined.

Goldman Sachs was in the news today and it was the kind they would like to avoid. S&P warned that Goldman Sachs was increasingly exposed to the potential for a major criminal suit by the government over tactics they used in selling Collateralized Debt Obligations or CDOs. Apparently the scrutiny of Goldman is increasing with the Justice Dept, SEC, CFTC, FINRA and state regulators. These entities are comparing notes and there are several investigations in progress. Analysts believe these investigations will result in the filing of civil and criminal actions. Now that the election cycle is in full swing there is more pressure on the government agencies to bring high profile cases.

Richard Bove said the pressure for the Justice Dept to bring an action was reaching a "high pitch." Bove recommending selling Goldman shares because of the increasing risk. Bove commented on the Rolling Stone article by Matt Taibbi calling Goldman a "great vampire squid wrapped around the face of humanity." He said attacks by the consumer media were tainting sentiment. In a recent survey more than 54% of responders had negative feelings about Goldman.

Goldman closed at a 6-month low on the downgrades.

Goldman Sachs Chart

Kohl's (KSS) reported earnings of 73-cents that were inline with estimates and revenue rose +3% to $4.16 billion. It was not an outstanding earnings quarter but they did lift their outlook for the full year and shares rose +4%. Same store sales growth of +1.3% was much less than Macy's +5.4% and JC Penny at +3.8%. Kohl's raised full year estimates to between $4.25-$4.40 from $4.05-$4.25. Analysts were expecting $4.36.

Kohl's Chart

Cisco reported earnings on Wednesday night and the result was ugly. Shares fell -5% today and nearly every commentator was hanging John Chambers in verbal effigy. They did not like his defensive nature on the conference call or in the various interviews. He definitely had a chip on his shoulder and was taking exception to some of the questions posed. It is tough to realize you are living in the slums today when you were the biggest company in the USA ten years ago. Cisco's market cap has shrunk from $450 billion in 2000 to only $94 billion today and dropping rapidly.

Chambers still acts like he is the tech sector when Cisco is getting beaten like a drum in multiple markets and product offerings. Competitors are springing up everywhere and they are beating Cisco on bandwidth capability and prices. Chambers is probably hostile because his efforts to restructure Cisco is painful and it will take a long time with more market share losses along the way. Cisco is planning on announcing a major layoff program later this summer and analysts believe it could be from 3,000 to 7,000 jobs.

Cisco Chart

Nvidia (NVDA) reported earnings of 27-cents that declined -2% but still beat the street estimates of 19-cents. Nvidia said it expected revenue to increase +4% to 6% in the current quarter to $1.1 billion. Analysts were expecting $992 million. Nvidia said sales of its Tegra processor for the mobile computing market had "taken off." Shares were up +3% during regular trading but much of those gains were erased in after hours.

Nvidia Chart

The futures markets were agitated again by currency issues, worries over China's economy and a continued daily margin change by the CME. Silver declined from $39.25 to $32.30 before rebounding to slightly over $35. Gold declined from $1526 to $1477 before rebounding to $1510 intraday. Crude oil declined from $104.40 to $95.25 before rebounding back over $100 at 2:PM.

Commodity traders are in shock and most analysts are recommending everyone avoid commodities until normal trends return. There were 348 million shares traded on the silver ETF (SLV) and there are 1.7 million option contracts. This commodity is broken and it may not recover for quite a while.

However, nearly all analysts believe silver will finish the year after setting new highs. In the energy sector noted oil trader Mark Fisher of MBF Asset Management said he thought the correction was great for oil prices. "Now there is a fear premium in the market where there was no fear before." He believes WTI will end the year over $120 and Brent over $130. Any decline under $100 on WTI is a buying opportunity.

Crude Oil Chart

On Tuesday I thought we were going to keep easing higher to retest the two year highs on the indexes from May 1st. It appeared there was a stealth rally underway where prices continue to rise even though the sentiment was turning negative. There was a denial of the market move in progress.

Wednesday's decline shocked a lot of people including me. I understood we could retest support at 1330 for a second test of the May 5th decline but I did not expect it. This morning's dip to 1332 was a successful retest of that level. The rebound from deeply negative territory was encouraging BUT now we have a lower high from Tuesday that we must deal with.

Tuesday's high was 1359 and that is now the level to watch. If we rebound over that level then the stealth rally is still alive and traders are managing to climb that wall of worry on multiple fronts. If we fail again below 1359 it will be negative for sentiment. If by chance we dip back below support at 1330 it would be downright bearish. It would tell me to prepare for the summer doldrums. Next support is in the 1300-1305 range but I would not expect it to hold.

We are at the pivotal point in the market where traders either decide to buy because they believe the economy is recovering or they decide to sell and move to the sidelines ahead of the end of QE2 in June. We have had very little market reaction to the coming halt in QE2 buying but we can't assume there will be no reaction. The market has moved sideways for the last two weeks and volatility is increasing not only in commodities but also in equities.

Volatility is good because it forces people to choose sides. Without both sides active in the market there is a false sense of security. When volatility exists it forces traders and investors to analyze the fundamentals and technicals and make an informed decision. That is what is happening so far in May. Investors are trying to read the tealeaves and decide what position they should take over the summer.

As long as the economic reports are questionable as they were in April, investors are likely to chose the safety of the sidelines than bet it all on the chance of a recovery. Until this decision process plays out in the markets we need to be cautious about our trades.

S&P Chart

The Dow respected support at 12,600 but we still have a lower high I place. Until that high is broken we should remain cautious and watch for a close under the 12,600 level as confirmation of a new trend lower.

Dow Chart

The Nasdaq rebounded slightly stronger than the other indexes but the weakness in Apple and Google still held it back. There is something wrong with both of those stocks and it could be related to lingering rebalance issues but this far into the month I doubt it. I believe a large fund or funds is rotating out of these stocks and doing it on a very casual basis to avoid depressing the prices.

The Nasdaq recovered the majority of the Wednesday loss and is still the strongest index. Watch 2825 as support and 2875 as a move over the Tuesday close.

Apple Chart

Nasdaq Chart

The Russell 2000 rebounded to close up +7 points at 847 but it remains well below the Tuesday close at 855. The same story applies here. The Russell needs to move over the Tuesday close to continue the prior trend. A failure to do this suggests support at 830 will eventually be broken.

Russell Chart

I would urge caution on entering any new trades on Friday. The market is in a state of confusion and complicated by the volatility in the currencies and commodities. Economic reports have been less than inspiring and the latest earnings reports have been a sharp departure from the trend set by the blue chips in the first two weeks.

There are growing indications there may be some market weakness in our future ahead of the June FOMC meeting and the end of QE2. If the economic reports show a rebound from April's dip then the weakness could be minimal. If the economic dip continues it would likely prompt quite a few hedge funds to turn bearish on the market.

Patience is a virtue we should practice on Friday.

Enter passively and exit aggressively.

Jim Brown

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