Talk of QE3 is growing as economic reports continue to show a slowing economy. The market rebounded from its opening lows but volume evaporated along with those afternoon gains.

Market Statistics

It was a typical pre-holiday trading session. All the real market activity came shortly after the open as traders reacted to some disappointing economics and weak earnings reports. Once the smoke cleared the volume collapsed as traders headed for the door to start the long weekend early.

Starting the morning off was a weaker than expected Q1 GDP report. Analysts were "officially" expecting +2.2% GDP growth but they were disappointed when growth came in at only +1.84%. This was only slightly better than the initial reading of +1.75%. Private inventory and exports were adjusted higher but an unexpected drop in consumer spending erased those gains.

Personal consumption declined from 2.79% growth in Q4 to +1.53% in Q1. Fixed residential investment declined -0.07, exports -0.06 and government spending by -1.07%.

The core PCE, excluding food and energy, rose by an annualized +1.4%. This is the Fed's preferred inflation measure and shows inflation is well below the Fed's target rate. The core PCE actually declined from 1.5% in the first release.

This allows the Federal Reserve to remain aggressive with their monetary policy. With unemployment near 9% and consumer spending slowing dramatically the Fed will think very hard before removing any accommodation currently in the market. QE2 may end on schedule but expectations are increasing for some new monetary stimulus from the Fed. They simply can't step back from the market with unemployment that high and the economy now slowing.

GDP Chart

Also depressing the market was a very sharp drop in the Kansas Fed Manufacturing Survey to 1.0 from 14.0. That is only one point above recession levels. The major components plunged into negative territory with New Orders and Back Orders turning really ugly. Another problem was the mismatch between prices paid and prices received. Manufacturers paid more for materials but received less for finished goods. That will impact future profits. The employment component remained in expansion territory but did decline significantly. Any number over zero represents expansion while any negative number represents contraction territory.

Kansas Fed Component Table

Kansas Fed Manufacturing Chart

Weekly Jobless Claims rose again with a +15,000 gain to 424,000 from a revised 409,000 in the prior week. There is a lot of noise in the weekly numbers but the four-week moving average has risen to 438,500. Florida was the only state that reported an increase in claims of more than 1,000. Analysts believe the flood around the Mississippi River could have had a negative impact on employment for the last 4-6 weeks.

Jobless Claims Chart

Nonfarm Payrolls are next Friday and it will be very interesting to see if employment took a dive over the last month. The consensus estimate today is for a gain of +191,000 jobs.

Reports due out tomorrow include Personal Income, Consumer Sentiment and Pending Home Sales. I doubt there will be anyone around to listen. If a report falls in the market on a holiday Friday does it make any noise?

There were a flurry of earnings reports on Thursday and most were lackluster. I am only going to touch on the high points because the economics were the market movers.

Tiffany (TIF) reported earnings that increased +26% on a +20% increase in sales. This is more evidence that the higher income consumer is not holding back on spending while the Wal-Mart crowd is staying home. Unfortunately there are far more Wal-Mart shoppers in the U.S. than Tiffany shoppers. Earnings of 63-cents beat analyst estimates of 56-cents. Tiffany shares rallied +6.00 on the news. The continued good news from high-end retailers helped to push the sector higher with Coach (COH) gaining more than +5%.

Tiffany Chart

On Wednesday Computer Sciences Corp (CSC) reported profits that fell -34% thanks to the drop in spending by the government. CSC gets 40% of its revenue from government contracts. The company also lowered guidance for the full year to $4.70-$4.80 and analysts were expecting $5.18. CSC shares fell -13% to $38 on the news.

Big Lots (BIG) fell -3% to a new four-month low after posting earnings of 70-cents compared to 68-cents in the year ago quarter. That beat estimates by a penny. The bad news came from a -3.6% decline in same store sales and a cut to full year guidance to $2.75-$2.90 from prior guidance of $3.05-$3.15 per share. Big Lots shifted its product mix toward lower margin, lower priced items and that knocked 30 points off its gross margins for the quarter. Higher fuel costs were also blamed. We better get used to that excuse for the Q2 earnings cycle.

Microsoft (MSFT) caught some flack after hedge fund manager David Einhorn said Microsoft CEO Steve Ballmer needs to leave and be replaced by somebody who can unlock value in the stock. Microsoft has risen only about 4% over the last five years. Einhorn said a company with the assets of Microsoft including more than $40 billion in cash needs to find somebody that can do the job. Obviously Ballmer can't as evidenced by the lack of performance over the last ten years. Microsoft has had a long string of spectacular failures over the last decade while Apple has righted its ship, built a better portfolio of products and consumers are beating a path to their door. The difference is the CEO. Apple had five CEOs who failed before Steve Jobs came back to work and rescued the company. Microsoft has the ability to do anything it wants but can't seem to get out of its rut.

Microsoft Chart

Crude prices rallied slightly on the drop in the dollar and the increased violence in Syria but the rally faded late in the afternoon. The WTI contract closed over $100 but just barely. Gasoline prices continued their decline to $3.81 nationwide.

The Dow lost -77 points at the open but managed to struggle back to positive territory before the close but just barely. The S&P has now traded down to 1315 for four consecutive days and held at that level. That is the 100-day average on the S&P. I mentioned on Tuesday we had moved to oversold and could see a short covering bounce any day. When support held again today I believe the morning rebound was that short covering. I also warned that the normally bullish trend before a long weekend might not appear this week. I could have been wrong there because there was really nothing positive to push the markets higher but they did rise slightly.

The S&P now has resistance at 1325 leaving it a narrow range to trade on Friday between 1315 and 1325.

S&P Chart

Like the S&P the Dow has overhead resistance at 12,425 and the 50-day average. The -77 point drop this morning took it back to Wednesday's lows but the rebound was quick although lacking conviction. I believe it was just traders thinking "we are not going lower ahead of the holiday so I will close my shorts and head out for vacation."

There were no major winners or losers on the Dow with CAT the biggest winner and a gain of +94 cents almost twice the second place finisher HPQ at +54 cents. IBM was the biggest loser at -57 cents.

There was very little volume at 6.2 billion shares and Friday's volume will be even lower.

This was not a trading day. It was a nothing day that would have been even duller had it not been for the ugly economics at the open.

Support is 12,325.

Dow Chart

The Nasdaq actually posted a decent performance with a rebound back above the 100-day average where it had been stuck for the last three days. This rebound was a surprise and was powered by PCLN +7, NFLX +4, CTXS +4, NTAP +3.65, FFIV +3 and AMZN +3. Apple and Google were both drags with losses just under $2 each but LULU -6 and FSLR -3 were the big anchors.

While the rebound was better than expected on the Nasdaq the index had already fallen further than the Dow and S&P in relative terms so it was more oversold. That oversold condition turned into short covering on what was really the last trading day for this week.

Nasdaq Chart

The Russell turned in the strongest performance with a +1.21% gain and another surprising move. It closed under the 50-day but the Russell has not really been paying attention to the support and resistance of the moving averages. The Russell has been far more event driven and had sold off on Tuesday to the lowest relative position of all the indexes. This oversold condition was tested again on Wednesday with 810 providing support and kicking off the rebound.

While I am encouraged about the big gain I have no confidence it will hold. Once the weekend even risk passes it will be interesting to see what direction appears.

Russell Chart

Friday is a holiday. The markets may be open but there will be limited trading in progress. There are no important economic reports and no earnings to provide disappointments. My recommendation would be to go shopping for some weekend groceries and something for the grill rather than adding any new stock positions.

Enter passively and exit aggressively.

Jim Brown

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