The Dow rallied for a +133 point gain intraday thanks to the morning short squeeze that ended at 11:30 but there was no conviction and stocks sold off again at the close.

Market Statistics

The markets still ended in positive territory to break their six-day losing streak. There have only been five six-day losing streaks for the Dow since 1997 and only two seven-day losses since 1980. We were due for an oversold bounce.

The International Trade report was given the credit for the squeeze but the report came out at 8:30 but the futures were already up +5 points before the trade report was released. Futures began rising when the Asian markets opened on Wednesday night. The Shanghai Index opened higher but declined to close flat and the Hang Seng Index opened flat and fell -240 points intraday before returning to the flat line so I doubt it was in sympathy with Asian markets. I believe the Thursday rally was simply an oversold bounce that triggered a short squeeze. Markets very rarely trade down for that many days in a row so we were definitely short-term oversold.

The market also received good news from ECB when they passed on a rate hike at Thursday's meeting. Trichet said the ECB's position on inflation was one of "strong vigilance," a code word in ECB parlance for a rate hike ahead. The ECB is expected to hike its key rate from 1.25% to 1.50% in July. The Bank of England also left its rate unchanged at .50%. Stronger language on private investor debt defaults for Greece also encouraged investors they will not be forced to share in a debt restructuring.

The economics were not that positive. The International Trade report got a lot of press because of the sharp drop in the trade deficit. The trade deficit for April declined sharply to -$43.7 billion from -$48.2 billion. On the surface it would appear our exports had picked up significantly, which they did by +$2.2 billion, but the balance was due to a decline in imports because of the break in the Japan supply chain. We imported -13.2% less goods from Japan in April. We imported significantly fewer things like auto parts and semiconductors post quake. This report should have shown a decline so I am not that excited about the move. The drop in the deficit will provide a boost to Q2 GDP.

The weekly Jobless Claims rose to 427,000 from 422,000 the prior week. However, last week's number was revised higher to 426,000. This was the ninth consecutive week over 400,000. This is not a positive sign but at least the unemployment claims are not rising.

Jobless Claims Chart

On the positive side the Bloomberg Consumer Comfort Index rose for the third consecutive week. However, the index is well into negative territory at -45.9. The lowest recent reading four weeks ago was -49.4. The index has been in negative territory since April 2007 and recent gains are insignificant until the index moves back over -30.

Moody's Comfort Chart

The commodity sector got a boost when the USDA crop report showed farmers planted 1.5 million acres less corn than previously expected. The amount of acreage planned for corn fell from 92.178 million acres to 90.7 million. U.S. corn stockpiles are expected to decline to 695 million bushels before the 2012 harvest and that would be the lowest since 1996. Corn futures rose +2.8% to touch $7.93 and the highest since June 2008. That compares to the average of price received by farmers in 2010 of $5.35 per bushel. The main problem hitting farmers is the floods with many fields too wet to plant and not expected to dry out in time. Corn is the biggest U.S. crop and valued at $67 billion in 2010.

Crop trivia: The average age of the U.S. farmer is 58. How many of these farmers will still be farming ten years from now? Quite a few will retire in place and just plant less and reduce the workload and the crop risk leading to smaller U.S. production. More farms are being sold and converted into subdivisions and housing developments. Those trends suggests grain prices will continue to rise long term.

Corn Chart

The crop report sent shares of the fertilizer and agricultural companies like Potash (POT), Mosaic (MOS) and Deere (DE) significantly higher. They all needed help because they have been selling off for weeks. You would think demand for fertilizer would be strong BUT there are now 1.5 million fewer acres to be planted and not needing fertilizer. It will be interesting to see if the rebound continues.

Mosaic Chart

Crude prices continued their rise with a +1.93 gain to close just under $102 thanks to the OPEC decision to drop quotas. They did not actually say that but that is the end result. Four OPEC members wanted to raise the quota by 1.5 million barrels. Those were the four that actually had some excess capacity they could produce. Those are Saudi Arabia, Kuwait, UAE and Qatar. The rest of the OPEC nations either can't produce at their current quota so raising their quota would have done them no good OR they did not want to hike quotas for political or economic reasons. Iran holds the rotating OPEC presidency for 2011 and they were adamant against a quota hike since it would send a psychological signal to the market potentially reducing prices plus it would allow their arch enemy, Saudi Arabia, to profit from the quota hike by "legally" pumping more oil.

By not agreeing to raise the quotas they hoped to keep prices moving higher. They may have been successful in the short term but they also succeeded in killing the quota system. Saudi, Kuwait and the UAE said they would immediately begin producing more oil and ignore the old quotas. The three countries, primarily Saudi Arabia, will begin pumping up to 1.5 mbpd "as needed." That means if someone wants to buy the oil they will sell it. They are not going to just start flooding the market with excess oil. Remember, the oil refiners want is the light sweet crude that these countries don't have in excess. They have an excess of less desirable heavy sour crude.

A JPM analyst said there was 2.0 mbpd of excess production this time last year. Today that has fallen to a -100,000 bpd shortfall and it is expected to increase to -1.5 mbpd by the end of Q3 assuming the price does not rise sufficiently to kill demand. It is imperative that Saudi and friends increase production by Q3. JPM estimates are for Brent crude to rise to $130 in Q3.

Light Crude Chart

Brent Crude Chart

Texas Instruments (TXN) rebounded to a small gain of 24-cents after dropping -$2 after their guidance warning on Wednesday night. TXN lowered guidance after Nokia delayed some orders due to falling market share. Oppenheimer said TI's exit from the low profit Nokia business was a positive and maintained an outperform rating on TXN.

Tech stocks rallied despite several guidance cuts from the major technology trackers. Gartner Group analysts cut estimates for 2011 global PC computer shipment growth to 9.3% from 10.5%. IDC cut estimates for PC shipment growth to 4.2% from7.1% earlier this week. On Thursday JP Morgan cut estimates for PC growth in the U.S. to 2.8% from 7.0%. That is their second cut in the last three months. With all these downgrades it was very surprising for tech stocks to close positive today but they were very oversold.

Apple continued to decline despite the minor tech rally. It does appear to have found support at $330. Apple relaxed its draconian rules on iPad content today after publishers stayed away in droves. Previously Apple had forced the subscription sales to go through their app store and incur a 30% commission payable to Apple. They also had restrictions on how much you could sell the same subscription outside of the Apple system. Say the New York Times was selling a web-based subscription for $20 a month. They were not allowed to mark it up to $30 for delivery over the iPad in order to cover the 30% commission cost. It had to be the same price on the web as on the iPad. Publishers revolted and avoided the iPad in favor of Android platforms. Apparently Apple got the message. They are still going to charge the commission but publishers can set the price to anything they want. More concessions may be in the pipeline given the increasing competition.

Apple Chart

After the close National Semi posted earnings of 26-cents compared to estimates of 27-cents. That was a -15% decline from the comparison quarter. Earnings saw pressure from the Japanese earthquake, declining sales to Nokia and slowing sales growth at other handset makers. NSM normally receives 10% of its sales from Japan and sales there dropped -15% after the quake. Margins were flat at a healthy 65.5%. NSM is being acquired by Texas Instruments for $25 per share so the earnings news had no impact on the stock price.

National Semi Chart

I wish I could be more positive about the market outlook but the trading action today was clearly an oversold short squeeze and met with another bout of selling at the close. The rally produced the first positive day in June for the Dow and S&P. Unfortunately the rebound from 1277 stopped exactly at 1295 resistance and exactly where it should have stopped. This was the third day in the last four the S&P tested that resistance and failed. Also complicating the picture was the dismal volume at only 6.1 billion shares. I said on Tuesday night I expected volume to be under 6.0 billion shares by Friday so we are right on track.

S&P-500 Chart - 15 min

S&P-500 Chart - Daily

The Dow appears to have found resistance at 12,185 that corresponds with the 1295 resistance on the S&P. The Dow declined to 12,050 on Wednesday and light support from late February. I believe this support will fail and we will test at least the 200-day at 11,600 if not the March lows at 11,600.

Dow Chart

The Nasdaq came to a dead stop on support at 2675 but like the other indexes the rebound was lackluster. The gap down open on Wednesday became overhead resistance today and the afternoon sell off was frustrating for the bulls. The constant downgrades of the PC sector no longer appear to be weighing on the techs but eventually those downgrades will turn into earnings warnings. Initial resistance is 2695.

Nasdaq Chart - 15 min

Nasdaq Chart - Daily

The Russell continues to be on track for a retest of the Jan/Mar lows at 775 and the 200-day average at 768. The small caps saw a little short covering today but the gain was minimal. I hate to keep repeating the same thing over and over but I don't see signs of a rebound despite today's gains. Support remains around 770.

Russell Chart

The short squeeze today simply allowed sellers to get short again at a higher level. Those who were reluctant to add new shorts after six days of declines were rewarded with a failed rebound at critical resistance at 1295 on the S&P and a new opportunity to reload. We won't know if that opportunity will be profitable for a couple more days but odds are good we will eventually see a lower low.

Volume should be minimal on Friday so volatility could increase slightly. I would be reluctant to add new positions until Monday.

Definitely, enter passively and exit aggressively.

Jim Brown

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