A +120 point Dow intraday gain fizzled at the close to only +17 but it was still a gain and the Nasdaq closed at a five day high.

Market Statistics

The markets opened lower this morning in a continuation of the sell the news event on Monday. New governments are forming in Greece and Italy but now there is a concern about whether these new temporary coalitions will have the strength to enact the needed reforms since they will have no popular support from the public.

You have probably heard the term "technocratic government" being used for both Greece and Italy and the new leaders. I am sure quite a few people don't know what that means. Webster defines technocracy as a form of government in which scientists and technical experts are in control as opposed to politicians. For instance in Italy, Mario Monti, is a renowned economist and not really a politician with broad party support.

In theory these professional economists will take power, appoint a cabinet and apply their technical knowledge about economics and make changes to the government and the economy in order to reverse their current downward spiral. The problem with technocratic government by committee is that the committee has no support base in the population. The committees may be composed of members from the various different parties but there is normally a coalition rather than a majority of a single party.

The problem with the technocracy is actually getting the laws passed once they move into the broader Senate/Parliament and are impacted by the normal political partisanship. The technical experts can determine what they think needs to be done but actually getting the lawmakers to go along with the changes could be a challenge.

This is what is impacting the markets this week. The normal political wrangling is taking place as the cabinets are being formed in Greece and Italy and already some party leaders in Greece have promised to oppose any changes suggested by the appointed members. In Italy Monti has already held numerous meetings and he said late Tuesday he is confident the opposition concerns will be overcome soon and the cabinet will be formed without delay.

Traders are not as convinced as Monti. After many months of arguments instead of action by Greece they are watching the process in Italy with a skeptical bias. Once the temporary coalition governments are formed the worries should cool somewhat as it will take some time before those governments can come up with changes.

Until then we are likely to continue to be pushed around by European headlines. France has moved to the top of the concern list after numerous articles suggesting their banks were in serious trouble as a result of owning Italian debt. France is the biggest holder of Italian debt and any haircut, like the one proposed for Greek debt, would be severely negative for France. So far the prospect of an Italian debt haircut has not really taken shape. The bond vigilantes have started to target France just in case and yields are starting to rise on French debt.

It may be a long time before the European problem goes away completely, as in years from now. We need to expect these random headlines to continue to weight on the markets. However, continued positive economic news from the U.S. and China would go a long way towards distracting investors from the problems in Europe.

In the U.S. the Retail Sales for October rose +0.5% and the second largest increase since March. September posted a rise of +1.1%. Analysts were pleased to see there was not a dip back into negative territory that would have suggested September's gains were an accounting abnormality. Instead we have seen a steady increase in consumer spending despite the decline in consumer sentiment. Core sales ex-autos and gasoline rose +0.7%. Year over year growth is now +7.2%. Electronics rose +3.7%, building materials +1.5%, food and beverages +1.1% and nonstore retailers +1.5%. Not all sectors were positive with home furnishings declining -0.7% and apparel -0.7%. The continued increase in consumer spending suggests there is no worry over a return to a recession.

The NY Empire State Manufacturing Survey rose to +0.6 and a significant improvement over the -8.5 reading in October. Analysts were expecting only a minor increase to -7.0. This was the first return to positive territory since May. However, the internal components were not that positive. New orders slipped slightly to -2.1 from +0.2 and backorders also declined to -7.3 from -4.5. The average workweek rose for the first time in six months from -4.5 to +2.4. That suggests activity is picking up but it will take a lot more orders to stimulate new hiring. The most positive components were a jump in capital spending plans to 25.6 from 7.9 and a spike in the six month outlook to 39.02 from 6.74.

The jump in the forward looking indicators was a strong injection of positive sentiment for investors.

NY Empire Chart

Inflation is nowhere to be found at the producer level. The Producer Price Index (PPI) for October fell -0.3% from a +0.8 in September. The core rate, excluding food and energy, prices were unchanged, down from +0.2% in September. Declining prices confirms for the Fed that inflation is nonexistent and they have no reason to change their current monetary policy. In fact should prices continue to fall they may actually increase stimulus to prevent a return of recessionary conditions.

Prices for autos declined -1.6% as more inventory becomes available. Energy also declined going into October and those declining prices were seen in products in October. There is a large amount of spare manufacturing capacity and that leads to lower prices as firms compete to gain market share. A pending recession in Europe will also push prices lower. If Europe appears to be dropping into an austerity led recession the Fed will be forced to increase monetary stimulus.

The calendar for the rest of the week is full of reports but the only really important one is the Philly Fed Survey on Thursday.

Economic Calendar

Not on the calendar for next week but definitely on the mind of investors is the Super-committee deadline on the following Wednesday. Recent comments from committee members suggest they are no closer to a joint solution than they were three months ago. However, we all know that nothing ever gets done in Washington without a deadline. That means they are likely to use every minute until that deadline beating each other up in the press and trying to perfect their brinksmanship ahead of next Wednesday.

Apple (AAPL) shares finally rallied for a change with a gain of more than $9. There were multiple catalysts for the rally. Apple announced it had named long time board member Art Levinson as non-executive chairman of the board. They also named Walt Disney CEO Bob Iger to the board. Levinson replaces Steve Jobs and Iger replaces Levinson on the board. Steve Jobs and Iger had become close during the acquisition of Pixar by Disney. Levinson is the CEO of Genentech and has been on the board since 2000.

Apple shares also rose on news several high profile hedge funds had begun accumulating new positions.

Apple Chart

Dell reported earnings after the bell that beat the street on earnings per share but missed on revenue. Dell lowered guidance for the current quarter as a result of the flooding in Thailand. Excluding items Dell earned 54-cents compared to analyst estimates of 47-cents. Revenue of $15.36 billion was below the consensus estimate of $15.65 billion.

Dell Chart

Dell warned that the floods in Thailand had disrupted supplies of hard drives and other components. This is not new news. The floods have inundated several plants that either make hard drives or supply parts for drives and for other equipment as well. Drive prices in the retail market today have risen 300% to 500% depending on the type of drive. On top of the price increase there is a limit per customer. NewEgg.com, one of the biggest online retailers of computer parts, has limited purchasers to one drive on most items with a five drive limit on some of the lesser quality brands/models still in inventory.

For instance a Seagate 2TB SATA drive that cost $79 at Microcenter two months ago is now quoted at $289 to $389 if you can find one and then you only get to buy one drive. That may not be a big deal for a home user that only needs one drive but for businesses it is a disaster. Most high capacity storage servers in use today require from 12 to 48 drives per server. This is severely restricting server sales to businesses because they are no good without drives and the cost of the drives today can be 3-4 times the cost of the server. For instance the 24 drive Supermicro (SMCI) storage server below sells for under $5,000 fully configured but the drives are now more than $14,000 today (if you could find them) compared to $3,000 two months ago.

Supermicro 24 Drive Storage Server

Other companies being hit by the Thailand floods include:

Seagate (STX) warned its factories were safe but parts suppliers had been hit.

Western Digital (WDC) warned that flooding damage will have a significant impact on operations for the rest of the year.

Apple (AAPL) warned that the overall industry shortage of drives would slow sales of the Apple Mac.

Emulex (ELX) warned that a subcontractor in Thailand had suspended operations for an indefinite duration.

Fabrinet, which supplies parts for optical and electronic manufacturing would remain closed for the rest of the year.

Emcore, maker of fiber optic components for broadband devices said flooding had submerged equipment at a subcontractor and will be unable to make deliveries until other facilities can be improved to handle demand.

Digi International, a maker of computer networking equipment, said flooding had inundated a contractor and they had no target date for restarting production.

LSI Corp (LSI) warned that supply chain problems related to the flooding would reduce Q4 earnings.

JDS Uniphase (JDSU) warned revenue would decline sharply in Q4 due to component shortages.

Lenovo Group, a leading PC maker, said the flooding had severely reduced the supply of hard drives necessary to sell their computers and forecast lower revenue.

Cisco (CSCO) said the sudden shortage of optical components for its networking equipment and "expect conditions will not return to normal for several quarters."

Research group IDC said the real damage to the computer sector won't be felt until early 2012 since the majority of Q4 sales will be done out of existing inventory. However, in a worst case scenario PC sales could decline more than 20% in Q1-2012.

Hewlett Packard (HPQ) reports earnings on Nov 21st and you can bet they will also warn of challenges from the lack of components.

Agilent (A) reported earnings of 84-cents compared to estimates of 80-cents. They guided exactly in line with estimates and did not give investors any reason to be excited. Shares declined more than $1 in afterhours trading.

Autodesk (ADSK) reported earnings of 44-cents after the bell compared to estimates of 41-cents. They guided roughly in line with estimates but shares rallied +75-cents after the report.

Commodities were mixed thanks to the volatility in the euro and the dollar with gold, silver and copper trading relatively flat. Oil was the exception to the rule and it rallied to close at $99.50 on declining supplies and rising demand. That is the highest close since July 26th. I wrote a big article on OilSlick.com last night about the rising demand and why oil prices are rising and I won't go into all the details today. Read: Growth Continues, Production Does Not

Today we learned that tankers loading oil in the Persian Gulf rose to 53 last week compared to the average of 35-38. Japan and China are buying every spare barrel in sight. Japan's demand in October was +200,000 bpd higher than the same period in 2010. China is scrambling to overcome a severe diesel shortage that plagued them last year and is ongoing. They told refiners to boost to maximum production to try and increase inventories ahead of their high demand season.

Russia is talking about adding a 3.5% export duty on their oil and last week was talking about matching deliveries to meet OPEC quotas. Russia is not a member of OPEC and that has been a problem for OPEC since Russia produces between 8-9 million barrels a day. If Russia has seen the light and understands they can get more money for their oil by keeping their production in line with OPEC quotas then prices are going a lot higher.

In the WTI futures we learned in the CFTC Commitment of Traders report this week that hedge funds had increased their exposure by +7.2% over the last two weeks. We are heading into the high demand winter season and this is typically where prices increase until spring. With the economics in the U.S. improving it suggests oil demand will also increase. Add in the worry over Iran and the problems in Syria and there is plenty of support for higher prices. Buy the dip in energy equities.

Crude Oil Chart

Despite the +120 point intraday gain by the Dow the markets really ended in neutral territory. The Nasdaq was a minor winner with a five day high close. However, the S&P is stuck in neutral territory and I fear it may continue to be lackluster until after the Super Committee releases a debt plan. Volume was minimal for the third consecutive day with only 6.2 billion shares trading and that was the highest of the last three days.

Italy and Greece have moved to a point where there should not be any really serious headlines for the next week or two but France and Spain now appear to be targets of the bond vigilantes. While I believe those are just targets of opportunity and the ECB will be able to quell those attacks with a little bond buying, there is always risk.

The growing realization that the Thailand floods could really hurt tech earnings for the next several quarters is going to eventually depress shares of computer related stocks. Will that impact the Nasdaq in Q4, nobody knows. I don't think the seriousness of the Thailand floods has really impacted market sentiment yet. It will hit when additional companies begin posting warnings.

For now the S&P is struggling with initial overhead resistance at 1265 with stronger resistance at 1275 and 1285. Actually the next 45 points are going to be a battle in five point increments and we may not succeed in that battle until after the Super Committee plan is announced. We have a nice series of higher lows but that strong overhead resistance is showing no signs of cracking.

S&P Chart - 90 Min

S&P Chart - Daily

The Dow has the same pattern as the S&P only the Dow is pressing the downtrend resistance with a little more upside bias. The S&P is stuck in the middle of the pattern but the Dow is holding at the highs. I was disappointed at the end of day swoon but with Dell, Agilent and Autodesk reporting after the bell that could have had an impact.

However, Chevron was the biggest drag. Chevron fell -$4 intraday starting at 1:30 after some news in the blogosphere suggested Chevron was responsible for a big oil spill off the coast of Brazil. That was not the case and Chevron and Transocean both rebutted the rumors. There was a minor spill in the hundreds of barrels from an appraisal well being drilled from Chevron. Hundreds of barrels, 400-650 was the estimate, not thousands. The "leak" was coming from cracks or seeps in the ocean floor not from the actual well. The news caused Chevron to lose -$3 for the day and knock -25 points off the Dow.

What it caused was some ETF selling as the Dow dropped on the Chevron news. Trailing stops were hit and it knocked the Dow back to barely positive.

Initial support for the Dow is now 12,000 and strong resistance at 12,175.

Dow Chart

The Nasdaq managed to make a decent 28 point gain thanks to Apple's return to favor but the index remains trapped below the 200-day average at 2687. The earnings warning by Dell and the revelation by several other tech companies of their exposure to Thailand should make further gains by the Nasdaq tough to come by until after the Super Committee.

Support 2600, resistance 2687.

Nasdaq Chart

Continued underperformance by the Russell-2000 suggests the recent rally has no legs. Until the Russell begins to outperform there is no confidence in the market.

Russell Chart

I have worries the market could take a step back ahead of next Wednesday's committee deadline. The odds of a breakout ahead of that even are slim. The growing tech warnings over the flood could weigh on the markets.

I have been in buy the dip mode with expectations of a continued move higher through Thanksgiving but the news leaks starting to appear from the committee regarding their disagreements suggests we could see some volatility ahead of the event. I would probably look for a stronger pullback to buy and that suggests something in the S&P 1220 range.

S&P futures are down -8 after Dell's earnings and guidance warning. The dollar is also spiking significantly so Dell is not the only news weighing on the market. Unless something changes before Wednesday we are looking at a negative open. In theory I would still buy the dip but not the first dip. Let's give the market some breathing room and see what develops.

Jim Brown

Send Jim an email