The major indexes traded in a narrow range ahead of Friday's Nonfarm Payroll report with no headlines moving the market.

Market Statistics

Actually the lack of volatility was amazing given the Bernanke comments to the House Budget Committee. Bernanke defended the current low rate stance by the Fed saying there were still risks to the economy. He said the pace of the recovery remains frustratingly slow. That is no surprise to anyone. However, he also warned of impending doom and the market ignored it. He said interest payments on the massive U.S. debt will soon grow to a major share of total revenue and warned the rates on the debt could quickly soar if investors lose confidence in the U.S. ability to service future debt. He also warned the U.S. could face "massive fiscal contraction in 2013" if congress did not act quickly to halt spending.

Since congress is not likely to materially address spending or deficits the outlook is clear. The U.S. will continue borrowing 30 cents of every dollar it spends until the bond vigilantes decide enough is enough. The U.S. has $15 trillion of "acknowledged" debt and that is expected to rise to $20 to $22 trillion by the end of the decade. However, if spending does not slow we could be there by 2015. For some the $20 trillion mark is where they expect the global debt buyers to back away from the debt auctions and our interest rates are going to rocket higher. This is NOT idle speculation. We are going to have to pay the piper at some point in the near future and it will not be pretty.

The Bernanke warnings today pushed the price of gold to a new two month high at $1761 and it shows no signs of weakening. The problems in Europe are a preview of what the U.S. will go through in a few years and unfortunately the U.S. is too big to save. We will have to go it alone and that means significantly higher interest rates, higher inflation, lower growth, etc. Commodities, especially the precious metals gold and silver, offer investors the best chance of hedging against that eventual disaster. Silver also rallied another 1.4% to $34.28 and moved a little closer to strong resistance at $35. A break over that resistance suggests a retest of the mid $40s from last summer.

With the Bank of England, Bank of Japan, ECB and the Fed all printing money the odds of gold and silver going higher are about 100%. The ECB put nearly 500 billion euros into the market with the 3-year LTRO offering last month. They are going to do it again in February and it is estimated they will do one trillion euros this time around. One trillion euros for three years at 1% interest. That is free money and it will impact metals and stocks even though that is not the intent. That much money sloshing around in the European banking system will impact all hard assets.

Gold Chart

Silver Chart

On the economic front the weekly Jobless Claims fell by -12,000 to 367,000. The prior week's claims were revised upward by +2,000 to 379,000. The trend has started to decline again after the post holiday spike. This is good news but it will be overshadowed by the Nonfarm Payroll report on Friday.

The ADP report on Wednesday showed weaker than expected job growth at +170,000 compared to estimates for +180,000. Job growth in December was revised lower from +325,000 to +292,000.

Jobless Claims Chart

On the flip side of employment the Challenger Employment report showed a +39% jump in planned layoffs over the rate in January 2011. This did not rile the market because January is normally a month where large layoffs are announced. The number of announced worker layoffs rose to 53,486 from 41,800 in December. Retail accounted for the most layoffs followed by financial services.

Bank of America (BAC) was slashing jobs in their mortgage department again today. People who were told as late as Monday their jobs were secure were told today their jobs had been eliminated.

The ISM - New York for January rose to 536.5 from 531.5 and another new high for the series. This was the fastest pace of growth in eight months. The current conditions component rose +8 points from 51.7 to 60.1. The expectations component rose +2 points to 64.5. Employment remained weak at 45.8. That is the seventh month in the past eight that employment has been in contraction territory.

For tomorrow the Nonfarm Payrolls will be the headline report. After the ADP news on Wednesday the consensus for new jobs has risen from 125,000 to 150,000. Actually anything over 100,000 would bring a sigh of relief and anything over 150,000 would probably be greeted with some further market gains. There is a high risk of jobs coming in under 100,000 given the layoffs of seasonal workers. The revisions to prior months could also be newsworthy but those revisions rarely move the market. It is old news.

Economic Calendar

In stock news earnings were mixed again but Green Mountain (GMCR) was perking right along. The company reported earnings of 60-cents compared to 18-cents in the year ago quarter and analyst estimates of 36-cents. Sales rose +102% with 90% of those sales from the Keurig brewing system and the K-cup sales. The company said it expected 45-50% growth in the current quarter and 60-65% growth for the entire year. Gross margins rose to 29.1% from 25%. There was nothing to dislike about the GMCR earnings and those expecting disappointing results were painfully disappointed. Shares of GMCR spiked +24% on the news.

GMCR Chart

Abercrombie & Fitch (ANF) sank to a new 52-week low at $40 after forecasting earnings of $1.10 to $1.15 that would be well below expectations of $1.55 per share. Revenue for Q4 rose to $1.33 billion but was below analyst estimates. U.S. sales rose +4% but overseas revenue surged +62%. Online sales increased +41%. Same store sales were flat. The company is now predicting full year 2012 earnings of $3.50 to $3.75 and analysts were expecting $4.21.

ANF Chart

Concur (CNQR) shares rallied +9% after reporting earnings of 21-cents compared to estimates of 20-cents. You would not expect a penny beat to cause a +9% spike but the stock was helped by an upgrade by UBS to buy from neutral and the price target rose to $66 from $48. The UBS analyst, Brent Thill, said the company has few credible competitors and is an attractive takeover target.

Concur Chart

Shutterfly (SFLY) rallied +8% after reporting earnings on Wednesday of 97 cents that beat estimates of 85 cents but it started the day in the red because of weak guidance. The company expects a loss in Q1 of up to 43 cents where the street was looking for a loss of 31-cents. After seeing its shares positively hammered in 2011 they appeared to find a bottom at $22 and maybe the rally this afternoon was the shorts throwing in the towel. The chart definitely looks like the basing pattern has completed.

SFLY Chart

Qualcomm (QCOM) saw upgrades from Oppenheimer, Citigroup and Goldman with price target increases to the mid $70s. Shares of QCOM rose +2% to a new 11-year high. Citi said the company would benefit from the rise in smartphone sales. Goldman said higher demand allows them to raise prices.

QCOM Chart

Affymax (AFFY) broke out over strong resistance ahead of its earnings scheduled for Feb-8th. There was no specific news for Affymax but the biotech sector was a hotbed of activity all week with new drugs announced and approvals expected for drugs under review by the FDA.

AFFY Chart

Zynga rallied +17% after Facebook said 12% of its revenue came from Zynga. Facebook gets 30% of the fees Zynga charges for virtual products inside its interactive games such as Farmville. While Zynga remains heavily dependent on Facebook this was the first time analysts realized how dependent Facebook was on Zynga. With the two so interdependent I think there is a very good chance Facebook will buy Zynga once it has completed its IPO. Zynga has a market cap of $1 billion and Facebook will easily be able to handle that plus a hefty premium once its shares price. I am not a Facebook game player but tens of millions are and it would be crazy for Facebook to let someone else, like Google, to develop a relationship with Zynga. Google could buy Zynga to develop games for Google+ and that would be in direct competition with Facebook.

I would be a buyer of ZNGA on any pullback. I doubt it has long to live as an independent public company.

Zynga Chart

The markets rallied at the open but that gain was short lived for the Dow. The Nasdaq and the small and mid cap indexes were in the green most of the day but ended roughly flat. The Nasdaq 100 ($NDX) gave back a lot of its morning gains but still closed at a new 11-year high.

The markets are waiting on the Nonfarm Payrolls on Friday and the "imminent" debt swap deal in Greece. That deal has gone from being done in the next couple weeks to a "matter of days" to a "matter of hours" to "imminent" but still remains to be completed. At this point an actual deal announcement may have limited market impact. However, another breakdown in the talks would be ugly. The big worry now is the breakdown in discussions for the second Greek bailout of 130 to 150 billion euros. Several countries are now balking at following through on the deal without further assurances of future austerity. If that deal failed the market could easily decline significantly.

More important in the short term is the Nonfarm Payrolls. I really don't think a number over 100,000 will make that much difference unless it is a blowout. The market is just worried there could be a severe miss to the downside. What we want on Friday is a Goldilocks number, not too high and not too low.

The S&P is now well above the critical 1310 level and appears to be trying to stake a claim on 1325 as the next support level rather than resistance. The index regained that level at 1:45 PM and stubbornly held it the rest of the day.

The market is refusing to go lower. Volume remains low at 6.9 billion shares but it was mildly positive at about 3:2 advancers to decliners even though the indexes finished flat. I think the majority of investors are waiting for that dip that may never come. I know I have been expecting one but have also been disappointed. I would love to have a "real" dip to buy as would the majority of traders. Until that happens we may continue this low volume melt up until a headline appears to upset the status quo.

After Wednesday's big gain you would have expected today to pull back slightly but it was not to be. I look back at those intraday dips on Monday and Tuesday and today they look like buying opportunities rather than the beginning of a decline. This may be a warning of things to come. Money managers learn quick and they may pull the trigger even quicker to buy the next intraday dips.

Support still 1310 and resistance 1345-1350.

S&P Chart - 60 Min

S&P Chart - Daily

The Dow is giving us a preview of what the S&P will probably do at 1,250. The Dow hit that strong resistance at 12,750 on Jan 23rd and has not budged in nine trading days. Several spikes above that level were quickly sold but multiple gap opens to the downside were quickly bought. This is a consolidation pattern and it will probably take some major headline to break us out of this range in either direction.

However, the overriding point is the lack of a credible sell off of any kind. The Dow has closed negative for five of the last six days but it is still holding just below resistance at 12,750. That shows you how little conviction there is on the part of sellers. Six days in the last two weeks the Dow sold off at the open but it is still only 46 points below that 12,750 level first hit on Jan-23rd. That is remarkable given the rally from mid December.

Support remains 12,600 but it appeared on Thursday to be trying to drive a stake in 12,700 as a higher launching point.

Dow Chart - Daily

The Nasdaq continues to post decent gains almost every day. The Nasdaq composite is now only 16 points away from major resistance at 2875 but the Nasdaq 100 has already broken out to new highs and those big caps are dragging the composite along for the ride. The Nasdaq 100 breakout could be telling us the resistance at 2875 has no teeth.

At this point I think it is a given the composite will test 2875, probably on Friday assuming the payroll report is not a disaster. You have to wonder if that level will prove to be an electric fence that knocks the index back to support or will it be just a pause point that allows current longs to trim positions and lock in profits.

Support is now 2800 and well below the close at 2859.

Nasdaq Composite Chart

Nasdaq 100 Chart - Weekly

The S&P-100 ($OEX) has not yet broken out to new highs like the Nasdaq 100. However, when/if that happens I would expect the SPX to be pulled higher like the Nasdaq 100 is doing to the Nasdaq Composite.

S&P-100 Big Cap Index Chart - Weekly

The Russell 2000 has broken out over 800 and continues to post decent gains. This sudden outperformance by the small caps is bullish and suggests fund managers are buying in self defense. They may not believe in the rally but they can't afford to miss it. Major resistance remains at 856 but that is well above and not a worry this week.

Russell 200 Chart - Daily

Russell 2000 Chart - Weekly

The trend is your friend until it ends and so far there is no end in sight. That could change in a heartbeat with the nonfarm payroll report of a sudden breakdown in the bailout talks in Greece. However, stronger PMI data from Germany and northern Europe suggests the recession may not be as bad as previously expected. If Greece magically passes the current set of deadlines and the second bailout is approved we could see a massive relief rally.

I believe the current meltup is the result of investors speculating the Greek problems will be handled and we will move on to other events. Dips are being bought a lot quicker despite a lack of conviction once resistance is hit. The market is melting up in anticipation of better times ahead. Let's hope it is not the case of the birthday pony. Wishing for a birthday pony may lift a child's spirits in anticipation but rarely does a pony arrive.

Jim Brown

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