The market appears to be in Wall of Worry mode and the higher we go the more investors are willing to ignore the problems.

Market Statistics

The markets gapped up again at the open on news from Europe and then sold off at the close for the third consecutive day. However, they still posted gains despite expectations by almost everyone to the contrary. I am officially calling it the Wall of Worry rally. There are so many worries that expectations for central bank easing in Europe, Japan, China and the U.S. are preventing a market decline. The central banks are successfully talking up the market without having to actually do anything. Eventually this tactic will fail but if we breakout to new highs we will see new money begin to chase performance. New highs are the best form of Viagra a market can have.

Most of the problems in today's wall of worry came from Europe. U.K. industrial production declined -4.3%. Sounds bad but analysts were expecting a -5% drop so the news was "less bad" and a rally began.

Comments from officials in Germany late last night appeared to approve of the ECB plan to buy sovereign bonds in an effort to keep interest rates low in Italy and Spain. The European markets and the S&P futures soared over night. The apparent about face by German officials was misinterpreted to badly that the German Bundesbank had to publish a clarification around 4:AM ET saying "Our stance on bond purchases has not changed." The Bundesbank is not the government and the German officials did not change their comments. The Bundesbank sees bond purchases as a redistribution of wealth from financially sound countries to those with serious spending problems and excess debt. Basically the sound countries would be funding the lavish spending by the countries in trouble. Despite the war of words in Germany the markets continued their overnight rally.

German factory orders declined -1.7% in June compared to May and economists had only expected only an -0.8% decline. Orders declined -7.8% year over year. Orders from the eurozone declined -4.9% after rising +7.8% in May. Domestic orders declined -2.1%. Call me crazy but I don't see any reason for a rally in those numbers.

Italy announced that its GDP contracted by -0.7% in Q2 and slightly better than the -0.8% in Q1. Again, this less bad number generated a rally. This is a continuation of a recession that has lasted more than a year and her pushed GDP down -2.5% over the last year and analysts predict that will continue through year end. The Italian government believes the economy will decline only -1.4% for the year despite continued declines. A Reuters survey predicts the budget deficit will be -2.3% of GDP compared to government estimates at 1.7% and 1.3% in 2013. Why anyone would believe any "less bad" government number out of Italy, Spain or Greece is beyond me.

That was how the market rally started overnight. Apparently those weak numbers calmed fears of any even worse decline AND increased expectations for ECB easing in the weeks ahead. It is no longer the Bernanke put holding up the market but now the ECB put.

That is not to say the U.S. did not have its own Fed speak pushing markets higher. Federal Reserve Bank of Boston president Eric Rosengren said the Fed should pursue an "open ended" QE program of "substantial magnitude" to boost growth and hiring amid the global economic slowdown. He said the Fed should set its guidance on the economic outcome it wants to see and then continue buying until that outcome arrives. He said without new stimulus the unemployment rate would rise to 8.4% by year-end and economic growth would not exceed 1.75%. A new easing program "needs to be substantial enough that is offsets the shocks we are getting from Europe and concerns about weak growth." He said even if you are a good swimmer you can't tread water forever. Eventually you will sink. He also said he disagrees with the idea that the Fed should remain on hold until after the election to avoid appearing political. Unfortunately Rosengren is not a voting member of the FOMC this year. The market ignored that fact and proceeded higher as though Bernanke had uttered those words.

On the economic calendar today the Job Openings Labor Turnover Survey (JOLTS) saw openings rise +105,000 to 3.76 million. That was the most new openings since July 2008 and the most job openings in total for 2012. More than 2.11 million people quit their jobs and that was down from 2.18 million in the prior month. For the period covered in this report 4.4 million people were hired, down slightly from the 4.5 million in the prior period. This report spans June-July payroll periods. The number of openings ticked slightly higher and hires slightly lower making the report market neutral.


The economic calendar for the rest of the week remains light and the markets will be dominated by headlines from Europe and the possibility for ECB action. We are hostage to the headlines and to any remaining earnings news.

Economic Calendar

The news from Europe lifted the Euro to 124.0 overnight but once the competing headlines crossed during the U.S. session the Euro returned to 123.25 and flat for the day. The dollar declined to six week lows on comments from Rosengren and expectations for QE in the USA. That dollar decline helped push equities and commodities higher.

Dollar Chart

WTI Crude Oil Chart

Brent crude rallied more than WTI because of expectations for ECB easing soon. It also rallied on expectations for increased impact of the Iranian sanctions after Standard Chartered Bank was caught hiding more than 60,000 transactions with Iran worth more than $250 billion. The bank will probably lose their license to operate in the USA as a result. What is pushing oil higher is the potential for other banks that may have been cheating to immediately cease and desist in hopes of escaping notice of regulators. The number of banks and companies still dealing with Iran will probably decline sharply on the news the U.S. is going to exact stiff penalties for violations. The allegations against Standard still have to be proved but the NY regulators fired a shot across the bow of anyone else in doing the same thing.

Brent Crude Chart

Even though the earnings cycle has slowed there are still some big names reporting. In terms of reaction there was one tonight that should convince even the hard core traders not to hold over earnings reports. Priceline (PCLN) reported earnings of $7.85 compared to estimates of $7.35. Revenue was a little light at $1.33 billion compared to estimates of $1.36 billion. So far so good but the worst was still ahead. Priceline pulled out the "Europe ate my earnings" excuse and guided lower for the rest of 2012.

PCLN forecasted Q3 earnings would be around $11.60 and analysts were expecting $12.82. Revenue is expected to rise 9% to 15% to $1.62 billion and analysts were expecting $1.8 billion. That compares to revenue that rose +40% in Q2.

After the warning you would expect shares of Priceline to decline in reaction to the news. Priceline shares declined more than $105 on the news. Talk about a dramatic hit to your trading account this was it. Even Apple only declined about $35 when they missed earnings.

Priceline Chart

Disney (DIS) reported earnings after the bell that failed to impress. The company saw a surge in revenue as a result of the Avengers movie with net income that rose +24% to $1.01. Analysts were expecting 93 cents. Revenue at $11.09 billion fell slightly short of the expectations of $11.32 billion. Even with the Avengers movie the studio division still posted a revenue miss at $1.63 billion and well under the $1.77 billion expected. Parks and resort revenue rose +9% to $3.44 billion. Shares fell slightly after the report.

Disney Chart

The market continues to exceed expectations to the upside but on very low volume. Monday's volume of 5.3 billion shares was the lowest non-holiday volume since last August. Today's volume at 6.3 billion was slightly better but still anemic. Despite hitting new three month highs the advancers only beat decliners by less than a 2:1 margin. That is not even slightly bullish.

What we do know is that shorts were near the high for the year just a week ago and that has powered the rally to this point. Now that the indexes are hitting new highs there is new money returning to the market. Nobody wants to miss a breakout.

The S&P rallied to 1407 intraday and closed right on 1401. That magic 1400 closing print should attract even more of the herd back into the market but the next 20 points is going to be VERY tough. The April high was 1422 and the high close was 1419. The May high was 1415 and the high close was 1405. The next higher resistance is the May 2008 high close at 1426. All of those numbers between 1405-1426 are going to be very hard to overcome.

However, at the point we are at in the rally ANY continued creep higher is going to be important and self propagating. You know every bear in the market is shorting these intraday highs once the intraday spike begins to fade. There is no conviction. Shorts from the prior close are squeezed on the open as a result of European headlines and then they try to short it again at the next close.

This can continue until the shorts finally run out of money but every tick to a new high in that very well defined resistance band is going to attract more sellers as well.

S&P Intraday Chart - 10 Min

S&P Chart - Daily

The Dow is the leader of the charge to higher levels but it has monster resistance at 13,279 and the high close from May. Today's intraday high was only 65 points below that high close but the -50 point sell off into the close left us more than 100 points under that key resistance.

These new intraday highs are great for improving investor sentiment but the sell on close orders on the NYSE indicate funds are cutting their positions at these levels.

Until the market rallies into the close there is no conviction and we are only one headline away from disaster.

Dow Chart - 5 Min

Dow Chart - Daily

The Nasdaq broke though a key resistance level at 3,000 and held the breakout despite the selling at the close. Wednesday's open could be tough with the -100 point decline on Priceline but the futures are not showing there is a problem. The Nasdaq futures are only down -1 point, which is amazing, and the S&P futures are flat.

The 3,000 level should be initial support but that remains to be seen. The Nasdaq has rallied +100 points in the last three days so any bout of profit taking could be ugly.

Nasdaq Chart - Daily

The Russell 2000 is NOT confirming the rally. It did move higher today but remains well under strong resistance at 810 and also well under the highs for the year at 840. This has been a blue chip rally. Those are the stocks that funds can exit quickly without losing a lot of money if the market suddenly turns against them.

Until the Russell sentiment improves the rally remains in doubt.

Russell 2000 Chart

The Dow Transports are also NOT confirming the rally. The transports are very weak relative to the Dow and S&P. Dow theory followers will not get overly excited until the transports begin to improve.

Dow Transport Chart

The main problem facing traders is lack of a typical August decline. You can bet that more than a few fund managers are going to be quick on the trigger to sell if it appears the S&P has tagged 1422 on the upside and then heads lower. It is completely conceivable that we could still retrace a lot of our gains since the June lows and if it happens it could come very quickly and without warning. We are only one headline away from a breakout to new highs or a breakdown to lower lows. Without any conviction in the market as evidenced by low volume and weak internals the possibility of a decent dip is very real.

S&P 500 Chart - Daily

I wrote in the weekend commentary: I do NOT think the market is going to go straight up. I believe it will remain volatile and hostage to the headlines but as long as we keep making higher lows we should just plan on buying those lows. If we move higher on Monday then I would expect a temporary failure at 1406 on the S&P and eventually another dip to buy.

I would not be a buyer above 1406 for anything but an intraday trade. I would jump on the train over 1426 but I view that 1406-1426 resistance band as dangerous territory. I am looking for a dip to buy.

Enter passively, exit aggressively!

Jim Brown

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