The market continued to move sideways on slow volume while we wait for a catalyst.

Market Statistics

The market remains on QE watch from central banks around the globe and until we get a catalyst we are likely to remain range bound. Opening gains from positive economic news from Europe and the U.S. failed to hold and the indexes returned to the flat line for the fifth consecutive day. The three month intraday high on the S&P at 1410 failed to hold and the index returned to close fractionally negative.

German GDP rose by +0.3% in Q2 compared to estimates of +0.2% and a gain of +0.1% in Q1. If you are ever going to split hairs over an economic report this would be it. Beating estimates of 0.2% by a single 0.1% is nothing.

The "good" news gets worse. French GDP was unchanged at 0.0% compared to estimates for a decline of -0.1%. So now the European markets are in rally mode because French GDP was flat at zero and German GDP beat estimates by +0.1%. I can hardly contain my enthusiasm.

This "improving" economic environment in Europe as some analysts were spinning the news is far from being a catalyst for the market.

Even worse the market sentiment in Europe improved because it appears that Spain will ask for a sovereign bailout. So why is a potential bailout for Spain a bullish event? Spain is expected to ask the EU/ECB to buy up to billions of euros of Spanish debt in the open market. In theory that will keep Spain's bond yields low and not require a full bailout and debt restructuring.

In theory the points mentioned above suggest Europe is not collapsing as previously feared. Analysts believe that means an economic rebound in Europe may come sooner than previously expected. That is a huge leap of faith when the majority of analysts still believe Greece will leave the eurozone and possibly before year end. There is more event risk to the downside in Europe in the months ahead.

In the U.S. traders appeared to be excited about a much better than expected retail sales report for July. Sales rose +0.8% compared to a -0.7% decline in June. Estimates were for a gain of +0.3%. Analysts were not that excited and called the July number a payback for an equally negative June. The bulk of the increases were in Home Furnishings +1.1%, Building Materials +1.0%, Sporting Goods and Hobbies +1.6% and Nonstore Retailers +1.5%. Service station sales rose +0.5% on rising gasoline prices but that failed to replace the -3.4% decline in June.

The better than expected sales ahead of the normal back to school spending boom is a definite positive for the U.S. economy. However, analysts pointed out that this was the strongest monthly gain since February when the economy was adding 250,000 jobs per month. They don't have a lot of confidence the sales will continue without a boost in job gains to produce more spendable income.

The Producer Price Index (PPI) rose +0.3% in July compared to +0.1% in June and estimates for +0.2%. Food prices and core goods were to blame for the increase. Crude prices have not yet been felt with finished energy goods falling -0.4% but they will catch up next month. Crude products rose +1.8%. Soaring meat prices helped push food prices higher with crude food goods rising +5.2%. Excluding food and energy core prices still rose +0.4%.

The calendar for the rest of the week is full of reports but only a couple that are really important. The Philly Fed on Thursday is the biggest economic report but the biggest market mover will probably be the Cisco earnings on Wednesday after the close.

The market is not likely to be moved by the economics because everyone is waiting on the next QE announcement not the next economic news.

Economic Calendar

Market volume remains very low with Monday's volume of 4.4 billion shares the lowest for the year other than the July 3rd holiday volume. Volatility is nonexistent. The VIX closed at a five year low on Monday at 13.70. The market adage "when the VIX is low it is time to go" should be a warning for everyone with the VIX at multiyear lows.

VIX Chart

Other than the European economics and the July retail sales there was nothing to move the markets. Stock news was very light. Groupon (GRPN) was a standout only because their results were so bad and the stock declined -27% on the news. Groupon posted its first quarterly revenue decline as the online deal market faded rapidly. Competition has increased significantly and consumers appear to have lost interest.

Revenue declined to $1.29 billion from $1.35 billion but that was still a 47% increase over the year ago quarter. However, revenue had doubled in the prior quarter and tripled in the quarter before that. Declining from a 300% increase two quarters ago to only 47% this quarter is a material change in the business.

Groupon guided analysts to earnings between $45 to $65 million in the current quarter compared to analyst estimates of $80 million. That was also a decline from the $72 million it earned in last quarter. Active consumers rose only 3% and the amount spent by customer declined.

Groupon used the "Europe ate our earnings" excuse. The company gets more than half of its revenue from outside the U.S. and most of that comes from Europe. They also said the weak euro and British pound translated into fewer dollars in earnings. The company said it would have to increase advertising in Europe, offer lower priced services and update its technology. All of those efforts will increase expenses in the short term.

Citi downgraded Groupon to neutral from buy and price target to $9 from $19. Benchmark Capital cut the stock to hold and the price target from $20 to $7. Not all analyst cuts were that dramatic. Barclays' cut their target from $27 to $15 and maintained an overweight rating. Good luck with that!

Groupon Chart

Angie's List (ANGI) collapsed as a result of the news out of Groupon and the release from lockup of 25 million shares. ANGI declined -16% to a new closing low.

ANGI Chart

Facebook (FB) shares also declined as the gloom spread over the Internet sector. Facebook has 268 million shares expiring from lockup on Wednesday and available for trading on Thursday. That is an increase of about 42% in shares available to trade or about 900 million. More than 200 million of those shares are owned by Microsoft and Goldman Sachs as early investors in Facebook. Facebook director Peter Thiel announced on Aug 10th in an SEC filing that he had converted nine million class B shares into class A shares. That will allow him to sell those shares on Thursday. He originally sold 16 million shares in the initial IPO. With the conversion he has about 27 million class A shares available to sell on Thursday.

Before year end, about 130 days from now, there will be three more lockups expiring that will bring the shares in the market to more than two billion. With earnings expectations for Facebook declining through year end the outlook for FB shares is not bright.

Facebook Chart

Home Depot (HD) reported earnings of $1.01 that beat estimates of 97 cents. Revenue of $20.57 billion missed estimates of $20.74 billion. Investors ignored the revenue miss and pushed the stock higher after the company reported signs of strong growth in areas of the country that had been the hardest hit by the recession. The CEO said there were encouraging signs of stabilization in the housing market. However, U.S. same store sales of 2.6% were much lower than the 4.3% growth in the year ago quarter. Home Depot raised its full year earnings outlook from $2.90 to $2.95 with revenue rising +4.6%. Analysts were expecting $2.92. Shares of HD rallied +3.5% on the higher outlook despite what could have been seen as a mediocre earnings report.

Home Depot Chart

High end retailer Michael Kors (KORS) rallied +15% after raising full year guidance to $1.34 per share, up from the prior forecast of $1.12 and analyst estimates of $1.13. The company said it was seeing continued strength in all three segments of retail, wholesale and licensing and across all geographies. Retail sales rose +76% in Q2 powered by a same store sales increase of +37%. Now that is what I call a real spike in sales compared to the HD numbers at +2.6%. KORS opened 76 stores to total 253 at the end of Q2. Net income more than doubled to $68.6 million or 34 cents compared to $24.1 million and 13 cents in the year ago quarter. They raised their estimates for the current quarter to 35 cents and well over analyst expectations of 28 cents.

KORS Chart

Crude oil rallied +64 cents in regular trading close at $93.37 on the potential for a rebound in Europe or at least a "less bad" recession as well as the spike in retail sales in the USA. Tensions over Iran were also a factor. U.S Defense Secretary Leon Panetta warned today there was still time for Iran to solve the nuclear crisis and avert military strikes. He made these remarks after Israel's Haaretz newspaper reported that Defense Minister Ehud Barak and Prime Minister Netanyahu were considering a strike on Iran before the U.S. elections on November 6th. Israel's ambassador wrote in the WSJ that the window of opportunity for negotiations "is now almost shut."

These tensions plus the recent disclosure of events at Standard Chartered have rekindled the security premium in oil prices. Add in the potential for QE from the ECB, BOJ, BOE and stimulus from the PBOC and prices are climbing.

Brent Crude Chart

Standard Chartered, the bank that supposedly did no wrong in handling 60,000 money laundering transactions for Iran, agreed to pay a $340 million civil penalty to the New York regulator that broke the story last week. That was an extremely fast settlement for somebody that did not wrong. The settlement came 24 hours before the regulator was scheduled to hold a hearing where the bank would have to show why its license should not be revoked. A London analyst said "Standard's management team has conducted themselves admirably in the face of extreme provocation." That should give you an idea how the claims of money laundering were received in Europe.

The regulator called Standard a "rogue institution" when he broke the charges last week claiming the bank had hidden $250 billion in Iranian transactions. In addition to the fine the bank agreed to an outside monitor to oversee the banks transactions for the next two years.

This does not get the bank off the hook. There are ongoing investigations by the U.S. Treasury, Federal Reserve, Justice Dept and other New York prosecutors. The bank said it was holding separate talks with each of those agencies. The Treasury Dept said it planned to hold Standard responsible for any sanctionable activity that may have occurred. The Fed said it was working with the other agencies on a "comprehensive resolution." Sounds like there will be more fines for Standard in the future. Standard Chartered is not traded in the USA.

U.S. treasury yields spiked higher once again as the selloff in bonds continued. The bond bubble appears to be bursting and investors are raising cash. The equity market is not showing a lot of inflows but investors seem to be raising cash to be ready for the next dip. Treasuries have been selling off for three weeks and the yield closed at a two month high today at 1.726% on the ten year note. If the equity market continues to improve and we get any improvement in the U.S. economic data we could be off to the races in equities and bonds are going to have some really bad days.

Ten Year Yield Chart

The S&P made a higher high at 1410 intraday but failed to hold that level. The intraday low was 1400 with a close at 1404. Despite the slight jump in volatility the actual range was still very tame. Volume today was slightly higher at 5.1 billion shares and probably related to the option expiration later this week and some short covering at the open.

The S&P returned to the pattern from the last week of selling in the last hour but there was a +4 point rebound right at the bell to keep the index was a larger loss. The line in the sand today is now 1400 as initial support followed by 1397. Obviously those are very close together and any material headline could blow through both without even a blink.

I continue to believe there is a bid under the market from the selloff in bonds and the expectations for a new QE program by one or more central banks. If Bernanke fails to deliver a convincing performance at the August 31st Jackson Hole speech we could see September start off with a major decline. Those speech expectations and pending action by the ECB is supporting the market. Overhead resistance has not changed.

S&P Chart - 15 Min

S&P Chart - Daily

The Dow range has not changed. The close at 13,172 is only 107 points from the May closing high but the closing print with a gain of +2 points was neutral. Nothing happened other than the opening spike was sold about as quickly as the Friday dip was bought. Volume is minimal and each side has ample firepower to keep the index inside its recent range.

Fortunately this provides us with clear lines of support and resistance and a violation on either side would be tradable.

Dow Chart - 15 Min

Dow Chart - Daily

The Nasdaq tried hard to break out to a new high with both Apple and Google up strongly at the open. Apple declined -7 points to close with a gain of +1.69 but Google closed near its high for the day at $669 and $1 below its high close for the year on January 4th.

Intraday the Nasdaq rallied to 3034 and then used the prior resistance at 3020 as support on the way back down. The close was right back in its recent range and a loss of -5 points. No harm, no foul.

Nasdaq Chart - 15 Min

Nasdaq Chart - Daily

The Russell remains the biggest problem. Today's close was a six day low and suggests the rats are leaving a sinking ship. A decline below Monday's intraday low at 791 is going to be a signal to abandon ship.

Russell 2000 Chart

The Dow Transports are still not confirming the Dow rally BUT they did manage to buck the flow and keep some of the morning gains. Watch the transports for signs of life that could give investors confidence to buy the broader market.

Dow Transport Chart

The markets are refusing to go down. That is not the same thing as markets rising but it is a good sign. They are so used to being hostage to the headlines that investors don't know what to do when there are no headlines. That said we are only one big headline away from a major drop or a major rally.

The markets are on QE watch while they wait for the Bernanke speech on Aug-31st. Cisco earnings on Wednesday night could upset this delicate balance. Any negative news from Europe could also upset the status quo. Be prepared for an unexpected move in either direction.

I am still looking for a decent multiday dip to buy.

Enter passively, exit aggressively!

Jim Brown

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