Traders watching the news flow and chart movement on Tuesday likely fell asleep as stocks ended unchanged on very low volume.

Market Statistics

The closing numbers were misleading as the majority of the gains occurred in the last hour to rescue the majority of the major averages from negative territory. The markets drifted lower most of the day after opening higher but buyers came in at the close and bought the dip.

The Nasdaq and S&P were helped by a sudden reversal in Apple shares. After declining to $650 intraday and touching the 50-day average at 651.99 the shares rebounded +$12 to close at $661.69. Since Apple is 10% of the S&P and 20% of the Nasdaq any rebound in Apple will produce a rebound in the indexes. With the close back over $660 Apple avoided another new two month low and held over that prior support at $659.

Apple Chart

On the economic front there was little news but it was positive. The ISM-NY rose slightly to 561.9 from 560.5. Not a big gain but still a gain to a post recession high. However, the six month outlook component fell sharply to its lowest level in 11 months at 56.4, down from 61.3. You can blame the fiscal cliff uncertainty for that. The current conditions component rose slightly from 51.4 to 52.9. Holidays are coming and that is good for business short term. The report covering the New York area was positive but only barely. Rising unemployment in New York is now 9.9% and expected to worsen with banks and brokers still cutting employees.

Vehicle Sales for September rose to 14.9 million units on an annualized basis. That is a post recession high and well above estimates for 14.5 million. This was even better than the surge in sales when the cash for clunkers program was in full swing. Analysts believe we are seeing a release of pent up demand thanks to an easing of credit standards by banks and finance companies. With the Fed holding interest rates low we are seeing banks and finance companies being more aggressive on auto loans as an opportunity to earn more interest since auto loans carry higher interest than mortgages. Higher risk auto loans carry a much higher rate.

Fuel economy is also powering the surge. With fuel prices solidly over $3.50 per gallon and creeping higher there is a trade in wave where gas guzzlers are being exchanged for higher MPG vehicles. Cars saw more sales than trucks indicating the consumer is getting into the act rather than truck buying generated by the surge in construction. Car sales rose to 7.7 million compared to trucks at 7.3 million. Year over year sales rose to +13%.

The change in model years after weak sales in July has brought back a lot of dealer incentives like 0% financing on remaining 2012 models.

The bad news is that the majority of cars sold were imported vehicles. U.S. made car sales declined slightly.

Moody's Vehicle Sales Chart

Economics due out on Wednesday included the ADP Employment report, ISM Services and the FOMC minutes. The ADP report is expected to show the economy gained +141,000 jobs. The ADP report was way off the mark last month with an estimates gain of +201,000 jobs missing the mark of only 96,000 jobs in the Nonfarm Payroll report. The ADP report attempts to estimate the jobs shown in the Nonfarm report.

The ISM Services report should be market neutral as long as it is still over 50 and with the jump in the ISM Manufacturing number on Monday we could see a corresponding increase in services.

The FOMC minutes are a cautionary event but with the Bernanke press conference after the meeting and his speech and Q&A on Monday I doubt there will be anything in the minutes to upset the market.

The biggest report left this week is still the Nonfarm Payrolls on Friday. Consensus estimates are for a gain of +120,000 jobs. A number much over or under 100,000 could impact the presidential race since the low jobs is an open wound for the president.

Economic Calendar

The market opened higher on the positive economics and gains in overseas markets. However, that euphoria quickly ended when the prime minister of Spain, Mariano Rajoy, dashed European hopes when he said a request for a bailout was not imminent. There had been a building of excitement that Spain would formally ask for a bailout this week and that would put a floor under Europe. I have warned for two weeks that he probably would not request the bailout until after the Oct 21st elections in Spain. Why give detractors something else to complain about ahead of the elections?

Spanish bonds and stocks as well as the euro rallied into Tuesday's close on expectations of the bailout request. After the close of the Spanish markets Rajoy told a press conference in Madrid that he has no plans to request a bailout in the near future. He has repeatedly said he would not request help as long as the yield on Spanish debt remained reasonable.

John Mauldin had a great article on Monday about Spain and why they would eventually leave the eurozone. Yes, leave the euro. Read it here - PDF It is a great article, long but great.

The short version is that Spain is in far worse shape than they claim and the problems go all the way down to the provinces, cities and local governments. Over the last couple years there has been a change in the business practices by those local governments due to a lack of funding from the national government. For instance he relates a story of a landscaper that won a contract to supply the town with 100 fully mature palm trees and to plant them along a boulevard in Costa Blanca. It was a big deal for a small contractor. After completing the work he applied for payment and was told he would be paid in three years. Reportedly this is happening all over Spain and businesses are failing in record numbers as a result.

The number of people employed in Spain is declining by just over 3% per month. Unemployment is 24.2% and youth employment nearly 50%. Home prices fell -11.2% in July alone. Spain has an estimated two million unsold homes.

Spain already owes the ECB over 450 billion euros and it is rising daily. The 100 billion euro bailout for the banks was hit with a setback last week when the three AAA rated nations in the eurozone, Germany, Holland and Finland, said the bank bailout had to be part of the country bailout and not stand alone. Spain had wanted the ECB/EU to loan the money directly to the banks so the liability would not be on the government's books. That would reduce the debt ratios for the government and make it look better when Spain finally asked for a bailout.

If the Spanish province of Catalonia separates from Spain the debt party is over. Spain will have no choice but to default and leave the eurozone.

Every part of the Spanish economy is failing. A bailout will only prolong the pain and it will eventually lead to the same thing only the creditors will have changed from investors to the ECB/EU. Germany may be finally coming to the realization that Spain really is too big to bail but not too big to fail. With Greece now expected to need as much as 40 billion euros in addition to the last 130 billion euros and the prime minister "asking" bond owners to cancel their new bonds so the country can improve its debt ratios and qualify for another tranche of aid, the outlook there is not good either. Two weeks ago the estimate was another 11 billion euros, then it jumped to 20 billion and now as much as 40 billion and the country is still spiraling down after being in recession for five years already.

The EU Finance Ministers are eventually going to realize they can't keep pouring money into these bottomless pits. Eventually they will be forced to rip the band-aids off and suffer the pain of having those countries leave the euro.

I related the background behind Spain only to prove a point. As we saw today the markets are repeating the scenario we saw with Greece. October marks the third anniversary of Greece admitting they had lied about their deficit and instead of 3.7% it was actually 15.4%. We have endured month after month of market gyrations based on Greek headlines. Now we are headed right back into the same scenario with Spain and the debt and impact to Europe and the rest of the world is going to be 4-5 times worse because their claimed debt is closer to one trillion euros. How much they really owe is still unknown.

The Dow dropped over 100 points on the Rajoy announcement this morning and we don't even know what the numbers are. Wait until the numbers start appearing and the eurozone countries start complaining and see what happens to the markets. It is not going to be pretty but at least we know the EU is highly skilled at kicking the can farther down the road. The pain will come at regular intervals as we saw with Greece until the end game appears.

In stock news Chipolte Mexican Grill (CMG) found itself a target of noted short seller David Einhorn. He claims CMG is overpriced and the margins are at risk because of the rising food prices, increased health-care costs for workers and competition from a rapidly rising Taco Bell and its new Cantina Bell menu. Einhorn said the PE for CMG is 36 compared to 20 for the S&P-500 Restaurant Index.

Chipolte immediately fired back saying Taco Bell does not present any threat to Chipolte. The company said it was easy to mimic the things Chipolte serves but impossible to copy the quality and soul of Chipolte food. They pointed out that CMG was started by a chef and Taco Bell was started by a plumber. I don't know why that is relevant today since Taco Bell was started in 1962 by Glen Bell and he died at the age of 86 in 2010. The company was sold to Pepsico in 1978 for $125 million. Pepsico is now Yum Brands. CMG spokesman said CMG food is prepared from organic ingredients with an attention to quality and detail. Taco Bell can't copy that.

Regardless of the claims of food quality the stock lost -$13 on the Einhorn short recommendation. YUM lost a buck even though Einhorn was passively endorsing Taco Bell.

CMG Chart

Fashion retailer Express (EXPR) saw shares decline -22% after the company warned for Q3 claiming weak foot traffic in September. The company cut earnings estimates from 27-32 cents to 16-20 cents. They also said they expected same store sales to decline in the mid single digits. In an effort to offload unsold inventory they were increasing promotions and discounts and that would weigh on margins. Express has had several bad days in the last several months. This one may be terminal and the stock price is likely to see "mid single digits."

Express Chart

Mosaic (MOS) reported earnings that disappointed after phosphate sales fell -30%. The company blamed slow factory maintenance and bad weather conditions including the drought and Hurricane Isaac. Mosaic said the result was their inability to meet the demand by farmers. The CEO said this was just a rough patch. "We get these operational glitches, and some are weather driven. I don't think there is anything that would cast a cloud over the horizon." He said the low water in the Mississippi river over the summer slowed or prevented shipping using barges. As a result demand outpaced our ability to supply. Shares declined -4% on the news.

Mosaic Chart

JP Morgan (JPM) found itself accused of civil fraud by New York Attorney General Eric Schneiderman. He said Bear Stearns, acquired by JPM in 2008, defrauded a large number of mortgage bond investors. The suit was filed under the Martin Act that does not require proof of intent to mislead. The suit does not seek any specific damages but demand compensation of those who were defrauded. According to the complaint those investors suffered losses of $23 billion or roughly 26% of the original value of the mortgages. The complaint claims the documents Bear Stearns used to sell over 100 RMBS transactions were flawed. The suit claims the mortgages had been properly evaluated and were being monitored continuously. According to the suit Bear Stearns failed to do either. The suit is being filed with the backing of the RMBS Working Group, which was formed by President Obama, to investigate and prosecute any alleged misconducts that led to the financial crisis. The AG and others claim there are more suits in the pipeline against other banks for the same problems. JPM shares were down fractionally.

JPM Chart

Earnings for Q3 are now expected to decline by -1.86% according to S&P. More than 100 companies have guided for Q3 and 72 were negative and 22 positive as of Monday. Four companies have already warned for Q4 and three were negative. If Q3 earnings come in negative as expected it will be the first time since 2009-Q2. That does not say much for fundamentals powering the market.

Fidelity Investments has $1.6 trillion in managed assets. Last week they reported that $848.9 billion of those assets were now in bonds and money market accounts. This is the first time ever that bonds and cash investments represented a larger percentage than stocks. This is even more unbelievable since the markets have been testing multiyear highs. You would think some of those investors would begin to buy stocks since the herd normally follows rather than leads.

We can use those numbers to project the amount of cash system wide and it is a staggering number. More than $2 trillion has gone into bonds since the recession. Stocks are no longer a favored asset. The financial crisis, flash crash, Europe, fiscal cliff, election, etc have all contributed to a risk off mentality. Baby boomers are retiring at the rate of 10,000 per day and they don't want their assets at risk. The financial crisis scared the heck out of those in the market and they have been moving away from stocks ever since.

If the markets broke out to new highs, even on the low volume we have been seeing, the urge to put at least some of their money back into stocks could be overpowering. Given the amount of cash on the sidelines the rally could be huge.

I think we need to get past the next couple of weeks before we start looking to the future. Volatility is starting to pickup and retirement contributions to funds should begin to slow on Wednesday. We are reaching the proverbial inflection point for October. However, since every minor dip is quickly bought I am rapidly beginning to doubt that any October decline will be meaningful.

Despite the morning pop, midday decline and closing spike the indexes were range bound all day. Those movements were just noise in the greater scheme of things. The S&P traded in a 12 point range and closed right in the middle with a gain of one point. Are you excited yet?

If fund managers are going to make changes to their portfolios before the fiscal year end on Oct 31st then they should occur over the next two weeks. They have to sell stocks before they can buy new ones and that is what everyone is waiting for.

Initial support was 1440 followed by 1430 and resistance is 1450. We are in consolidation mode while everyone waits for a direction to appear. The 30-day average is 1433.

S&P Chart

The Dow traded in a 143 point range thanks to the headline driven moves. Without the headlines it would have been a very boring day on low volume. Support at 13,400 has not been tested this week but resistance at 13,600 remains solid.

Dow Chart

For the Nasdaq resistance has returned at 3140 and support is 3085-3100. As I reported earlier the Nasdaq is hostage to the moves in Apple. If it were not for the $12 rebound in Apple the Nasdaq would have closed with a loss at just over 3100. It was trading at 3101 when the Apple rebound occurred and that sparked short covering to close at 3120.

There is no magic here. Just follow the bouncing Apple.

Nasdaq Chart

The one bright spot for me was the Dow Transports. For five days now they have clung to support at 4885 and avoided a material breakdown that would have produced negative sentiment for the Dow. However, don't confuse lack of movement at support as a bullish event. It may be simply consolidation before the next leg lower, or higher.

Dow Transports Chart

I have no direction suggestion for the rest of the week. I have thought for the last couple weeks we would see a decline in the middle of October for portfolio restructuring. With every little dip being instantly bought I am not sure we are going to see any material decline. Apparently so many people missed the rally there are a lot of impatient buyers willing to jump in at the slightest opportunity. The next ten days should be very interesting.

Enter passively, exit aggressively!

Jim Brown

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