The second best week of the year for the markets ended with all the major indexes at new highs.

Market Statistics

Those investors hugging the sidelines waiting for a bigger dip to buy were very disappointed last week as the indexes broke out to new highs with convincing gains. There is no doubt that cash is coming out of money markets and fixed income and headed into equities. For a summer Friday the volume was decent at 5.55 billion shares after 6.4 billion shares on Thursday.

The Bernanke comments on Wednesday night energized reluctant investors and the price chasing began in earnest on Thursday. The Dow was the laggard on Friday but it had a good excuse. Boeing shares declined up to -7% intraday after a fire broke out on a 787 at Heathrow airport and a second 787 from Manchester to Florida turned around four-hours into the flight and returned to Manchester after experiencing technical difficulties.

The fire on the plane brought back memories of the battery meltdowns that grounded the 787 for nearly four-months earlier this year. However, the situation was different this time. The plane was parked and had been unattended for nearly 8 hours before smoke was seen coming out of the top of the airplane near the tail. Since the batteries are on the bottom of the plane near the front it does not appear to be a recurrence of the battery issue. The location of the fire appeared to be above the galley and it could be as simple as somebody leaving a coffee pot on when they left early Friday morning.

The second 787 that returned to Manchester experienced a "technical issue" and returned as a precaution according to Thomson Airways. You can imagine 787 pilots everywhere being somewhat leery about getting on each flight with the number of incidents being reported. So far there has not been a crash and every minor problem they overcome means one less to worry about in the future.

Boeing has record backlogs of more than $400 billion. They will build 34,000 planes over the next two decades plus they are very active in government contracts in missiles and satellites. Boeing will get these problems solved. Every new aircraft goes through similar problems as all the bugs are worked out. Any material decline in Boeing shares is a buying opportunity.

The -$5 drop in Dow component Boeing knocked more than 40 points off the Dow and kept it in negative territory until the market on close orders appeared. Boeing traded about 10 times normal volume.

787 with fire damage

Boeing Chart

Friday's economics left a lot to be desired and gave no lift to the market. Consumer sentiment for July declined slightly from 84.1 to 83.9. That is hardly an earthshaking move. Sentiment hit a four-year high of 84.5 in May and has been eroding slightly since then.

The internal components moved a lot relative to the headline number. The present conditions component spiked from 93.8 to 99.7 and the highest reading in 2013. The expectations component dropped sharply from 77.8 to 73.8. We normally don't see big moves in the opposite direction on those components. Having the stock market at historic highs probably had a lot to do with the sharp jump on the present conditions component.

Consumer Sentiment Chart

The Producer Price Index (PPI) showed prices rose +0.8% and higher than the +0.5% advance in May. Commodity prices, mostly higher gasoline prices, were the majority of the gain. Prices for finished energy goods rose +2.9% thanks to a +7.2% spike in gasoline prices. Higher meat prices were also a factor after the 2012 drought caused farmers to shrink herds to lower feed costs.

Core prices rose only +0.2% with the majority of the gains in cars and trucks. Core intermediate goods avoided a third consecutive monthly decline with a gain of +0.1%. The Fed has no reason to let up on the accelerator as a result of rising inflation in producer prices since there is none.

The economic calendar for next week is going to be headlined by China's GDP report on Sunday night. This could be a game changer. The official expectation is for something in the 7.5% growth range. However, the Chinese Finance Minister Lou Jiwei said the economy may expand less than expected and that growth as low as +6.5% may be tolerable in the future. Jiwei will be executed at dawn on Monday. Obviously I am just kidding but it was a shock to hear a Chinese official utter those words when the official party line is 7.5% and no lower. Premier Li is still quoting 7.5% growth through 2020. Clearly Chinese officials are not prone to pulling numbers out of thin air and risking their careers. This suggests this was a trial balloon ahead of what could be disappointing GDP news on Sunday.

China's broadest measure of credit fell to a 14-month low in June as a result of the interbank cash squeeze. Jiwei's uncensored comments suggest the government is prepared to allow the economy to slow further even though it is already at a 23-year low. The new government has said they are willing to suffer through some subpar growth in order to reform the economy into a more stable path. Policy makers have said they were going to cut spending by -5% and use the savings to reduce taxes and support job growth. Jiwei said, "I want to emphasize that structural economic adjustment is a painful process. It won't be possible to enjoy a comfortable life and rapid growth rate with the structural adjustment. The slowdown is necessary to achieve a structural transition." That sure sounds like a warning of things to come.

Update: On Saturday the official Chinese news agency said Jiwei was mistaken and meant to say 7.5%. Oops!

The Macquarie Group immediately cut 2013 GDP estimates from 7.8% to 7.3% and 2014 estimates from 7.5% to 6.9%. There are estimates from less recognized analysts down in the high 6% range for Sunday's numbers. That would be a disaster for the U.S. markets.

I have mentioned before that analysts are moving to tracking electricity usage rather than rely on government economic numbers. This chart from ICIS shows electric consumption about to decline to a two year low even though the power plants have been told not to report declines in production. Enough data is getting through to indicate the trend is declining. Imagine how bad it would be without the government cover up?

China Electrical Generation - Source ICIS

In the U.S. we are going to get a double dose of Ben Bernanke on Wednesday and Thursday when he testifies before the House and Senate. This used to be called the Humphrey-Hawkins testimony. I doubt he will say anything to roil the markets but you never know.

The Fed has a lot of analysts studying the global economy and they may have inside news about the impending GDP from China. That could be why Bernanke went so dovish on QE on Wednesday. If they new China was about to implode that may have been a preemptive strike by Bernanke.

The Fed Beige Book is out on Wednesday afternoon and it may show conditions are softer than previously reported. St Louis Fed president James Bullard, normally a hawk on rates, recently came out in favor of extending the QE process and reiterated his stand in a speech on Friday. He said the Fed should not trim QE until inflation reaches the 2% target rate. "Pulling back on accommodation as inflation is sinking is not the right combination. I would like to see us do more" to prevent falling inflation. Bullard dissented in the last FOMC meeting saying he wanted the Fed to "signal more strongly its willingness to defend the inflation goal in light of recent low inflation readings." Inflation registered by the Personal Consumption Expenditures (PCE) rose only +1% for the year ended in May.

SF Fed President John Williams told reporters in Vancouver on Friday that low inflation had prompted him to consider the need for "additional accommodation." He had said, as recently as June 3rd, the Fed should begin cutting QE purchases as early as "this summer" but then said he supported Bernanke's plan to trim QE later this year. Now he is suddenly in favor of "additional accommodation?"

The comments from the Fed heads suggest there is trouble under the economic hood that has not yet come to light. Bullard also said the markets seem to be relying on "increased optimism" in the economic outlook. "However, given recent forecasting performance, we should be careful in using an optimistic forecast to justify current policy decisions. A more prudent approach would be to wait and see if better macroeconomic outcomes materialize in the months and quarters ahead."

What the market heard was "months and quarters" suggesting the Fed was not going to change QE for a long time since watching the economy for quarters would put us into 2014 at the earliest. If there is some creeping economic weakness the Fed is aware of but we are not privy to then these comments would make sense.

The biggest U.S. economic report this week is the Philly Fed Manufacturing Survey on Thursday. If Bernanke is creating waves with his Senate testimony the report could get lost in the headlines. The Philly Fed report spiked from -5.2 in May to +12.5 in June and extremely out of character for the types of moves we consider normal. We could easily see a correction in the data that brings us back into lower range.

Economic Calendar

The real news for next week besides China and Bernanke will be the first full week of earnings. The highlights will be GS, IBM and GOOG but there are plenty of important reports. The big day is Wednesday. Guidance will be more important than earnings and that will be even more important if China roils the market on Sunday.

Citigroup on Monday is not likely to have as big an earnings report as JP Morgan. Citi is big in countries that are struggling where JP Morgan is bigger in the USA. Citi has exposure to Europe and the emerging economies. Morgan Stanley on Thursday also has large exposure to overseas economies.

Coca-Cola and Johnson and Johnson on Tuesday will be our first real look at the impact of the global currency volatility. They are selling products in local currencies and then converting it into higher priced dollars in order to bring the cash back to the USA.

GE will be important on Friday for guidance and earnings will be ignored. They are broadly diversified so their global guidance matters.

Schlumberger and Baker Hughes on Friday will give us the health of the energy sector. They both said to expect more drilling this summer when they reported in Q1 but it has not yet appeared. Rig counts have declined since Q1.

Whirlpool on Friday should give us insight into the housing market and consumer health. Again, guidance is critical.

Earnings Calendar

This is going to be an interesting earnings cycle. UPS added to the uncertainty on Thursday when they warned they would miss Q2 earnings estimates and lowered full year guidance significantly. UPS said they would earn about $1.13 for Q2 compared to estimates for $1.20. They lowered guidance for the full year to between $4.65-$4.86, down from $4.80-$5.06. Analysts were expecting $4.98.

UPS blamed the miss on customers shifting to cheaper delivery options, a slowing U.S. economy and over capacity in airfreight shipping that was driving prices lower. "We expect the Q2 trends to persist and UPS is adapting to meet these conditions." UPS has been reducing capacity in Asia but the slowing economy in the USA and the shift to cheaper options is forcing cutbacks in the U.S. as well.

UPS said "We do not expect a significant uptick in next-day priority services until we see a global recovery and not just a U.S. recovery."

You may recall that in June FedEx reported a 45% decline in quarterly profits as a result of customers shifting to cheaper ground delivery rather than overnight delivery. The company said international priority shipments fell -2% while economy deliveries rose +11%.

UPS Chart

The double warning from UPS and FDX suggest there is economic trouble ahead that could be further revealed in the coming earnings reports. How much higher will the market rally if this earnings cycle turns out to be a dud?

S&P said Friday that 30 companies have already reported for Q2. Only 19 beat estimates, 2 met estimates and 9 missed estimates. Because the early reporters are typically the ones with the best news we really can't draw any conclusions from the numbers.

S&P is still expecting roughly 3% earnings growth but revenue estimates have taken a tumble to a decline of -1.0% from the +0.5% forecast last week.

FactSet is only expecting earnings growth of +0.8%. If you subtract financials earnings would decline -2.4%. As a recap Q4 earnings came in at +5.3% growth. Q1 dropped to +3.3% and now Q2 is expected to drop again. So where is the Fed's recovery?

Of the 108 companies that released guidance for Q2, 87 have projected earnings below estimates. That is the worst record since FactSet began keeping records in 2006.

Consumer spending is going to take another hit in Q3. Starting Monday 650,000 civilian defense workers will have to take off one day per week without pay through Sept 21st as part of the sequestration program. These workers are not the $7.50 an hour Wal-Mart category. Losing a day's pay per week is not going to be shopper friendly especially with gasoline nearing $4 a gallon. That is a -20% cut in pay for the next eleven weeks. This is just one group. This is happening to all government workers in some form. This will weigh on corporate revenue in Q3.

Besides the currency problem facing international companies the high cost of gasoline and diesel is going to be hurting U.S. focused companies. Costs have already been cut to the bone over the last couple of years and without an increase in revenue it is going to be hard to grow earnings.

The financials are expected to post the best earnings but increasing regulation is going to weigh on their guidance. The worst sectors are going to be energy with an expected decline in revenue of -17%. Revenue in the telecom sector is expected to decline -11%.

Even the refiners are warning that high oil prices are going to hurt their earnings. Valero (VLO) warned on Friday that higher costs and lower discounts for some oil grades were decreasing profits. Valero said it expected Q2 profits between 80-90 cents and that included a charge of 5 cents for the spinoff of CST brands. Analysts were expecting profits of $1.15 so even accounting for the charge Valero is going to post a big miss. Valero said higher costs for natural gas and lower discounts for heavy sour crude were the main reasons for the miss. However, the refiners have been profiting from buying cheaper land locked Midwest crude and shipping it by rail to the coasts where they can refine it and charge the higher Brent prices for the products. The spread between Brent and WTI including the shale oil products, has narrowed significantly from a high of $23 to less than $2 last week. That means they will lose money on any existing shale oil contracts because of the high shipping costs.

Global PC sales fell -11.4% in Q2 and only slightly less than the 13.9% decline in Q1 according to IDC. In a different survey by Gartner Group sales fell -10.9%. IDC blamed the decline in PCs on the availability of tablets and the aversion to Windows 8. Until the buying public feels better about the change in the user interface in Windows 8 there is very little incentive to buy a new PC. IDC also said the slowing sales was due to retailers cutting back on inventory until a new wave of PC buying appears. With a new release of Windows 8 coming out later this year the retailers don't want to inventory any more PCs with the current Windows version. IDC also said the high prices for ultrabooks in a weak economy was also delaying sales.

The weak PC sales could impact earnings for the chip makers, manufacturers and retailers.

Every industry seems to have its excuse already prepared for this earnings cycle. The key will be how investors react to the litany of excuses if the preponderance of the earnings reports turn into disappointments.

On the bright side JP Morgan (JPM) reported earnings of $1.60 compared to estimates of $1.44. That equates to $6.1 billion in profits and a +32% increase over the year ago quarter. Revenue rose by +14% to $25.2 billion. Rising interest rates decreased loan originations by -7% and resulting in lower loan volume. Net interest margin or NIM declined to a record low of 2.2%. That is the difference between what JPM pays for money and then receives back in interest. With short term rates still close to zero it limits the amount a bank can charge customers. The bank derived a significant portion of their earnings (25%) from a -$1.4 billion reduction in loan loss reserves. That accounting trick went straight to the bottom line even though the number of nonperforming loans rose from 10,068 to 11,370 in Q2. They still have $19.4 billion in loss reserves to play with. Banks have been faulted by the Comptroller of the Currency for this practice but it continues unabated. If they have some extra earnings in one quarter they can move cash to loan loss reserves. If you need to boost earnings to meet estimates in a future quarter they transfer it back. JP Morgan shares ended the day fractionally lower.

Jamie Dimon warned of a "dramatic reduction" in future mortgage profits as interest continue to rise. He said refinancings would decline sharply on rising rates and new loans would be harder to qualify as rates rise. The average rate on a 30-year fixed mortgage was about 4.7% on Friday. That is a two-year high and a full point higher than early May. Mortgage applications have declined in 7 of the last 8 weeks.

JP Morgan Chart

Wells Fargo (WFC) reported earnings of 98 cents compared to estimates of 93 cents. Net income was $5.5 billion on revenue of $21.4 billion. They earned $2.8 billion from mortgage banking. Net interest margin was 3.46% and significantly better than JPM at 2.2%. WFC repurchased 26.7 million shares in the quarter and reduced loan loss reserves, both of which improved the earnings per share.

WFC originated $112 billion in mortgages compared to $131 billion in the year ago quarter. That still represents 25% of all mortgages written nationwide. The scale is massive. JP Morgan only originated $77 billion but had much higher profits in other areas of banking.

WFC shares rallied +1.7% on the news.

WFC Chart

AT&T (T) announced after the close it was buying Leap Wireless for $15 a share in cash. That is roughly a 90% premium to the $7.98 close. Shares of LEAP had risen from $6 to $8 over the last two weeks so it appears somebody got the news a little early. Option volume on LEAP spiked on Friday well before the news was announced so the SEC will have plenty to do in the weeks ahead tracking down all the big buyers.

John Paulsen should be a happy camper today. He was the fifth largest shareholder in LEAP at 7.8 million shares. That equates to a $9 per share profit since June 26th times 7.8 million shares. Picking up a cool $70 million after the close is a good days work. Of course it is a drop in the bucket to the hundreds of millions he has lost in the GLD ETF over the last year. Easy come, easy go.

LEAP Chart

Gold rallied more than 5% for the week for the best week in more than two years. It has a long way to go to get back to any reasonable valuation for anyone still holding it from the crash. Gold closed at $1283 on Friday with a +$61 gain for the week. The potential for additional quarters of QE and strong demand by central banks and retail investors helped power the move. The sharp decline in the dollar after the Bernanke speech also helped. The 50-day average at $1350 is going to be strong resistance.

Gold Chart

Crude oil closed the week with a gain to end at $106.25 but this has disaster written all over it. This is multiyear resistance and the situation in Egypt appears to be cooling off. There is still risk from Syria, Libya and Iran but that is already priced into the market. Massive inventory declines over the last two weeks have helped to push it higher but gasoline and diesel demand is not keeping pace.

Gasoline prices are expected to rise 15-20 cents over the next few days as a result of the spike in oil prices. The national average was $3.55 on Friday. For every $1 increase in the barrel of oil it raises the price of gasoline by about 2.5 cents per gallon. For every $1 increase in oil it costs consumers an extra $1.5 billion a year in fuel costs. As we have seen in the past gasoline at $3.75 creates an uneasy consumer climate and prices at $4 puts them back into hoard mode. They put off driving and shopping and stay at home. This has a corresponding impact on the economy since the number of shoppers decline.

Crude Oil Chart

Gasoline Futures Chart

I think it is official. Quite a few investors are no longer waiting on a correction to enter the market. The money flowing out of the bond market is trickling into equities and the shorts are getting killed.

Hedge funds have been heavily short the market in expectations of a summer correction. The June swoon just whet their appetite and increased their position sizes. Art Cashin said there was "enough blood in Hedge Fund Alley to cater Dracula's daughter's wedding."

Friday commentators kept harping on the fact that investors had gone from disbelief to belief and nobody was waiting on a correction. The 2013 rally has been called the most hated rally ever because all the "smart" investors had been waiting for a correction since January. They were cussing it with every tick higher.

I definitely agree there has been a sudden change in sentiment. There were $1.8 billion in market on close buy orders on the NYSE on Friday. That is $1.8 billion to buy with Egypt melting down, Syria in ruins, Libya returning to a feudal society, Europe in recession and China likely to report a dismal GDP on Sunday night. There was no fear because everyone has the new high fever.

David Kostin, an analyst at Goldman Sachs, has been raising estimates again. His year end S&P target is 1,750, 2013 target is 1,900 and 2015 target is 2,100. He bases that on an $8 increase in S&P earnings each year starting at $108 for 2013 then $116, $124 and $131 in 2016. Apparently there will not be any further recessions and the yellow brick road will just keep leading us higher. However, Goldman slashed their Q2 GDP estimates by 0.3% to +1.3%. Apparently everyone at Goldman is drinking the same Kool Aid.

At the same time Barclay's slashed Q2 GDP estimates from +1.0% to +0.6% as a result of the sharp decline in Wholesale Inventories at -0.5% compared to expectations for a +0.3% gain.

JP Morgan slashed its estimate by -50% from +2.0% GDP growth to +1.0%. However, they raised Q3 estimates from +2.0% to +2.5%. They claim the shrinking inventories in Q2 will lead to more manufacturing in Q3.

Barclays GDP at +0.6%, JP Morgan at +1.0% and Goldman +1.3%. It will be interesting to see how the rest of the pack plays their own revisions. We still have two weeks before the Q2 number is released.

Traders will likely expect those revisions to keep the Fed in QE mode for at least the rest of the year. The Fed will not want to cut back on QE if the GDP is running around 1% or less. In the Fed's mind that is a reason to increase QE rather than cut it.

In case you have not noticed Greece, Portugal, Italy and Spain are starting to creep back into the headlines. The European credit crisis is not over and the short term fixes from late last year are wearing off. Portugal's 10-year bond rates rose to 7.84% as the president called for a "National Salvation" agreement.

Unemployment in Greece ticked up to 26.9% in April, the most recent numbers available. A leaked report from the EU Commission claims Greece will miss its austerity targets by a wide margin. The EU claims Greece lacks the "willingness and capacity" to collect taxes. The Greek economy is in freefall because of austerity overkill. GDP is expected to decline from -5% to as much as -7% in 2013.

Italy is hanging on by a thread and leaders said last week the budget crunch may require more from the rich. The rich are already fleeing Italy to avoid new taxes and "bail ins" or forced taxes on their bank deposits. S&P cut Italy to near junk at BBB on Tuesday with a negative outlook. The IMF just cut GDP estimates for Italy to -1.8%.

In Spain the second largest newspaper, El Mundo, says a "pre-revolutionary" mood is taking hold. The government is breaking down after repeated scandals and scorched earth austerity.

Fitch cut the credit rating on France to AA+ from AAA with a "stable" outlook citing the country's uncertain economic outlook and need for structural reform.

The European debt crisis did not go away and it will be back in full bloom soon.

Advertise for Option Investor

So why are the U.S. markets in rally mode given all the problems around the world? Because fund managers and investors are in a squeeze. It is not a short squeeze although I am sure there are some traders still trying to short the market. Eventually they will succeed if they can stay liquid long enough.

I am talking about a cash squeeze. A very large percentage of traders and investors are sitting in cash waiting for the next correction to buy. The minor dip in June just whetted their appetite for the next big dip. Unfortunately that big dip never came and now investors are watching new highs being made daily and name brand analysts raising their S&P targets to previously unbelievable levels.

Those traders are experiencing a severe bout of "lost opportunity" syndrome. it is not as bad as lost money but it repeats every day until they give up on waiting and jump into the market. Summertime is supposed to have lackluster markets so traders on vacation can rest easy they are not missing anything. They will plan to be back at their desk by the end of August and ready to buy the historical Q3 dip.

For various reasons completely unrelated to stock fundamentals and macroeconomics the market is moving higher and these summer traders are missing the move. Those waiting for a correction are throwing in the towel and buying stocks. We would normally call this a capitulation moment except that the volume is relatively low. There is no conviction to the rally but the headlines keep coming. This has the potential to end badly, very badly.

Eventually fundamentals will matter but for now the potential for additional quarters of QE are powering stocks higher.

The S&P powered through resistance at 1,650 and the prior high close at 1,669 and never looked back. The index has gone almost straight up since the June 24th low at 1,560. The new historic high close on Friday was more "trader bait" since new highs attract new money faster than any other indicator. It is not logical but it is the truth. In theory a major correction should attract more money but when the market is at the lows everyone is afraid to buy. They want to see the return of an uptrend first. Once that uptrend is established they either claim the bounce has already gone too far or they want to wait for another dip and the cycle repeats. Continued new highs cause lost opportunity fears and the price chasing accelerates.

For the S&P the rebound has pushed 81% of stocks above their 50-day average and 91.6% above their 200-day average. Where investors should have been buying was on the dip. However, buying is accelerating even though the indicators are returning to overbought territory.

S&P Stocks Over the 50-day Average

Stocks Over the 200-day Average

According to the charts the S&P should have clear sailing until round number resistance at 1,700 and then uptend resistance at 1,715. That does not take into account things like an imploding GDP from China or some random bit of Fedspeak that could send the markets back into a panic induced sell cycle.

Support should now be prior resistance at 1,650.

S&P Chart

The Dow managed to close at a new high only as a result of the market on close buy orders. The -40 point hit from Boeing kept the Dow in negative territory most of the afternoon but $1.8 billion in NYSE market on close buy orders succeeded in turning it positive.

The Dow has intraday resistance from May at 15,521 and 15,542. I don't assign too much importance to those levels and I feel the 15,500 round number resistance is probably more valid. Friday's high was 15,498. Once through that round number we could see the index accelerate to equal the S&P except for the thin nature of a 30 stock index. Like we saw on Friday it only takes one stock to torpedo the other 29. With multiple Dow stocks reporting this week any one could kill the rally. If we see 2-3 with disappointing earnings it could be a real wet blanket to future gains.

Support is 15,250 followed by 15,050. The 50-day at 15,131 could also be a pause point although the Dow is not as reactive to averages as the S&P because of the ability of one stock to skew the index.

Dow Chart

The Nasdaq has busted loose from the laws of gravity. The Nasdaq has rallied +300 points since the June 24th low at 3300 to close at 3600 on Friday. That is a 13-year high and above all recent resistance levels. This is a dangerous move with the flurry of earnings from tech stocks over the next two weeks. It represents maximum optimism in a minimum reality environment. Remember Oracle and Accenture missed badly on earnings the prior week.

Support from here should be back in the 3,500 range but any material change in sentiment could have lasting implications.

Nasdaq Chart

The Russell 2000 has rallied +10% since the June 24th low. There was only one day with a material decline as the Russell added +96 points. Clearly the Russell is overbought in a weak earnings environment. This rally was begun as a result of the index rebalance but then caught fire as traders began chasing prices.

At this point the fact that fund managers are not scaling back positions it would appear to be projecting continued bullish sentiment. The market can remain in a trend far longer than those betting against it so it is possible the new highs will continue attracting new money.

Support should be prior resistance at 1000.

Russell 2000 Chart

The NYSE Composite Index ($NYA) and the Dow Transports ($TRAN) have failed to keep pace with their brethren. Neither has broken out to a new high. The NYSE has a lot of ETFs and foreign ADRs that may be holding it back along with many of the homebuilders. The Transports have been held back by UPS, FDX, the railroads after the two big train crashes recently and Boeing was a huge drag on Friday.

NYSE Composite Chart

Dow Transport Chart

To summarize, we are seeing the impact of a cash squeeze, where those not in the market or under invested are desperate to get in, coupled with a short squeeze after Bernanke and other Fed heads suggested QE could continue longer than expected. This is a headline generated rally.

When fundamentals come back into focus we are not likely to be making new highs. Earnings are expected to be dismal but that is potentially good news. Expectations are so low that companies should be able to beat the lowered estimates and appear on the surface to be winners.

China's GDP on Sunday could be a game changer BUT everyone knew that was coming all last week and the markets kept making new highs. It appears nothing matters but the Fed and QE. As long as that Bernanke put does not expire we could continue to move higher.

Beware the return of the European debt crisis later this summer as well as the debt ceiling debate. The U.S. will run out of funding by Oct 31st if the ceiling is not raised. Obama has said he will not negotiate so expect a major battle when the issue finally makes it into the public eye. Nothing happens in government until the last minute so that should happen in September-October.

Enter passively and exit aggressively!

Jim Brown

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"How many legs does a dog have if you call the tail a leg?

Four. Calling a tail a leg doesn't make it a leg."
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