The lack of a material decline on the S&P and Dow was a minor win for the bulls today.

Market Statistics

After Monday's monster short squeeze sent the Dow, S&P, Transports and NYSE Composite to new highs any gain today was a win. Turnaround Tuesday did not live up to its name and the bears hoping for a return to the negative trend were disappointed at least in the Dow and S&P. The Nasdaq and Russell 2000 returned to trend with each losing about -13 points.

The biggest worry there was the Russell 2000 with a -1.1% decline. The Russell leads markets up and down so weakness there is always troubling. However, the Russell only gave back half of the 26 points gained on Monday so we would be happy with those ratios every time. Unfortunately the Russell did close on the lows of the day and the Nasdaq was only +1 point off its lows.

The divergence between the Dow/S&P and the Nasdaq/Russell suggests we still don't know if the market is going up or down. All we really know is that Monday was a big short squeeze and there was no material follow through today. If anyone doubts Monday was just a short squeeze need only look at the Dow. The index gapped up to 16,695 at the open, moved sideways the rest of the day and closed at 16,695. There was no follow through buying during the day. The major indexes set new highs but Monday's volume was very anemic at only 5.7 billion shares. Volume today was even less at 5.5 billion. New highs should be made on large volume. That low volume is another warning signal.

Today the market was supposedly worried over the weak retail sales numbers for April. You know, the month where the polar vortex evaporated and consumers were expected to come out of their snowbound homes and flock to the malls. Apparently they forgot to shop.

April retail sales rose only +0.1% after a +1.5% during a frigid March and +0.9% in a cold February. If you exclude autos and gas sales actually fell -0.1% in April. Sales by sector showed a -2.3% decline in electronics and appliances, food service and bars fell -0.9%. Nonstore retailers declined -0.9%, furniture and home furnishings fell -0.6%. Clothing and accessories rose +1.2%, sporting goods +0.7% and building materials rose +0.4% for the only major gains.

Analysts tried to blame the seasonal adjustments for the Easter weekend claiming there may have been some bad accounting. Easter was March 31st in 2013 and April 20th this year. I really don't understand why the Easter weekend would cause a -2.3% decline in electronics and appliances. I think those analysts were grasping at straws. If anything having Easter in the middle of April should have produced a sales spike.

The weak sales suggest the expected GDP growth in Q2 may be overly optimistic.

Business inventories for March rose +0.37% and in line with estimates of 4%. This was the smallest increase since July. Manufacturing inventories rose only +0.09% compared to +0.72% in February. The report was mixed with both positive and negative components but it was lagging data for March and was ignored.

On the positive side the NFIB Small Business Optimism Index rose nearly 2 points from 93.4 5o 95.2 for April. This is the highest reading since October 2007. The internal components were little changed with most improving only slightly but they did improve. Those planning to increase employment rose from 5% to 8% and those planning to increase capex rose +1 to 25%. Expectations for the economy to improve rose from -18% to -9%. That is a net number of those expecting improvement and those expecting a decline. It was -20 in November and -19 in February so it is heading in the right direction.

Those respondents thinking it was a good time to expand remained flat at 8%. However, 20% of respondents reported declining earnings over the past three months. That was actually the smallest number in the last three years. The NFIB survey was in line with the improvements in the recent ISM Nonmanufacturing index in April.

Overall the morning economics were lackluster and the weak reports suggest the expected GDP growth in Q2 may be overly optimistic. Estimates for the next revision of the Q1 GDP have fallen to a range of +0.2% to -0.7%. Q2 estimates are still in the +3.6% range but they won't get there with continued weak reports.

Thursday is the big day for economic reports with the Philly Fed the most important. It is the first major report for May and it is expected to decline. The Housing Market Index and the New Residential Construction will tell us if builders are still positive on the market.

On the earnings front Encana (ECA) reported earnings of 59 cents on higher gas prices and a sharp rise in liquids production. Analysts were expecting 53 cents. Liquids production rose +56% to 67,900 bpd while gas production declined -2% to 2.8 Bcf per day. Sales rose +78% to $1.9 billion. Encana is planning to spin off its PrairieSky Royalty unit later this month and they expect a $790 million payday. The unit is expected to have an enterprise value of $4.1 billion. Liquids production is going to rise sharply after they announced they were buying Eagle Ford assets from Freeport McMoran for $3.1 billion. They will get 53,000 Boepd in existing production and more than 400 undrilled locations. This will replace the production they sold in the Pinedale and Jonah fields in Colorado and Wyoming for $1.8 billion and the 90,000 acres in East Texas they sold for $530 million. Encana shares spiked on the news but faded to a fractional gain by the close.

Fossil Group (FOSL) reported earnings of $1.22 that declined -8% but beat estimates of $1.18. Revenue of $776.5 million and also ahead of estimates of $771.6 million. However, the company said it expects to earn 90-97 cents in Q2 on a +9% rise in revenue to $768 million. Analysts were looking for $1.16 on revenue of $772.9 million. They guided for full year earnings of $6.90-$7.30 and $3.54 billion. Analysts were expecting $7.21 and $3.58 billion. Shares declined -$5 in afterhours trading.

Take-Two Interactive (TTWO) posted earnings of 21 cents on revenue of $233.2 million. Analysts were expecting 11 cents and $202.6 million. They guided lower for the full year to .80-$1.05 and analysts were expecting $1.06. Shares declined about $1 to $19.71 on the news.

Elizabeth Arden (RDEN) reported a loss of -84 cents and analysts were expecting a breakeven. Revenue of $211 million missed estimates of $257 million. Apparently Justin Bieber and Taylor Swift ads chased buyers away rather than attract a younger audience. The company said it hired Goldman Sachs to explore strategic alternatives. I wonder if one of those alternatives is to change the name. Shares fell -33% on the news.

Investors in DXP Enterprises (DXPE) woke up to a real headache. The company reported earnings of 75 cents compared to estimates for $1.17. Revenue rose +20% to $348.5 million but missed estimates for $378 million. Shares declined -$43 on the news.

The market appears to have finally factored in the ongoing war in the Ukraine and the headlines no longer weigh on the market. In the ongoing fight against Russia more sanctions were applied but the real news s the retaliation. The head of Russia's space program Deputy Prime Minister Dmitry Rogozin said Moscow will reject the U.S. request to use the International Space Station beyond 2020. They charge the U.S. $50 million to transport our astronauts to the ISS. Rogozin suggest the U.S. consider sending astronauts to the ISS using a trampoline. In that same line of Rogozin said Russia will also block the U.S. from using Russian rockets to launch military satellites. Russia supplies NK-33 and RD-180 rocket engines to the U.S. for use by Boeing and Lockheed-Martin to launch satellites including military versions. Rogozin said the U.S.

Does anyone else wonder how the U.S. got into this mess? Contracting with Russia, our potential enemy, for rockets to launch our own satellites sounds to me like the ultimate in stupidity. Not only are we putting ourselves at risk of not being able to replace satellites Russia and China may shoot down at the beginning of any conflict but we are allowing our own high tech work force to decline while building up theirs. We are sending money overseas to fund their tech sector while our workers are drawing unemployment.

Along those same lines why are we buying one million barrels of oil per day from Venezuela when they hate us and that single purchase every day funds that corrupt regime? Stop the imports, Maduro's regime crashes and Venezuela gets a new government. However, maybe the weak enemy you know is better than the one that might take his place.

Earnings highlights for Wednesday include Cisco, Sodastream, Agilent and John Deere. Thursday is the recognized end of earnings when Walmart reports.

One of the big headlines for the day was the news Coke (KO) had exercised its option to increase its stake in Keurig Green Mountain from 10% to 16%. Coke currently owns 19.5 million shares and have the option to add 6.5 million more. This is very strong confirmation that the coming launch of Keurig Cold is likely to be very successful. Coke is limited to a 16% stake but given the problem Coke has had increasing sales volumes there is a very good chance they could end up bidding for the entire company. Keurig has an entire array of new products coming to market and that will utilize the existing K-cup brewer as well as the new brewers. Keurig is a long way from done as many thought a couple years ago when their K-cup patents began to expire. I see this as either trouble for SodaStream (SODA) or confirmation of the soda dispenser concept. It will be interesting to see how the new Keurig Cold dispenser operates compared to the SodaStream product.

I am hostile because I was considering a position last week at $92 but the Nasdaq was in decline and I kept thinking I would see a dip below $90. A perfect lesson "if you snooze you lose."

While the lack of follow through in the markets today was actually a win for the bulls it may be a hollow victory. We may need a couple more days to determine market direction for sure but there were several bearish undertones in the indexes.

The S&P may have spiked over 1,900 for a few minutes at the open but sellers were waiting. The index managed not to decline but it was a fight. Gaining a fractional eight tenths of a point on dismal volume was hardly bullish but at least the sellers were kept at bay.

I don't think anyone knows where the market is going. Sellers are afraid to short and buyers are afraid to buy. The volatility is almost nonexistent with the VIX right at a five month low at 12. In theory this is a sell signal. Put buyers are nowhere to be found and that suggests everyone is bullish. When "the VIX is high it is time to buy. When the VIX is low it is time to go."

With everyone looking for direction in all the wrong places the market is poised for trouble. Buying stocks requires a reason for the optimism. Selling can appear simply because there is no reason to buy.

Between 11:00 and the close the S&P traded in a very narrow 3 point range between 1,896 and 1,899. On the longer term chart it still looks like a pending breakout but that narrow a range suggests significant uncertainty.

For three weeks I have been recommending holding off on long positions until the S&P moved over 1,900 on strong volume and that has not happened. We need another event to push us higher or eventually there will be a negative headline traders will seize as the reason to sell. Maybe that event will be Yellen's speech on Thursday but then what else could she say that would be bullish? After three dovish speeches it is about time for her to say something that is not seen as dovish.

I would continue to wait for a strong close over 1,900 or a decent dip back to 1,840 for long positions.

The Dow continues to move higher as the rotation into the relative safety of blue chips favors that index. The Dow is clearly in breakout mode over short term resistance at 16,580 but now the longer term resistance comes back into play. If that resistance from April 2011 is broken I think the obvious Dow target is 17,000.

Until the rotation into blue chips ends it is hard to construct a bearish scenario for the Dow. However, continued declines in the Russell will eventually corrupt market sentiment and the concept of "relative safety" will fade.

Short term support is now 16,500.

On the Nasdaq the short term two-month downtrend line was broken on Monday but horizontal resistance at 4,150 held. The selloff today was minimal and support from Monday afternoon at 4,130 held remarkably well. I would say the bulls won another victory on the Nasdaq where Monday's gains held. We can thank Coke for the spike in GMCR that helped to support the Nasdaq.

The key for the Nasdaq would be either a move over 4,180 to confirm the rebound or a decline back below 4,100 to resume the two month decline. With Cisco reporting after the close on Wednesday they could be a negative event. Cisco has been struggling over the last couple years and what they say in their guidance is going to be critical.

The Russell 2000 remains the weakest link in the market. The +26 point short squeeze on Monday saw a 50% retracement today. The decline to 1,121 nearly put the Russell back under downtrend resistance. The Russell performance the rest of the week is going to be the key to the market. If the Russell nears the critical 1,100 level again the implications will be ominous. A dip under that level should be enough to drag the big caps lower and possibly wreck market sentiment. We are still in May and nobody has gone away but we still have plenty of time for a market upset.

The NYSE Composite posted only a fractional loss and that suggests the broader market is still healthy. The new target would be 10,800. Support is 10,560.

I would remain cautious until the market picks a direction. It is trying to head higher but the Russell is the grease to the downside. We need to see volume increase. You can still make or lose money in a low volume market but we need volume for confirmation of any directional move. Gaining 20 points in the Dow on 5 billion shares does not show us any conviction in direction. If buyers were convinced we were going higher the volume should be 7-8 billion shares.

There is a market adage that says "Never short a dull market." I would also add never buy a dull market. Keep your cash handy for a setup that offers more favorable odds of success.

I would be cautious of new long plays until the S&P closes above 1,900 or successfully retests the 1,840 level.

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Enter passively, exit aggressively!

Jim Brown

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