A sudden spurt of short covering triggered by a PMI spike in China and quarter end retirement contributions pushed the market higher.

Market Statistics

Overnight China's Purchasing Manager Index (PMI) rose from 50.8 to 51.0 in June. This is the highest level in six months. The HSBC PMI rose from 49.4 to 50.7. The combination of reports suggested the Chinese economy had stabilized and helped to spike the futures overnight and set the stage for the U.S. markets to rise today.

The remainder of the Russell reconstitution buying also helped give the markets an upward bias. Add in the normal end of quarter contributions to retirement accounts and the stage was set for a strong market day.

The Nasdaq had been in breakout mode for several days and the opening print on the S&P sent it to a new high and a market stampede was in progress. The Dow rallied +171 points to a new high at 16,998.70 intraday and only 1.3 points from the psychological 17,000 level.

More importantly the Russell 2000 broke out to a new high at 1,213 intraday and completely erased the -9.3% drop to the May lows. The Russell 2000 is the sentiment indicator for the market and it has been bullish for the last week.

The U.S. economics were mixed again but the weak reports were not weak enough to drag on the market. The ISM Manufacturing for June declined slightly from 55.4 to 55.3 compared to estimates for a rise to 55.9. The minor decline failed to upset the market since it remained near six month highs. Anything over 50 represents expansion.

The new orders component rose from 56.9 to 58.9. However, order backlogs declined from 52.5 to 48.0 and export orders fell from 56.5 to 54.5. Inventories were flat at 53.0 and employment was flat at 52.8. Overall the report was weaker than expected but it was not dramatic.

The 88 economists surveyed by Bloomberg projected an average rise to 55.9 with estimates ranging from 54.0 to 57.0.

Construction spending rose only 0.1% in May compared to Moody's estimates for a +0.8% gain. This was down from the revised gain of +0.8% in April. Residential spending declined -1.5% and non-residential spending rose +1.1%. Most of that was the result of a +4.3% spike in spending on utility structures. That sector is up +29.7% since May 2013. Spending on highways rose +0.7% and bridges +3.2%. This report was ignored.

The Intuit Small Business Employment Index declined from 0.16% to 0.10% for June. The index suggested small businesses added only 20,000 jobs compared to 25,000 jobs in May. Workers took home an average of $2,715 in June compared to $2,804 in May for an annual drop in wages of -$1,080. To summarize, new hires declined, hours worked were flat and wages declined. It was not an encouraging report.

The Texas service sector outlook survey rose from 10.3 in May to 21.1 in June. The revenue index rose from 13.1 to 16.9. Employment rose from 13.8 to 16.5. Conditions in Texas appear to be continuing their rebound from the February lull. Hours worked increased from 4.9 to 7.3 and wages rose from 17.0 to 20.8. Those components suggest the job market in Texas is improving otherwise wages and hours would not be rising.

Auto sales surged in June to an annualized rate of 16.98 million, up from 16.8 million in May. Estimates were for a decline to 16.3 million. The June rate is the highest since July 2006 and compares to the 15.9 million rate from June 2013. Auto sales are soaring because the average age of a vehicle in the U.S. is around 10 yrs, interest rates are very low and the spring weather has been outstanding. This is a good sign for U.S. economic growth.

A report from the Health Department Inspector General on Obamacare problems found the administration had been unable to resolve problems with 2.6 million applications out of the reported 8 million people that signed up. The main problem was verifying citizenship and income. The report said the government's eligibility checking system was still not fully functional. Without successful eligibility verification the system takes the information submitted by the applicant to estimate how much subsidy money the applicant is eligible to receive. The inspector general said this was a major problem because insured persons would have to repay the subsidies with their taxes in 2015. Those that are eventually found to be ineligible for insurance because they are not citizens will have received free healthcare in the interim funded by taxpayers.

Other "inconsistencies" may mean some applicants are not receiving all the subsidy funds they are qualified to receive. Overall about 80% of the 8 million applicants are receiving subsidies. The CBO has retracted its prior claims of a potential deficit reduction by the passage of Obamacare and now say measuring the fiscal impact of the program is impossible.

"The provisions that expand insurance coverage established entirely new programs or components of programs that can be isolated and reassessed," the office wrote. "In contrast, other provisions of the Affordable Care Act significantly modified existing federal programs and made changes to the Internal Revenue Code. Isolating the incremental effects of those provisions on previously existing programs and revenues four years after enactment of the Affordable Care Act is not possible."

Wednesday is a big day for economic events with the ADP Employment, Factory Orders and a speech by Janet Yellen on Financial Stability. The ADP Employment report will probably give traders direction on the Nonfarm Payrolls on Thursday and traders may close their positions after the ADP numbers and head for the beach.

Yellen is not expected to say anything new and her speeches have been bullish for the market. Today's rally could have been instigated in part on expectations for another bullish speech by Yellen.

The Nonfarm Payrolls will be the closing bell for the markets for the week. After the opening print with reaction to the number the market should go dormant with the lowest volume of the year.

Today is the first day of the second half and despite dire predictions by numerous analysts all through the first six months of the year the markets had a great first half. The Dow was the laggard with a +2.3% gain followed by the Russell 2000 at +3.7%. However, that Russell gain came after a -9.3% decline in Q2. The big cap indexes managed bigger gains with the S&P-100 gaining +5.9% and S&P-500 +6.9%. The Nasdaq Composite gained +6.9% and Nasdaq 100 +8.5%. The Dow Transports overcame higher fuel costs with a +11.6% gain. Semiconductors gained +20.6% and Biotechs +21.8%. Energy gained +12.5%.

GoPro (GPRO) has turned into the IPO of the year with the share price having doubled in only 5 days. The average gain per day has been +20%. The sharp rise in the price is related to multiple things. First the name is very well known to the public and especially to the younger generations. There are millions of hours of YouTube videos shot with a GoPro camera.

Secondly the company only released 18 million shares out of the 123 million authorized. This created a feeding frenzy for the shares and the younger investor drawn to this product is probably not buying them based on fundamentals. They like the product and therefore they buy the stock. The daily spikes only increase the feeding frenzy. Options will be listed next week according to the CBOE.

NetFlix (NFLX) shares rallied $7 after Goldman Sachs went bullish on the stock saying it could rise another 34%. Goldman said international subscribers of 11.7 million at the end of Q1 could rise to 62 million by the end of 2017. Goldman said the U.S. user base could grow from the current 46 million to 55 million. Expanding into new international markets could push the total subscriber base to 207 million with a market share of 30%. The bank said Netflix could add profits almost at will by adjusting prices. At $8.99 they felt a Netflix subscription could increasingly be viewed as a high-value add-on to a wireless data plan for any number of devices. Goldman upgraded the company from neutral to buy with a price target of $560. Shares closed at $473 with a +7.4% gain.

Acuity Brands (AYI) was not having a very good day. The company missed earnings for the second consecutive quarter and investors were not kind. Revenue rose +11.5% to $603.9 million and short of estimates for $609.1 million. Earnings rose +3.1% to $1.00 but analysts were expecting $1.12. The earnings report spent a lot of time talking about new trends and rising sales but investors still trashed the stock. Shares fell -15% to $117.

GM shares rallied +3.5% despite saying they were adding another 8 million cars to the recall list GM has now recalled more cars than they made in total over the last three years. Apparently GM has decided to go "all in" on the recalls because they have nothing else to lose. The weekly recall announcements for the last several months plus the CEO testimony to congress and the constant blasting in the press has finally reached the ignore point for consumers. The news is so common they don't even hear it any more. By dumping all the potential problems they can find into a series of new recalls they have created a huge kitchen sink quarter for earnings. They believe the recalls will cost them around $2-$3 billion and they can take that charge in one quarter and then be done with the entire problem at least financially.

GM shares have risen for the last six weeks despite the negative news. Today they actually posted an increase in sales in June of +1% when most analysts were expecting a decline of up to -6%. SUV sales were strong with Escalade sales rising +84% and Suburban sales rising +72.7%. With gas prices spiking it is really surprising to see sales spike for the large SUV models.

Want cream with your coffee? Keurig Green Mountain (GMCR) and Nestle announced a multiyear agreement to produce K-cups with Coffee-Mate creamer in the cup. The 2-in-1 K-cup will be available initially in Original and French Vanilla flavors. They will be available in stores and online nationwide.

The Coffee-Mate creamer was first introduced in 1961 and is now offered in 20 different flavor combinations. Since 25% of coffee drinkers use creamer in their coffee this was a natural deal. Green Mountain has a 72% market share of the single serve market.

Blackberry (BBRY) continues to surprise investors with its daily gains. The stock is up +35% since May and it just keeps going and going and going. The rally is based on comments from CEO John Chen about a return to profitability, new products and a new focus. Apparently somebody believes him because the stock keeps rising. There is a tremendous amount of short interest and those shorts are getting flushed out every day. John Chen has been focused on the upcoming launch of the Blackberry Z3 in India and the Middle East and that should provide an earnings boost. Better sales of the BB10 will also help earnings. The company has built up a $3.1 billion cash reserve and talks about Blackberry's demise have all but disappeared. Shares of BBRY have significant resistance at $10.85 but a move over that level should create a huge short squeeze.

Google (GOOGL) announced it is acquiring privately held Songza for an undisclosed price. Songza is a service that creates soundtracks tailored for people's changing modes. This shows Google is aware of the changing trends favoring services that create tailored playlists for remote devices. Google is planning on using Songza's technology in its own music-streaming service as well as on the YouTube video site.

Salix Pharma (SLXP) surged +13% to $140 after saying its drug Xifaxan succeeded in a late stage study of irritable bowel syndrome with diarrhea. The company said patients in the phase-three study showed significant improvement in symptoms compared to the placebo group. A Sterne Agee analyst said the company could see significant incremental profits from the drug because they already have a strong suite of gastrointestinal drugs and a sales force in place.

IBM shares gained more than +5 points and added more than 40 points to the Dow as a major short squeeze was triggered. IBM has been declining for the last three months as a result of weakness in Asia. China and Asian neighbors are not buying IBM servers because they fear the NSA backdoors engineered into the hardware. Whether true or not the result is the same. Slowing sales and struggling profits.

The decline was short circuited today after IBM announced a new Big Data service in the cloud. The scope is truly amazing and far too detailed to describe here. IBM believes there is 2.5 billion gigabytes of data created every day from things like point of sale terminals, invoices, purchase orders, legal forms, emails, proposals, technical documents, web pages, loyalty cards, credit card charges, etc. IBM can manage all these information sources in the cloud to make every piece of data available to everyone based on their authorized clearance. Two thirds of the Fortune 500 say their biggest challenge in linking everything together is data variety.

With a high short interest in IBM any announcement can trigger short covering and once that fuse is lit we can get a rather large candle in certain stocks. The positive market news today added to the lift from the announcement and the squeeze was launched.

As we near the start of the Q2 earnings cycle in two weeks the estimates are already coming down. Bloomberg surveyed a number of analysts and estimates have come down from 7.3% to 5.2% with revenues dropping from 3.7% growth to 3.2%. S&P Capital IQ said today they are still expecting 7.11% growth in earnings but revenue estimates have declined from 3.4% the prior week to 2.6% today. S&P said the majority of the earnings gains will come from the Telecommunications Services, Materials and Energy sectors with growth of 39.5%, 15.0% and 12.0% respectively. Financial are expected to be the biggest drag at only +0.6% earnings growth. S&P believes all 10 sectors will report positive gains with total S&P earnings at a record of $28.84 for the quarter.

Let's hope both surveys are correct and we do show decent earnings growth in Q2 and hopefully better than the +3.4% final number for Q1. With the manufacturing sector stuck in the mud and barely maintaining the current trend and consumer spending in the tank thanks to higher food and energy prices we could see some disappointments this quarter.

The markets are not showing any hesitancy over the coming earnings cycle. With the strong gains today we are off to a good start for Q3. However, as Jeffery Saut pointed out the S&P is up the last two days of June and the first five days of July about 72% of the time since 1950. That is a pretty good record. That record has the benefit of the Russell index reconstitution and the end of quarter/half retirement contributions.

I do expect the market to continue to creep higher this holiday week IF the ADP/Nonfarm payrolls are close to the forecasts and Janet Yellen puts on her patriotic hat and gives a bullish speech on Wednesday. I don't think she has a bearish speech in her repertoire but you never know when she might decide to live on the wild side.

The S&P rallied to a new intraday high at 1,978.58 and closed at a new high at 1,973.34. The S&P is still about 25 points from the assumed target at 2,000 but it is making progress. The intraday spike today failed right at uptrend resistance at 1,978. We are now a long way from support at 1,950 and 1,925 so we do have room for volatility to appear.

Volume today was 6.09 billion shares and just over the 5.7 billion on Monday. Volume the rest of the week should be much less unless some economic event causes a serious market stumble.

The Dow spiked to within 1.3 points of 17,000. While this number is more psychological than technical there is uptrend resistance at this level. A breakout could quickly run for 200-300 points on short covering. We saw strong uptrend support at 16,800 last week and the range between support and resistance is narrowing.

We need to thank IBM and Visa for the majority of the Dow's gains. Between them they added about 70 Dow points.

The failure just under 17,000 is the third time in the last month. While we can still breakout any day we do have history at this level. If we truly fail here again it could prompt a reset and possibly lower lows. While I don't see that tonight it is always possible.

The Nasdaq is truly in breakout mode. The last three days of gains have been to new 14 year highs and despite the +50 point spike there was very little pullback at the close. However, the Nasdaq is now in overbought territory after the +420 point run since the late May lows at 4,040. We had plenty of consolidation time in mid June but the acceleration really started on June 25th. We have gained +120 points in only five days. It may be time for a rest.

However, if you look at the winners and sinners list below the bullish gains were far stronger than the losses. This brings up the market saying, "Buy the dips and sell the rips." We definitely had a rip higher the last several days.

The Nasdaq 100 is also in breakout mode and has added nearly 100 points since the struggle at 3,800 for the prior two weeks.

The Russell 2000 hit a new intraday high at 1,213 but could not hold on and slipped to 1,205 at the close and beneath the historic high close at 1,208. I am perfectly happy with the Russell. It has erased the -9.3% drop in Q2 to trade at new highs again. We definitely can't complain.

We need the Russell to punch through that old high resistance and close somewhere in the 1,215-1,220 range to really light this market candle.

Analysts continue to claim this is the most hated market rally in history because so few people are invested. Equity funds have seen outflows for the last eight weeks and bond funds have seen inflows. Investor participation is definitely not in sync with the new market highs. Investors waiting on the sidelines are losing money every day the market makes a new high.

I believe this "disbelief" in the rally will keep a floor under it for some time. Everyone who realizes the error of their ways in going to cash is now hoping for a pullback so they can jump back in. Every minor 2-3% dip is immediately bought. Unless there is a really negative surprise in the payroll reports there is nothing on the immediate horizon that could derail the rally. Everybody is drinking the Kool-Aid and believes the economy is accelerating. Until something appears to shock investors out of their bullish daze the rally should continue.

This is of course contrary to the normal midterm election year decline. Since we are just entering the Q2 earnings cycle there may be just enough bullish momentum to carry us 2-3 more weeks but I would be increasingly cautious if we start seeing some unexplained drops. The market does not need an excuse to correct. The talking heads on TV will assign whatever excuse is convenient if it happens.

Enter passively, exit aggressively!

Jim Brown

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