Despite better than expected earnings growth some high profile misses knocked the market for a loss.

Market Statistics

Earnings growth for Q2 is an astounding 8.3% based on nearly half of the S&P-500 that has already reported. However, some high profile earnings misses and guidance warnings are pressuring the indexes as we head into the summer doldrums. There may be some cracks forming in the bull market's foundation.

Visa and Amazon were the major problems on Friday. Dow component Visa (V) lost -$8 and knocked around 60 points off the Dow. Amazon, 13% of the Nasdaq 100, lost nearly 45 points at the open to help push the NDX lower by nearly 40 points at the open.

Visa's guidance was a wet blanket after they said they saw no signs of an economic recovery. That was a slap in the face to investors wanting to be long this market. Analysts may be imagining green shoots everywhere but Visa said it is not happening. Of course Visa's guidance may have been prejudiced by the very weak consumer spending. Retail sales are shrinking and high gasoline prices have kept consumers out of the malls. However, Visa also said cross border transactions were very weak. That means travelers are not spending money either. Visa's comments really weighed on the market.

Friday had only one economic report and it was neutral. The June Durable Goods orders rose +0.7% compared to a decline of -1.0% in May. After a +0.9% gain in April that gives us only a +0.2% average for the second quarter. That is not good and it will impact the Q2 GDP.

Orders for capital goods rose +1.9% but a weak rebound from the -5.3% decline in May. They are now down -10.4% for the year. Backorders rose one tenth to 0.8 and shipments were barely positive at 0.1. New orders did improve from -1.0 to +0.7.

There may be green shoots in the durable goods orders but they are growing in barren ground given the overall picture.

Next week is going to be very busy economically. This is payroll week, GDP, ISM Manufacturing and a Fed meeting all in one. The potential for volatility is very high and all the major reports are lumped into the last three days of the week.

The ADP Employment on Wednesday is expected to show employment fell from 281,000 new jobs to only 200,000 for July. The Nonfarm Payrolls on Friday are expected to show a decline from 288,000 to 247,000 new jobs. Both numbers are still in the Goldilocks zone but nobody wants to see new jobs decline.

The first look at the GDP for Q2 on Wednesday is expected to show growth of +2.5% compared to a -2.93% decline in Q1. The Q2 number is also going to be very volatile. Numerous companies have blamed weak earnings on weather in Q2 so there is the potential for a weaker than expected number. Weak retail spending and a slowing housing market could also have pushed it lower.

The first of the three estimates for GDP is normally the highest. As late data for the quarter becomes available the second revision which we will get next month is normally lower. The third report in September can go either way.

The ISM Manufacturing Index on Friday is expected to show a minor increase from the 55.3 in June so any decline there will be a surprise.

The FOMC meeting is not expected to be a market mover but anything is always possible. The data has been mild enough they are not likely to change course on the QE taper. Only three months remain with Yellen saying it will likely end in October. There is no press conference after this meeting so the announcement at 2:PM Wednesday is the only hurdle.

Earnings were driving the market all week and Friday was no different. The semiconductor sector was hard hit. On Friday Silicon Labs (SLAB) reported earnings of 58 cents that beat estimates of 46 cents. Revenue rose +10% to $154.9 million beating estimates of $149 million. However, great earnings still needs great guidance to avoid declines in the market. For the current quarter the company sees revenue in the range of $155 million, under the $156.8 million analysts expected. For earnings they forecast 45-51 cents and that was well below the 54 cent consensus. John Vinh of Pacific Crest Securities said they were buyers on the dip and they thought the company was trying to under promise on their guidance. Shares fell -14% on that weak guidance.

The Semiconductor Index ($SOX) is down -5.3% since Intel reported earnings two weeks ago. The selloff has been brutal and there was no specific reason. There were some earnings misses but most of the reports have been positive.

Texas Instruments (TXN) reported earnings that rose +3.5% to 62 cents compared to estimates for 59 cents. Revenue rose +8% to $3.29 billion and ahead of $3.28 billion estimates. Guidance for Q3 was 71 cents and $3.45 billion and analysts were expecting 68 cents. TXN shares dropped nearly $3 after the news with the biggest decline on Friday.

Arctic Cat (ACAT) did not enjoy the same boost in sales as experienced by Polaris (PII). The company said earnings declined -35% to 35 cents but that still beat estimates of 31 cents. Revenue rose +19% to $143.6 million compared to estimates of $131.8 million. It would appear they had a good quarter despite the decline in profits but the stock was sold with a 6% decline. Arctic Cat was probably too close to the blowout Polaris earnings and investors were hoping for a repeat.

On the positive side Lear Corp (LEA) reported earnings of $2.12 that beat estimates for $1.97. Revenue rose +11% to $4.59 billion and also ahead of estimates for $4.44 billion. The auto parts manufacturer said auto sales in China rose +12% and that accounts for 11% of Lear's revenue. The company raised revenue guidance to $627 million, up from $597 million. Analysts were looking for $625 million. They also raised revenue guidance ahead of consensus. Shares rose +3.3%.

Stanley Black & Decker (SWK) reported earnings of $1.43, an increase of 17.2%, compared to estimates of $1.37. Revenue of $2.885 billion rose +1% but missed the estimates of $2.939 billion. However, they raised full year guidance from $5.35-$5.50 to $5.50-$5.60. The hike in guidance overcame the shortfall in revenue and shares rose sharply by nearly 7%.

The Nasdaq decline would have been a lot worse if it were not for Baidu (BIDU). Profits rose +35% to $571.1 million and revenue rose +58.5% to $1.9 billion. Shares of BIDU rose +11% or $22 and a new high. This offset some of the decline in Amazon.

Amazon declined despite a +23% increase in revenue. The company said expenses rose +24% as the company continues to build out monster distribution centers, phone production and marketing plus numerous other improvements in services or new services being added.

Once Amazon ends the empire building they should be able to turn on profits at will because they are building millions of satisfied customers that are shifting to an Amazon lifestyle by ordering everything online.

The Amazon Fire phone finally went on sale on Friday.

Pandora (P) declined -10% after reporting the number of active listeners rose +7.5% to 76.4 million. That missed the 76.6 million estimate by Pacific Crest Securities and 77 million forecast by RBC Capital Markets. Shares fell -10% and the most ever in a single day. Other analysts were quick to call this a buying opportunity because the majority believe Pandora will eventually be acquired by somebody like Google. With a market cap of $5 billion they are a pocket change acquisition for the big players.

The earnings cycle continues unabated next week with a few high profile names. This is energy, healthcare and pharmaceuticals week. Twitter and LinkedIn also report but I would not expect a repeat of the Facebook performance. Herbalife reports on Monday and that will be interesting after the failed attack by Ackman last week. UPS reports on Tuesday and they will be another read on the economy because of package volume comments.

Zillow (Z) is about to become a monopoly in the online real estate market. It is rumored Zillow maybe preparing a $2 billion bid to acquire Trulia (TRLA). Zillow is already the largest U.S. real estate website and taking over Trulia would make competition even tougher. Together the two sites had more than 85 million unique visitors in June and accounted for 89% of all traffic to the 15 most used real estate websites tracked by ComScore.

Zillow bought for $50 million in 2013 and for $16 million in 2012. Trulia expects a 70% increase in revenue in 2014 to about $253 million. Zillow's revenue was expected to grow 58% to $311 million. Zillow partnered with Yahoo Homes and had 53.8 million unique visitors in June compared to Trulia's 31.6 million. Move Inc (MOVE) had 23.8 million. MOVE is the parent of Real estate firms spend about $28 billion a year on advertising so these companies have just scratched the surface in terms of revenue available.

Earnings for Q2 have come in better than expected. So far 230 S&P companies have reported. Earnings growth has risen to 8.3% and well over the initial expectations for the quarter and the lowered revisions from several weeks ago. The long term average is 9% earnings growth and we could actually hit that average before the quarter is over. More than 69% of companies have beaten earnings estimates and 63% have beaten or met estimates on revenue. However, 37% of companies have missed on revenue. Even with those misses revenue growth is about +4% for the quarter and the long term average is only +6%.

Even with earnings better than expected they were not able to hold up the market. Equities declined on Friday for multiple reasons. The first was reactions to lowered guidance from multiple companies. Second was news from Ukraine that Russia was shelling Ukraine positions from across the border and U.S. claims that Russia was sending heavy caliber long range multiple launch rocket launchers and other heavy weapons. The third reason was the belief the EU and U.S. were going to launch some heavy sanctions on Monday.

Lastly there was a call by Goldman to cut equities to neutral for the next three months. Goldman believes the selloff in the bond market and the buying in the treasury market could lead to a selloff in equities over the next three months. They said the global acceleration in economic growth is "largely behind us and geopolitical risks are elevated." They "also expect the general pace of returns to slow compared to what we have seen in the last couple years." Long term, 12 months or more, Goldman is still bullish equities "by a wide margin."

The corporate bond market has sold off hard over the last three weeks and Goldman is worried the sharp rise in rates will harm corporate profits or at least the outlook for earnings.

Meanwhile the yield on the 30-year treasury has fallen to a 13 month low as people run to the safety of treasuries. I believe some of this is overseas money looking for a safe haven.

The following chart is a comparison of the High Yield ETF (HYG) in red and the S&P in black. They are very highly correlated as shown in the bottom panel. When the HYG corrects the S&P does as well. Note the top right crossover of the HYG. That is the first time since 2009 the HYG moved below the S&P.

To summarize they expect the market to decline over the next three months and they recommend buying the dip.

Lipper said equity funds saw outflows of $8.6 billion in the last week so quite a few investors are already heading to the sidelines.

The S&P closed at a new high on Wednesday and Thursday with closes over 1,987 but fell back to 1,978 at the close on Friday. We can't derive much in the way of a market change from one day of declines, especially on a Friday with geopolitical news swirling. The Amazon and Visa declines set the tone for the market early and the market swoon could have been just a normal bout of profit taking ahead of the weekend.

Volume was low at 5.0 billion shares as it should have been on a summer Friday. There were twice as many decliners at 4,676 as advancers at 2,254 in the broader market but it was 3:1 in favor of decliners on the S&P at 347:117. On the Nasdaq it was 2:1 decliners over advancers.

The S&P has seen 230 companies report and post earnings depression (PED) is a very real event. With another 140 S&P companies reporting next week that PED is going to worsen by the weekend. Even if companies beat on earnings there is a tendency for the earnings spike to fade as traders take profits and move to a new stock that has not yet reported.

With multiple analysts and firms coming out last week with a market weakness call there will probably be some reluctance on the part of investors to put their recent profits back into the market until summer is over. The heavy economic calendar next week is also a risk investors should consider.

Goldman was the big market call on Friday with David Kostin, Kathy Matsui and Peter Oppenheimer heading a group of 11 strategists predicting equity market weakness over the next three months. Kostin still has a 2,050 year end target. Jeffery Saut of Raymond James warned of an impending 10-12% selloff in the prior week.

I believe the combination of PED, economics, geopolitical issues and the summer doldrums will plague us for the month of August. While the broader market may weaken there will still be pockets of strength where investors are taking advantage of any dips to pick up bargains. The majority of fund managers would welcome a short decline to add to or start new positions. One man's trash is another man's treasure. As investors take profits others will likely be ready to step in and pick up those cast offs. I just expect it to take more than the short 3-5 day dips we have seen in the past. I would not be too eager to rush in on the first sign of weakness.

Current support on the S&P is 1950-1960 followed by 1930. The 50-day average is 1946 and the 100 day is 1906 with the 200-day at 1851. It is entirely possible we could see the 50-day tested over the next couple of weeks.

The Dow fell back to close under 17,000 and right on short term uptrend support. As long as this uptrend holds we could see new highs ahead. However, the Dow has traded in a narrow range since the short squeeze on the 14th and last week was actually a lower high. It would appear that the Dow is on the verge of breaking that uptrend.

Another problem with the Dow Industrials is that the Industrials ETF (XLI) is suddenly diverging from the S&P. Note in the top right of the chart the blue line (XLI) has broken below the S&P and could be signaling the Dow is about to follow the industrials lower. Obviously you can tell from the chart the industrials can underperform the S&P for long periods of time but the correlation tightened in late 2013 and a divergence now could be producing a market timing signal.

In the daily chart for the Dow the longer term rising uptrend support was pierced on Friday. While that one day is not a significant event ANY further decline to the 50-day at 16,847 or below would be a major warning. The Dow has support at just about every 100 point increment down to 16,600 but the uptrend really breaks down with a decline under 16,720.

The most bullish index remains the Nasdaq 100 ($NDX) with only a 0.45% decline of -18 points on Friday. Since Amazon was the majority of that decline the rest of the big cap techs were holding their own. The NDX closed right at the high for the day not counting the opening print. That shows investors were nibbling on the dip even on a Friday.

The Nasdaq Composite failed to make a new closing high by -12 points. The decline on Friday was not dramatic with only a -22 point loss. As long as it holds above the 4,344-4,350 level the rebound has the potential to move higher. A decline under that level would bring technical selling and a potential decline back to 4,050. Nothing is pointing to that possibility today but the lower high from last week is still a work in progress. If it appears to roll over then traders will probably become a lot more cautious.

Resistance is the recent high at 4,485 and support 4,344-4,350.

Last but definitely not least is the Russell 2000. The index has significantly underperformed its big cap brothers and closed only 13 points above its recent low. The Russell is diverging from all the other indexes and the four day rebound was almost completely erased by Friday's losses.

The Russell typically leads both rallies and declines so any further drop on the Russell is going to be a problem. Heading into the summer doldrums with 37% of companies missing on revenue and even more lowering guidance it could be a challenge for small cap investors.

Any decline below the prior week's low of 1,133 would setup a potential decline to 1,096.

I am starting to worry we may be coming to the end of the buy the dip trend. This is summer and the indexes are struggling at the highs. Once the earnings excitement fades we could be in for a slow, choppy decline into August. The next two months are typically the worst two of the year for the markets and while a rally is always possible we need to be on alert for an alternate reality. Markets don't go up forever and it has been more than two years since a 10% correction. Tiptoe lightly through the coming minefield. Reduce your long positions to only those with the best relative strength. We don't want to run from the market but simply manage our risk in case a decline does appear.

Random Thoughts

Late Saturday the news channels are showing video of artillery rockets being fired from inside Russia across the border into the Ukraine military positions. This is blatant use of force against another sovereign nation and this should bring about some significant sanctions on Monday. The market may not react well to those headlines. Putin refuses to acknowledge any involvement in the MH17 shoot down despite video of the SAM-11 weapons systems leaving the area and driving back across the Russian border. Putin appears to be immune to peer pressure and is going to pursue his goals whatever the cost. Eventually somebody in the EU will decide they have had enough and ratchet up the sanctions to find Putin's pain threshold and he will react accordingly by stepping up his attacks, both military and economic.

Last week he cancelled importation of milk from Ukraine because it was "unsanitary." On Friday the government told McDonalds they could no longer sell certain menu items because the nutrition contents on the menu, like calories, fat, sugar, etc were incorrectly labeled and were illegal. McDonalds said the content descriptions were approved in advance by Russia.

Putin has a habit of bring government regulations into play whenever he wants to takeover businesses or run companies out of the country. He has done it to several oil companies by claiming they failed to follow the EPA rules and their operating license was revoked. They are forced to leave and Russian takes over their operations. There is no rule of law in Russia. There is only rule by Putin, an ex KGB officer. This problem with Russia and the Ukraine is likely to worsen before it gets better.

To make this worse the Ukrainian government has collapsed. The UDAR and Svoboda parties said they were leaving the coalition government and would seek an immediate parliamentary election. Under the constitution the government has 30 days to form a new coalition or call early elections. Prime Minister Arseniy Yatsenyuk then resigned to further complicate the problem. With Russia chewing up the landscape and citizens pleading for a resolution, those in power are finding it no longer the fun job it once was.

Israel unanimously rejected all of Secretary Kerry's truce proposals over the weekend. Hamas is still firing rockets into Israel with more than 2,000 fired in the last three weeks. Clearly Hamas does not want a cease fire or they would quit firing the rockets. Israel said it is going to widen its incursion into Gaza until they find all the rockets and launchers. This battle is starting to take on a wider significance and it may eventually impact the global equity markets. The Palestinian death toll is now over 700.

Initial jobless claims fell to 284,000 and well below estimates for 307,000 last week. That is the lowest level since February 2006. The four week average declined to 302,000 and the lowest since May 2007. The average smoothes out weekly fluctuations due to vacations, auto plant shutdowns for restructuring for new models, etc. Analysts are now beginning to worry that the Fed may be underestimating the job market and they could be caught off guard by a sudden surge in hiring. One analyst said an unemployment number below 6% next week could really shake up the FOMC and possibly cause them to act out of character when deciding what to do with QE. The last time the jobless claims numbers were this low the Fed funds rate was 4.5%. Today the two-year note yields 0.49%. There is a huge disconnect in progress.

Don't forget this chart. We are three months away from the end of QE according to Yellen. The Fed may not be removing the punchbowl just yet but participants better get ready for the mother of all hangover headaches.

Greenspan warned last week about "false dawns" and the looming Fed exit from the stimulus market. Greenspan, now 88, was head of the Fed for 18 years. Now he is warning there may be trouble ahead. He said bubbles can't be stopped without a "crunch." He is also peddling his new book. Do you think his high profile headlines could be related? Trouble Ahead Article

Here is an interesting article pointing out all the various analysts predicting a market crash in 2016 and there are quite a few. Consensus Building for 2016 Crash

Last week the SEC approved a rule to force money funds to switch to a floating net asset value rather than the $1 in use today. The floating NAV means shares you bought for $1 could be redeemed later for something less than $1. If the NAV went down to 79 cents then you would lose 21 cents for every dollar you invested. The SEC also approved "gates" to prevent investors from withdrawing funds in a time of economic crisis. If you want your money back you have to wait until the crisis is over. Oh, by the way the NAV at that time could be significantly lower than $1 or whatever you paid to enter the fund. Lastly, they also opened the door for funds to charge a fee to withdraw your money.

To summarize, assume you have money in a fund today at a $1 for $1 entry price. A major bank announces a problem similar to Lehman. Suddenly the financial system is recoiling from the thought of another financial crisis. The money funds slam the gates shut to prevent hasty withdrawals. Twelve to 18 months later they open the gates for limited withdrawals at 75 cents per share and a 10% withdrawal fee. Considering the trillions invested in money funds this would be an economic catastrophe.

If the financial system is so sound today why is the SEC passing such draconian rules? What do they know that we don't? Do you have money in a money market account today? The pilots of our financial system are putting on parachutes while the stewardesses are telling us everything is fine.

Beware of a weaker than expected Q2-GDP on Wednesday. The anemic Durable Goods Orders and weakness in purchases of automobiles, homes, building materials, food, gasoline and retail sales in general may bite us in the backside when the GDP is announced. Retail sales for June were $438.47 billion without seasonal adjustments. That represents a -5.59% decline from May. However, once the numbers were "adjusted for seasonality" retail sales showed an increase of +0.25%. That is your government watchdogs at work. However, Walmart and other large retailers have not shown any improvement in retails sales but actually showed declines in retail sales. Apparently declines in government reports are not allowed. We have suddenly become China where the reports are constructed by the politicians rather than the accountants.

This page will definitely get your attention. The Business Insider compiled a list of the most important charts in the world from dozens of analysts, economists, strategists and portfolio managers. There is some really good data here. The Most Import Charts in the World

Argentina is about a week away from its second default in 13 years. Creditors claim Argentina will no longer communicate with them despite not having made the required payments. Argentina said it is not in default because it has not said it was in default. Apparently until you claim a default the lack of payments is immaterial according to Argentina. To that end Argentina has made it clear it will formally default in early August.

John Carlin, assistant attorney general for national security in the Justice Dept said "we are in a pre-9/11 moment, in some respects, for cyber attacks." He said it is clear because they said it." Al Qaeda leader Ayman al Zawahin recent issued a videotape statement indicating the group is planning major cyber attacks against U.S. infrastructure such as electrical grids or financial networks. Terrorists, nation states and sophisticated criminal groups "have the capability now to cause significant damage" through cyber attacks. He pointed to the example of 30,000 computers being damaged at Saudi Aramco. Those computers controlled much of Saudi Arabia's energy infrastructure. In "Game Over Zeus" cyber criminals used a botnet, a network of hundreds of thousands of hijacked computers, to steal U.S. corporate data and encrypt the information then extort payments from the companies that owned the data in order to release it back to them. Link to larger article

The AAII Investor Sentiment is now showing fewer bulls at 29.6% than bears at 29.9% and the lowest weekly sentiment reading since May 8th. This happened while the S&P was making new highs on Wednesday and Thursday. Apparently investors trapped in 2000 and 2008 are not going to let it happen to them again and they are running scared.

Enter passively and exit aggressively!

Jim Brown

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"There have been three great inventions since the beginning of time: Fire, the wheel, and central banking."

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