The market can't seem to make up its mind whether it is going higher or lower.

Market Statistics

The Dow dropped -52 points at its low for the day along with declines in all the major indexes. The volume was very lackluster with the low for the day coming at 2:30 as a choppy session appeared destined to plunge as we neared the bell. A rebound began late in the afternoon but it was not enough to lift the indexes into the green. Most closed with minor losses after the lack of a downdraft at the close prompted some to cover their shorts.

There was a lack of material headlines to move stocks and the headlines we did get created conflicting emotions. Putin made a big show of sending 280 freshly painted army trucks towards Ukraine with what he called humanitarian aid. Ukrainian officials said they would not allow the trucks entry into the country. Officials fear they could be a modern day Trojan horse with weapons hidden inside the humanitarian supplies.

The convoy was loaded without the assistance of the Red Cross and they said it did not conform to rules established to prevent illegal shipments. Russia later said it would turn the trucks over to the Red Cross at the border but because they were not prescreened it is unclear how this would work.

The key event here is what Russia will do if the Red Cross insists on inventorying the contents before the trucks are allowed to cross the border. If Russia suddenly revokes its offer and turns the trucks around it would be a safe bet that military equipment was hidden in the relief supplies.

In Iraq there was a mix of headlines where the U.S. bombing succeeded in creating an exit path for the thousands of religious minorities that had been under siege on Mount Sinjar. Elsewhere ISIS made further inroads and captured a new town only 20 miles from Iran.

Prime Minister al-Maliki refuses to step down for the new appointee Haider al-Abadi. The various factions are choosing sides and there is a real danger of a Shia on Shia battle breaking out in Baghdad. Shiite militia and army commanders loyal to al-Maliki signaled their support for his refusal to step down. Al-Abadi has the support of the powerful Shiite clergy, a major force in Iraq. With all the problems Iraq has today they don't need a Shia civil war.

The German ZEW indicator of confidence among professional investment analysts fell to a 20-month low on worries over the events in the Ukraine. The headline number fell from 27.1 to 8.6 compared to expectations for a decline to 17.0. German economists fear the impact of the sanctions against Russia will knock Germany back into a recession. Germany sends about 30% of its exports to Russia. This drop in the ZEW was a wet blanket for all of Europe and created additional worries for U.S. companies doing business in Europe. This was a factor in the weak U.S. markets today.

In the U.S. the Job Openings & Labor Turnover Survey (JOLTS) for June showed job openings rose to the highest level in 13 years. The number of unfilled positions rose by +94,000 to 4.67 million and the most since February 2001. That was up from a revised 4.58 million in May. The growth rate of openings rose +3.3% and the highest since June 2007. Roughly 2.53 million people quit their jobs in June and the most since June 2008. This voluntary termination trend suggests the job market is improving and workers are more confident about getting a new job. This was a positive report but it was a lagging report for the June period. We have already had two Nonfarm Payroll releases since this period.

The weekly chain store sales declined -1.4% and the biggest drop in several months. Since this is the back to school shopping season this is really troubling. We should have seen increases but analysts pulled an excuse out of their hat saying "sales tax holidays occur in July and weaken the first week of spending in August." Did you hear about any sales tax holidays?

The NFIB Small Business Optimism Index rose slightly from 95.0 6o 95.7 for July. The number of respondents planning on increasing employment rose to 13% and a post recovery high. Those expecting the economy to improve rose from -10% to -6% but still in contraction territory. The earnings trends component was flat at -18% and well into contraction territory but still better than the -27% six months ago. A net of 23%, up +1%, planned on making capital expenditures. All the other components were basically flat. The report was mildly positive but was ignored.

The calendar for Wednesday is also bland. The retail sales for July will be the most important. Expectations are for a minor +0.3% rise. Apparently all those tax holidays the analysts were blaming for the decline in chain store sales for the first week of August did not really attract a flood of shoppers in July.

The biggest earnings on tap for Wednesday will be Cisco Systems after the bell. Macys (M), NetApp (NTAP) and ReMax (RMAX) will also be watched.

JC Penny (JCP) and Walmart (WMT) round out a full week of retail earnings on Thursday.

The retail disaster for today came from Kate Spade (KATE). The company said sales rose +50% in Q2 but that was the highlight of the earnings news. The company still lost $14 million or -11 cents and they lowered their gross margin projections for the rest of 2014 as a result an increased promotional environment. Excluding special items they earned +5 cents. The lowered guidance for KATE caused a -25% decline in the stock.

Michael Kors (KORS) found its shares declining as well as a result of the Kate Spade guidance. The "increasingly promotional" comments suggested there was a purse war brewing between the companies. I think Kors will win. I am waiting for KORS to find a bottom to recommend a new long entry.

King Digital (KING), producer of the game Candy Crush, reported earnings of 59 cents that met estimates but revenue of $594 million was well under estimates for $608 million. The company warned that full year revenue would be in the range of $2.25-$2.35 billion, down from May guidance of $2.55-$2.65 billion. In an effort to head off the expected crash in its shares the company declared a $150 million special dividend. This is an "all in" bet that failed.

The company is facing a lockup expiration of 93% of its shares on Sept 22nd. They tried to head this off as well by saying the officers, directors and founders had agreed to postpone the lockup expiration on their shares representing 80% of the total until after the company reports Q4 earnings. Because of the large number of shares in lockup the $150 million special dividend only amounts to 46.9 cents per share. With only 7% of the authorized shares actually in the market the dividend looks more like a bribe to the insider shareholders to postpone their lockup expiration. Otherwise why would a company that earned $161.7 million in the quarter and warn on future earnings declare a $150 million dividend? Turn out the lights, this game maker is done.

LED maker Cree Inc (CREE) reported earnings of 42 cents that beat estimates by a penny but warned on future guidance. The company sees revenue of $440-$465 million and earnings of 40-45 cents. This was below average expectations of $465 million and 45 cents. Shares declined about $3 in afterhours.

JDS-Uniphase (JDSU) reported earnings of 14 cents on revenue of $448.6 million. This beat estimates for 13 cents and $438 million. They claimed a 15-year record high gross margin at 50%. JDSU lowered earnings guidance to between 8-12 cents on revenue of $405-$425 million. This was well below the 14 cents and $441 million consensus estimates. Shares declined slightly after the report.

Are you picking up on the trend here? Lowered guidance is going to be the killer for Q3. More than 37% of the S&P guided below estimates for the current quarter or full year. This suggests business activity is declining rather than accelerating. With the impact of the Russian sanctions on Europe we are going to see a lot more guidance warnings in the future.

Today Schlumberger (SLB) warned the sanctions would impact earnings by 3 cents a share in Q3 even though the actual sanctions were narrow and specifically targeted. The sanctions focused on deepwater over 500 feet, arctic offshore, and shale exploration and development. Since most of Russia's onshore fields are not shale the impact of the sanctions will be minimal for Russia.

National Oilwell Varco (NOV), a major supplier of oilfield equipment, warned they had $160 million in sales to Russia through June and "some or all" of such sales may be restricted by the sanctions for the rest of 2014.

We are just scratching the surface for sanctions impact and we can expect dozens if not hundreds of warnings in the future. We don't have to worry just about sales to Russia but sales to any other company or country that does business with Russia. That is a very big list.

Brent crude prices collapsed to $103 today and could drop below $100 after the IEA lowered demand growth assumptions for the rest of the year. The IEA cut growth forecasts for 2014 by -180,000 bpd because of slowing demand. I could write an entire essay on why demand is slowing but that is not relative to this commentary. Suffice to say slowing economies consume less oil.

The IEA did not say demand was contracting. They still expect demand to grow by 1.0 million barrels per day in 2014 to 92.7 mbpd. However, that is down from the prior 1.18 mbpd forecast but still an increase. For 2015 they are expecting demand to rise 1.3 mbpd to 94.0 mbpd.

Demand growth this summer has been so slow that the increased production from Libya is going unsold. Libya had seen production decline from 1.4 mbpd to 213,000 bpd because of the civil strife. A month ago the rebels agreed to release control of the ports for a portion of the revenues from selling the oil. Production resumed and is up to nearly 600,000 bpd but they are having trouble finding buyers.

Production in Iraq has not been materially impacted and the security premium in oil due to the Ukraine and Iraqi fighting is now evaporating. If Brent declines under $100 we can expect to see OPEC, especially Saudi Arabia step in to slow production and maintain the price over $95. Brent under $100 suggests WTI will be $95 or less. It is trading at $97 tonight.

This is punishing energy stocks but it is a blessing for the U.S. economy. Lower gasoline and diesel prices will take less money out of the pockets of consumers and allow them to spend it on consumer goods instead of pouring it in the gas tank. Americans consumed roughly 394 million gallons of gasoline per day last week. A 10 cent decline in gasoline is worth $39 million a day in additional consumer spending power.

Intercept Pharmaceuticals (ICPT) continues to live up to its reputation for volatility. Shares posted a 16% gain today of $39 on news their liver drug did not raise cholesterol. However, the high for the day was $349 and the low $274 and right where it closed. Yesterday's close was $237 so at one point the stock was up +112 intraday. This is insane.

Revel, the bankrupt Atlantic City casino will close by September 10th after failing to find a qualified buyer. The casino is only 2 years old and cost $2.6 billion. It filed for bankruptcy March 2013 and was taken over by creditors. It filed a second time in June. This will be the fourth major casino to close this year in Atlantic City. The Atlantic Club closed in January. Caesar's Showboat will close on August 31st and Trump Plaza will close Sept 16th. Because gambling is now legal in 34 states instead of just a couple there has been a strong decline in the number of people traveling to a remote casino location. Caesar's CEO said "the drive-in business in Atlantic City has all but disappeared." Gambling was approved in Atlantic City in 1976 and revenue increased every year until 2007 when the recession began. Since then it has collapsed.

Volume was very low today at 4.87 billion shares. This is the lowest since July 11th and it is expected to slow even further as we head for Labor Day and the end of summer. Anyone still planning on a vacation is rapidly running out of days. This slowing volume suggests the market could continue to be choppy for the next couple of weeks. Historically this is the strongest week of the month and the week after expiration starts a slide that last the rest of the month. History is a guide not a guarantee so we can't count on that trend repeating but we should watch for it.

The S&P gave back another -3 points to close at 1933 but that was still off the low of 1928. The stall at resistance at 1945 on Monday is still in progress with intraday support at 1930 barely able to contain the decline. It is hard to make too much out of the market action today since there wasn't any. The markets opened weak and remained weak but the decline was minimal thanks to the low volume. Nobody is participating. Everyone is either watching for a buying opportunity or watching the waves on a beach.

The Dow chart shows another perfect pattern of a bounce from support and failure at resistance. The Dow didn't quite get to 16,600 with a high at 16,589 but it is close enough for this commentary. The Dow actually turned positive for about a minute late in the day but lost traction almost immediately.

We can't apply too much logic to this lackluster performance because of the lack of volume. It takes volume to defeat support and resistance levels and without it we could remain trapped in the current range.

No Dow components gained or lost more than 81 cents. It was a pretty boring day.

The Nasdaq lost -12 points and the most of the major indexes. However, it was able to remain over prior resistance, now support, at 4371 and mount a decent rebound at the close. Only six Nasdaq components gained more than $3 for the day. Only eight lost more than $3.

The Nasdaq can decline to 4344 without causing any material damage. However, a decline under 4344 could easily see a -100 point drop.

The Russell 2000 lost -9 points but remains above the congestion range from last week. The minimal decline kept it in a rebound posture from the prior Monday's lows with support at 1120 the level to watch. Unlike last week when the Russell was up and the big cap indexes were down, the Russell joined the decline today. This suggests last week's rebound was more month end contributions being put to work than fund managers aggressively buying small caps.

I don't think we can project market direction from the action we have seen this week. The path of least resistance appears to be down but sometimes appearances can be deceiving. I would continue to suggest taking only small positions with minimum risk until we get to Labor Day.

Beware the potential border crisis with Ukraine if the Russian army trucks, freshly painted white to look innocent, suddenly turn into a disaster if Russian weapons are discovered. They may not be 280 Trojan horses but they may not be exactly what they seem.

Enter passively, exit aggressively!

Jim Brown

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