After six consecutive losing sessions the market was due for a bounce and certainly received it Friday. Essentially the news story of the day was "good enough" – i.e. China was good enough, and JPMorgan ex-fraud was good enough. Wells Fargo did not get much attention but also posted good results, with a nice uptick in mortgages. This company now originates one out of every three mortgages in America which is a remarkable concentration of power. TBTF.
I was harping on a trend line connection the lows of early June and late June that looked as if it could potentially break, causing great harm to the market. As we have seen countless times since April, just as the market is about to breakdown or breakout we get a key reversal. The one exception was the month of May where a breakdown did follow through. However the April, June and July have been a series of "fake outs" in either direction. We can even see that late last week as the market broke this trend line on an intraday basis Thursday but reversed course Friday to punish any of those who believed the potential breakdown would have follow through. Conversely the week before we had a break out to the upside into the S&P 1370s, that was also a head fake and reversed sharply. This key trend line is in orange.
On the positive side, a "higher low" has been created in the S&P 500 so there is an area of reference that is very obvious now – Thursday's lows. If that breaks in the coming weeks it would not be a good sign, but if it holds and we can see a new "higher high" that would be constructive. The action continues to be highly volatile and trend less.
The dollar continues to mark a very bullish condition and the market is fighting that headwind. We can see a pullback Friday but that was to be expected as Friday was a "risk on" day. U.S. bonds also show no sign of letdown – frankly the strength in equity markets with these 2 signals beeping "alarm" and "slowdown" and "safety trade" is relatively remarkable.
As for macro news it appears Europe has been erased from everyone's memories – it is bemusing how the "end of the world as we know it" was upon us a few weeks ago and now you don't hear almost a peep about Greece, Spain, or Italy on the financial infotainment channels. They are already onto the next flavor of the day.
Domestic econ data is modest this week with a miss already registered this morning in retail sales. (-0.5% vs expectation of +0.2%). The other key reports of the week will deal with consumer inflation and housing. All eyes will be on Mr. Bernanke who testifies to Congress Tuesday and Wednesday. Traders will be straining their ears for any hope of more easing measures.
Outside of that we enter the heart of earnings season in the next 3 weeks. Individual names should be extremely choppy and the flavor of the day should be dominated each session by a few key reports.
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund's holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog