Financial markets will find and exploit hidden flaws, particularly in untested new innovations — and do so at a time that will inflict the most damage to the most people — Raymond F. DeVoe

The major indices settled with modest gains following a holiday-shortened week of light corporate news and economic reports.

1. Trade Deficit — the Commerce Department reported the nation’s trade deficit narrowed as imports fell and exports climbed to near two-year highs.
2. The Bank of England announced no change in interest rate — holding its key lending rate at a record low 0.5% and maintaining its bond-buying program at 200 billion pounds ($309 billion).
3. China’s August imports were up 35.2% year-on-year to $119.27 billion, against a 25% increase expected by economists surveyed by Dow Jones Newswires. Exports climbed 34.4% to $139.3 billion, against an expected 35% increase.
4. H-P Bribe Probe Widens — U.S. Investigators Are Looking at Multiple Transactions, some outside Russia; Hewlett-Packard Co. disclosed Thursday that a probe by the U.S. Department of Justice and the Securities and Exchange Commission of possible bribes the company paid in Russia is now wider than previously reported.

The week ahead — Economic data:

Stock prices tend to discount what has been unanimously reported by the mass media — L. Ehrenkrantz

1. IMF rolls out precautionary credit line — the goal is to provide these countries with financial help before they reach a crisis point. The IMF is creating a new credit line that is expected to serve as a precautionary “insurance policy” for developing countries with sound fundamentals that may not meet the more stringent requirements of the IMF’s 2009 flexible credit line.
2. India’s economy rockets ahead — India’s economy expanded at the fastest pace in over two years, growing 8.8% in Q2 from a year earlier.
3. Factories’ Strength In U.S. And China Reassures Investors — U.S. manufacturing growth unexpectedly accelerated in August and the jobs gauge hit a 26-year high, an industry report said Wednesday, complementing bullish data from Asia that bode well for the global economic recovery.

4. Retail Sales — Retailers rang up solid August sales Thursday, beating views for the first time since March as deep discounts spurred shoppers to step up back-to-school buying.
5. Rare glimpse into China’s forex reserves — A report in the China Securities Journal, an official newspaper, cited unnamed reserve managers who said the holdings are the largest stockpile in the world at $2.45T, roughly in line with global averages. 65% allocated to dollars, 26% to euros, 5% to pounds and 3% to yen.
6. Russia Wheat ban extended, fears of a global food crisis — Russian Prime Minister Putin extended his country’s grain-export ban through at least Nov. 2011, after announcing last month that Russia would suspend grain exports until the end of this year.
7. Gov’t Income Supports Surging — A record 30 cents of every dollar in personal income comes directly from government, Commerce Department data show.

Economic Calendar for next week:
1. 9/8 — Beige Book and July Consumer Installment Credit;
2. 9/9 — trade deficit;
3. 9/10 — July wholesale;

Embedded is an interesting Video from WealthTrack — Bruce Berkowitz, portfolio manager of the Fairholme Fund (best Domestic Stock Fund Manager of the Year in 2009)

Whenever a well-known bearish analyst is interviewed in the financial press, it usually coincides with an important near-term market bottom — Clif Droke

1. 2Q GDP — U.S. economic growth slowed to 1.6% in the second quarter.
2. Magazine Cover — on Aug 22, the New York Times published what may as well have been entitled “The Death of Equities II.”
3. Bullish Sentiment at Lowest Level Since March 2009 — according to AAII, Bullish sentiment fell 9.4 percentage points to 20.7% in the latest AAII Sentiment Survey. This is the lowest that expectations for stock prices to rise over the next six months have been since March 5, 2009. The historical average is 39%.

4. FOMC Chairman Bernanke stated the Fed Ready With Stimulus — economic recovery has weakened more than expected and the Fed is ready to take further steps if needed to spur slowing growth.
5. Is the Bond Market a Bubble ? — an interesting chart from the Bespoke Investment Group depicting the historical yield on the 10-year US Treasury going back over 50 years;

6. Yen rises to multi-year highs — the yen reached its highest level against the dollar in fifteen years, and the highest level against the euro in nearly nine years this week;

The week ahead — Economic data:
1. 8/31 — Consumer Confidence
2. 9/1 — Construction Spending
3. 9/2 — Export Sales; Factory Orders
4. 9/3 — Unemployment;

Get inside information from the president and you will probably lose half your money. If you get it from the chairman of the board, you will lose all your money — Jim Roger

The major indexes (S&P500, Dow Jones & Nasdaq) closed below the 50-SMA and 200-SMA.

1. New Jobless Claims Hit 9-Month High; Factory Activity Falls — New claims for jobless benefits rose by 12,000 in the week ending Aug. 14 to 500,000, the fourth gain in the last five weeks and the highest since last November; Mid-Atlantic manufacturing activity shrank in August;
2. Germany lifts forecast — Germany raised the growth outlook for its economy to +3% for the year, up from a previous estimate of +1.9%.
3. Consumer and wholesale prices rose in July, their first gains since March, the Labor Department said over the past week.

4. Rep. Barney Frank says bankrupt government mortgage giants Fannie Mae and Freddie Mac “should be abolished.”
5. Congressional Budget Office estimated The federal budget deficit will surpass $1.3 trillion in 2010 and is expected to be the second largest shortfall in the past 65 years.
6. ECB mulls exit timing — The ECB will likely consider in Q1 2011 the timing for withdrawing its emergency lending measures.

The week ahead — economic data:
1. 8/24 — Existing Home Sales
2. 8/25 — Adv Durable Goods; New Home Sales
3. 8/26 — Initial Jobless Claims;
4. 8/27 — Q2 GDP;

1. Consumer confidence fell in early August to the lowest level since October 2008, a month after the collapse of Lehman Bros. sent the economy tumbling into a severe recession and financial crisis, according to the IBD/TIPP Economic Optimism Index out Tuesday

2. The Federal Open Market Committee announced that it would reinvest principal payments from mortgage assets into longer-term Treasurys.
3. States get $26B in aid — Obama signed into law a $26B plan that Democrats said will help cash-strapped state governments preserve the jobs of thousands of teachers, police and firefighters.
4. U.K. growth moderating — The U.K.’s economic recovery is likely to continue at a slower pace than previously expected, said the Bank of England in its quarterly Inflation Report, peaking at a 3% annual pace instead of at 3.6%.
5. China ‘s domestic growth slows — July Industrial production rose to 13.4% in July vs. 13.7 last year; Retail sales also slowed and consumer inflation rose.
6. Retail sales weak — data is yet another indication that the economy has slowed significantly and the recovery could fail if job growth doesn’t pick up. Sales at clothing stores were one of the weakest areas, falling 0.7%.
7. German economy posts stellar growth — Germany’s GDP grew an adjusted 2.2% in the second quarter vs. Q1, marking the strongest growth in 20 years on the back of healthy contributions from exports and investment;

Here is an interesting video from CNBC regarding the manic state of the market.

The week ahead — 2Q earnings season continue & economic data:
1. 8/16 — LOW 2Q;
2. 8/17 — Housing Starts; PPI; HD 2Q; ANF 2Q; TJX 2Q;
3. 8/18 — DE 2Q;
4. 8/19 — Export Sales; HPQ 2Q; CRM 2Q;

The whole problem of the world is that fools and fanatics are always so certain of themselves, but wiser people so full of doubts — Bertrand Russell

As noted on Aug 3 ‘s missive, the major indexes (S&P500, Dow Jones & Nasdaq) break above the 200-sma on lower volume.

1. Wheat hits new 23-month high — Russia bans wheat export due to draught;
2. Lack of job growth — Nonfarm payrolls drop 131,000 in July; Estimate 100,000;

3. Retailers’ July Sales miss forecasts for the 4th straight month — 53% of retailers missed targets;

4. Economic reports shift from gloom to improving trend — private hiring and service-sector activity picked up in July. Recent shift toward more upbeat economic news.

5. BP pumps cement down well — permanently plug the blown-out well.
6. ECB kept rate at 1% and BOE kept rates at 0.5%

The week ahead — 2Q earnings season continue & economic data:
1. 8/9 — crop progress;
2. 8/10 — FOMC mtg; CREE 2Q;
3. 8/11 — US Trade Balance; CSCO 2Q; NVDA 2Q; SLW 2Q;
4. 8/12 — Export Sales; USDA Supply/Demand;
5. 8/13 — CPI; Retail Sales;

One statistical trend that is positive for the rest of 2010 is the Presidential Election Year Cycle (PEYC). Based on the historical record going back to the late 1800’s to present, the average dow return for year-3 of the PEYC is 15.5% versus year-1 return is 8.8%; year-2 is 0.4% and year-4 is 4.1%; A noted investment advisor, Jeremy Grantham, stated “Do not think for a second that a very stimulated market will go down in Year-3 just because it’s overpriced…So far, it has had 19 tries to do down since 1932 and has never pulled it off…”

The major indexes (S&P500, Dow Jones & Nasdaq) break above the 200-sma on lower volume.

So far, half way through earnings season, roughly 78% of the S&P 500’s companies have beaten their earnings estimates. Two out of three companies have beaten sales estimates.

Raymond James strategiest, Jeff Saut noted “The July Jump has had another endearing feature in that the three consecutive 100-point “up days” in the D-J Industrial Average (DJIA/10465.94) catapulted the Dow above its June closing high of 10450.64 last Monday. Simultaneously, the D-J Transportation Average (DJTA/4422.94) closed above its June high of 4433.60, thus registering a Dow Theory “buy signal,” at least as I interpret Dow Theory. Ladies and gentlemen, a same day confirmation from both averages is a rare event and suggests a fairly powerful “up move” is underway. That said, Dow Theory signals often come after a significant rally (or decline) has already taken place and hence has expended a lot of energy.

Also worth noting is that a number of other Dow Theorists opine an upside signal has not yet been registered. They need a close above the Dow’s April 23rd price of 11204.28, with a confirmation by the Transports above its May 3rd closing high of 4806.01, for a Dow Theory “buy signal” to be rendered. Alas, “listening” to the market is an art, not a science, and Dow Theory is interpreted differently by many practitioners. Nevertheless, by my pencil a “buy signal” has been registered and I am a buyer on weakness with fairly close stop-loss points to manage the risk.

Also noted by Lowry ‘s research “In summary, as the major price indexes have moved sideways since the May 25th low, market conditions have showed clear signs of strengthening, not weakening. While overbought readings on short-term indicators suggest the potential for a near-term pullback, any decline should act only as a temporary setback in the rally from the July 2nd low and is unlikely to represent the next leg of a more prolonged move lower.”

Below are the charts of the S&P500, Dow Jones & Nasdaq.

To succeed in the markets, it is essential to make your own decisions. Numerous traders cited listening to others as their worst blunder. — Jack Schwager

As noted in the previous week, the major indexes encountered resistance at the 200-SMA (S&P500 between 1,060 and 1,100).

1. California faced a $19.1 billion state deficit and with no budget in place — Gov. Arnold Schwarzenegger reinstated furloughs for state workers in an executive order declaring a fiscal emergency Wednesday
2. Moody’s warns U.S. needs debt plan to maintain its triple-A credit rating — The U.S. government needs to lay out a credible plan to address its rising debt.
3. Beige Book shows economic fragility — U.S. economic activity continued to be “weak” in June and into July, the Federal Reserve said in its Beige Book report.
4. GDP 2Q slows to 2.4% — below the average 4.4% increase over the last six months.
5. U.S. consumer sentiment fell to 67.8 in late July from 76 in late June.
6. European Banks Stress Test — only 7 out of 91 banks needed to raise a total of €3.5 billion in additional capital; As a sign of easing risk concerns, the Markit iTraxx Senior Financials Index, which measures the cost of insuring debt issued by 25 European financial firms against default, has narrowed. The index was at 118 basis points Friday, according to Markit, down from 131 basis points at the end of last week

AAII and Investor’s Intelligence — Bullish sentiment is slowly making a comeback

The week ahead — earnings season continue:
1. 8/2 — Construction Spending; ISM Manuf Index
2. 8/3 — Factory Orders
3. 8/5 — Export Sales
4. 8/6 — Consumer Installment Credit

Buy when others are despondently selling and sell when others are greedily buying. — Mark Mobius

The major indexes remained trapped between the trading range (S&P500 between 1,060 and 1,100).
1. Europe Banks Stress Test — results will be disclosed after market close 7/23/2010
2. President Obama signed Financial Overhaul Regulations into law
3. Germany Business Sentiment rose sharply in July — improving outlook for Europe ‘s largest economy
4. Ratings agencies S&P, Moody’s and Fitch are refusing to let bond issuers use their ratings — new financial reform laws create too much risk for them; SEC will allow a six-month exemption
5. Obama signed a six-month extension of emergency jobless benefits — restores aid to nearly 3M people whose checks had been cut off since the program expired in early June
6. Hungary shuns IMF, ratings agencies poise to downgrade — Hungary’s prime minister Viktor Orban indicated he won’t renew a safety net with the IMF and will back out of a commitment to cut the budget deficit to EU-prescribed levels next year

Below are the daily charts of the major indexes.

Nasdaq — Daily Chart

Dow Jones — Daily Chart

S&P500 — Daily Chart

The week ahead — earnings season continue:
1. 7/26 — New Home Sales
2. 7/27 — Consumer Confidence; Adv Durable Goods
3. 7/29 — Export Sales
4. 7/20 — GDP Q2; Emp. Cost Index;

The major indices dropped sharply on Option Expiration Week and encountered resistance at the 200-SMA. Below are the major events which occurred this week.
1. BP temporarily sealed oil leak –BP reported a pay out of nearly $4 bil in claims.
2. Moody downgraded Ireland — noted Ireland ‘s government’s ongoing loss of financial strength and the country’s weakened growth prospects
3. IMF and EU withdrew $21bil from Hungary — Hungary must cut their budget
4. Citi Bank (C), Bank of America (BAC) — beat profit views on lower credit losses — shares fell on the banks inability to expand revenue.
5. GE recorded profit — revenue fell 4.3% to $37.4 bil, missing est of $38.4 bil
6. China cuts Treasury holdings by $32.5 bil in May to $867.7 bil; Japan also cuts 1.1% to $786.7 bil.
7. Elizabeth Warren (law professor) is candidate to lead the consumer watch-dog position — position created by the Financial overhaul legislation.

The week ahead — 2Q earnings season continue:
1. Farnborough Internation Airshow — Europe collects to see the latest in airline production, including the Boeing 787.
2. IMF seeks another $250 bil to boost its lending capacity from $750 bil
3. 7/20 — Building permits; Housing Starts;
4. 7/22 — Existing home sales; Leading indicators;
5. 7/20 — EU Stress Test; Greece 1.5Bil Euro aunction