Stocks Finish Mostly Lower on Below Average Volume Ahead of Bernanke Speech and Economic Data

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Stocks Mixed into Final Hour Ahead of Bernanke Speech

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Computer longs, Semi longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is slightly negative today as the advance/decline line is mildly lower, sector performance is mixed and volume is below average. My intraday gauge of investor angst is above-average levels. Growth stocks are once again substantially outperforming value stocks, with many leaders posting strong gains. The MS Tech Index is up 12% year-to-date, as well. There are rumors going around that Microsoft(MSFT) may attempt to buy Research In Motion (RIMM) to compete with Google. I find that prospect highly unlikely. I still think Google will exceed $600 by year-end on better-than-expected earnings and growth stock multiple expansion. The AAII percentage of bulls fell to 40.3% this week from 41.3% the prior week. This reading is below average levels. The AAII percentage of bears rose to 46.3% this week from 43.1% the prior week. This reading is approaching elevated levels. Moreover, the 10-week moving average of the percentage of bears is currently at 38.6%, a high level. The 10-week moving average of the percentage of bears peaked at 43.0% at the major bear-market low during 2002. The 50-week moving average of the percentage of bears is currently 37.0%, an elevated level seen during only two other periods since tracking began in the 1980s. Those periods were October 1990-July 1991 and March 2003-May 2003, both of which were near major stock market bottoms. The extreme readings in the 50-week moving average of the percentage of bears during those periods peaked at 41.6% on Jan. 31, 1991, and 38.1% on April 10, 2003. We are currently very close to eclipsing the peak in bearish sentiment during the 2000-2003 market meltdown, which I still find astonishing, notwithstanding the recent correction. Here are a few other gauges showing significant bearishness despite the S&P 500's 4.2% gain off the recent lows:

1. The VIX is still at the highest level since April 2003.

2. The 10-week total put/call is 1.12, the highest level in history.

3. The 21-day ISE Sentiment Index reading is right near record lows at 103.0.

4. The 10-day Arms Index is a very high 1.27.

5. Domestic stock mutual funds continue to see significant outflows.

6. Money market fund assets are soaring to new record levels.

7. The three-month T-bill yield has plunged 108 basis points over the last four days as investors continue their flight to safety.

8. Both public and professional short interest readings are near record levels.

9. Index futures traders are positioned near historically net short levels.

Finally, insider buying is still near levels last seen right before the bull market took off in 2003. These readings are all indicative of a market that has put in place a meaningful bottom. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering and bargain hunting ahead of Dell’s report and Bernanke’s speech tomorrow.

Today's Headlines

Bloomberg:
- Prices for previously owned single-family homes rose an average of 3.2% from a year earlier, the Office of Federal Housing Enterprise said.
- Research In Motion(RIMM) rose to a record on the Nasdaq Stock Market amid speculation the maker of BlackBerry e-mail devices may be bought by Microsoft Corp.(MSFT), traders said.
- The UN found a small quantity of a toxic chemical discovered in Iraq a decade ago and stored by accident in the NYC office of the agency that searched the country for weapons.
- Tiffany & Co.(TIF) raised annual profit and revenue forecasts after second-quarter earnings exceeded analysts’ estimates and sales rose the most in seven years.
- Neil Hennessy, known for his “Dogs of the Dow” mutual fund, said the index of the largest US companies may rise as much as 15% through the end of the year.

Wall Street Journal:
- Apple Inc.(AAPL), whose iTunes store is the most popular source of online music, may release next week a new version of its iPod music player that has more features.

Washington Post:
- Terrorism Policies Split Democrats.

AP:
- Cruise companies and their passengers spent $17.6 billion in the US in 2006, up 9% over the prior year, citing a Cruise Lines Intl. Assoc. study.

Philadelphia Inquirer:
- For the first time since 2003, New Jersey has no “persistently dangerous” schools, citing a state Education Department report.

Reuters:
- Dunkin’ Donuts plans to add about 10,000 franchised stores by 2020 as it expands into the western US from the Northeast.

El Pais:
- Industrialized countries with targets to curb air pollution under the Kyoto Treaty may agree to cut emissions in 2020 by up to 40% from 1990 levels, citing a draft agreement being negotiated in Vienna.

Xinhua:
- China’s gold production in the first seven months of the year climbed at the fastest pace in a decade, citing a forum organized by the China Gold Association.

2Q GDP Strong, 2Q Inflation Decelerates, Initial Jobless Claims Rise

- Preliminary 2Q GDP rose 4.0% versus estimates of a 4.1% increase and a prior estimate of a 3.4% gain.

- Preliminary 2Q Personal Consumption rose 1.4% versus estimates of a 1.5% gain and a prior estimate of a 1.3% increase.

- Preliminary 2Q GDP Price Index rose 2.7% versus estimates of a 2.7% gain and a prior estimate of a 2.7% increase.

- Preliminary 2Q PCE rose 1.3% versus estimates of a 1.4% gain and a prior estimate of a 1.4% increase.

- Initial Jobless Claims rose to 334K versus estimates of 320K and 325K the prior week.

- Continuing Claims rose to 2579K versus estimates of 2575K and 2566K prior.

BOTTOM LINE: The US economy expanded in the second quarter at the fastest pace in more than a year as exports surged and business spending accelerated, Bloomberg said. Trade contributed 1.4 percentage points to growth, the most since 1996. Commercial construction rose 28%, the most in 26 years. The Core PCE, the Fed’s favorite inflation gauge, rose 1.3% during the quarter, the slowest increase in four years. Investment in equipment rose at a 4.3% rate, almost double the prior estimate. I expect growth to average about 2.5% in the second half of this year as exports remain strong and inflation decelerates further.

First-time applications for jobless benefits unexpectedly rose, Bloomberg reported. The four-week moving-average rose to 324,500 from 318,250 the prior week. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate, rose to 2.0% from 1.9% the prior week. While the labor market will likely loosen a bit more in the short-run, I expect it to remain healthy over the intermediate-term without generating substantial unit labor cost increases.

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Thursday Watch

Late-Night Headlines
Bloomberg:
- Michael Woolfolk, senior currency strategist at Bank of New York Mellon says the Fed is ready to cut rates at “anytime.”
- Malon Wilkus, CEO of American Capital Strategies, see opportunities in the buyout market.
- Australian business investment climbed three times as much as economists expected. Capital spending on equipment, buildings and plants rose 6.3% in the second quarter from the previous three months, the Bureau of Statistics said in Sydney. Businesses plan to spend 11.5% more in the year ending June 30, 2008, than they predicted three months ago.
- South Korean manufacturers’ confidence rose to a 17-month high, suggesting companies may ramp up production and spur growth in Asia’s third-largest economy.
- Corn fell for the fifth consecutive session on speculation that August rains will boost US production and dry weather in September will aid harvesting of record supplies.

Wall Street Journal:
- Yahoo! Inc.’s(YHOO) head of sales, Gregory Coleman, is resigning as part of a staff reorganization.

MarketWatch.com:
- Those who work at home or remotely report higher levels of satisfaction.
- Shares of US financial stocks rebounded modestly on Wednesday, after taking a pounding in the previous session, with Goldman Sachs(GS) leading gainers in the brokerage sector.

CNNMoney.com:
- Carlyle see credit storm calming. The fund, which invests in mortgage-backed securities, predicts “strong probability” for a dividend in the fourth quarter.

Reuters:
- Apple Inc.(AAPL) shares rose more than 5% on Wednesday on growing expectations that the company will announce a revamped line of iPods next week.

Financial Times:
- Google’s YouTube agreed to a deal with the British societies that collect royalties for 50,000 songwriters, composers and publishers to legitimize the use of their recorded music on the video-sharing Web site.
- Dry bulk freight costs at record high.

Late Buy/Sell Recommendations
Citigroup:
- JC Penney’s(JCP) Back-to-School season is off to a strong start, supported by a fully integrated advertising campaign, improved merchandise flow driving newness, trend-right merchandise, and a multi-channel approach. We believe the company is optimistic on Holiday 2007 based on back-to-school trends thus far.
- Reiterated Buy on (SPSN), target $15.
- Reiterated Buy on (TEX), target $94.
- Reiterated Buy on (ADBE), target $50.

Night Trading
Asian Indices are +1.0% to +1.5% on average.
S&P 500 futures -.13%.
NASDAQ 100 futures -.10%.

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Earnings of Note
Company/EPS Estimate
- (BTH)/.12
- (CIEN)/.31
- (CPWM)/-.64
- (DLM)/.02
- (DELL)/.31
- (ESL)/.55
- (FRE)/.99
- (FCEL)/-.34
- (GCO/.30
- (HRB)/-.35
- (OVTI)/.19
- (SHLD)/1.13
- (TIF)/.35
- (WIND)/.04
- (ZLC)/-.08

Upcoming Splits
- (FTI) 2-for-1

Economic Releases
8:30 am EST
-Preliminary 2Q GDP is estimated to rise 4.1% versus a 3.4% prior estimate.
- Preliminary 2Q Personal Consumption is estimated to rise 1.5% versus a 1.3% prior estimate.
- Preliminary 2Q GDP Price Index is estimated to rise 2.7% versus a 2.7% prior estimate.
- Preliminary 2Q Core PCE is estimated to rise 1.4% versus a 1.4% prior estimate.
- Initial Jobless Claims for last week are estimated to fall to 320K versus 322K the prior week.
- Continuing Claims are estimated to rise to 2575K versus 2572K prior.

10:00 am EST
- The 2Q House Price Index is estimated to rise .3% versus a .4% gain in 1Q.

Other Potential Market Movers
- The weekly EIA natural gas inventory report, (NVLS) mid-quarter update and Moody’s Perspective on the State of the Credit Markets could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by technology and commodity stocks in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the day.