Despite Friday’s mediocre performance, the Dow Industrials closed July with a gain 7.1%, and the S&P 500 and Nasdaq rose 6.9%. Together the indices scored the best month in a year. The catalyst for the gains was earnings. With 70% of the S&P 500 companies reported, profit margins are at a record 9.7%, according to Standard & Poor’s.

But there is still concern on the part of investors, and Friday’s performance seemed to highlight the problem. Trading volume has been very light as investors are still not willing to make big commitments to risky investments. And analysts caution that future earnings may not turn out so well since even though many companies were able to turn a healthy profit, many have failed to meet revenue forecasts. In other words, the gains have been made as a result of lower labor costs, and with more economists saying that 10% unemployment next year is still possible, there is a point at which earnings will not be able to keep up the pace.

On Friday, in just minutes the market was down 1% as stocks opened lower on disappointing GDP data. Later the Q2 GDP figure reported in at an annualized rate of 2.4%, which was just under a revised target of 2.5%. But a better-than-expected Chicago PMI number and a final July consumer sentiment number of 67.8 enabled the market to claw its way back, and by the close it had overcome most of the early losses.

The euro closed 0.3% lower and is down 9% for the year, despite gaining 6.5% in July. The yield on the 10-year Treasury note on Friday moved lower to 2.9% as buyers headed for safety.

At the close, the Dow Jones Industrial Average fell 1 point to 10,466, the S&P 500 broke even at 1,102, and the Nasdaq gained 3 points at 2,255. 

The NYSE traded 1.2 billion shares with advancers over decliners by 1.4-to-1. The Nasdaq crossed 655 million shares, and advancers there were ahead by 1.3-to-1. 

For the week, the Dow was up 0.5%, the S&P 500 gained 0.1%, and the Nasdaq fell 0.4%.

On Friday, crude oil for September delivery rose 59 cents to $78.95 a barrel, and the Energy Select Sector SPDR (NYSE: XLE) fell to $53.84, off 11 cents. 

December gold rose $12.70 to settle at $1,183.90 an ounce. The PHLX Gold/Silver Sector Index (NASDAQ: XAU) gained $2.17, closing at $169.72.

What the Markets Are Saying

With all of the hype about July being the best month in a year, you would think that the bulls were pounding into new highs with volume supporting an even higher projected target. Instead, the market is still mired in a struggle reminiscent of the mural by William Holbrook Beard, “Bulls and Bears in the Market,” which vividly depicts a battle as the beasts toss each other about on the steps of the NYSE and onto Wall Street with fur and hide flying everywhere. Painted in the 19th century, it is a classic reminder that the frustrations of the Street have been going on a long time. 

The failure of the S&P 500 to charge ahead and through the 200-day moving average has even been reported by the daily market writers who rarely comment on a technical analysis issue. Both Briefing.com and the Wall Street Journal noted the failure of the S&P 500 to cross the barrier, and both also took note of the lower-than-average volume.

However, it is not only the 200-day moving average, now at 1,114, but also the recent high at 1,121 made on July 27 that carry weight. There are two reasons for the importance of 1,121: First, it is the 50% market crash retracement target bounce from the October 2007 top to the March 2009 bottom. Second, it is lower than the last retracement high made on June 21 at 1,131, so a failure to exceed it would create a lower high. If the index continues to fall through the next support, at 1,080 to 1,082, there is a strong possibility of a further challenge to the May/June lows, and finally to the low of July 1.

Last week, each of the major indices except the Dow fell away from its 200-day moving average, including the broad-based NYSE Composite Index. Once again, the fur and hide are flying, and it’s anybody’s guess as to which will win the struggle. At mid-week it appeared that the bulls were gaining an advantage, but now with three days down and a less than satisfactory end to the week, the bears are back in control. Appearances can be deceiving.

Today’s Trading Landscape

Earnings to be reported before the opening include: Administaff, Allergan, AllianceBernstein, Barnes Group, CNA Financial, Drew Industries, Franklin Electric, Granite Construction, Haemonetics, Healthsouth, Henry Schein, Humana, Lifepoint Hospitals, Loews Corp., Mannkind, Mercury General, Momenta Pharmaceuticals, NRG Energy, NuStar Energy, NV Energy, Orbotech, Oshkosh Truck, PolyOne, Senior Housing, Tasty Baking, Valeant Pharmaceuticals. After the close: Actuate, Altra Holdings, American Financial, Argonaut Group, BioMarin Pharmaceuticals, Brookdale Senior Living, Carmike Cinemas, Charles River, Circor, Cognex, Comfort Systems USA, Comstock, Corporate Executive Board, Cutera, DaVita, Developers Diversified Realty, Ducommun, Encore Capital, Evergreen Solar, Extreme Networks, First Industrial Realty, Forest Oil, General Cable, GFI Group, Guidance Software, Herbalife, Hologic, InfoSpace, Innophos Holdings, Intevac, Kaiser Aluminum, Kilroy Realty, Meadowbrook Insurance, Intevac, Kaiser Aluminum, Kilroy Realty, Meadowbrook Insurance, Nationwide Health, Oplink Communications, Orthovita, Otter Tail Power, Phoenix Technologies, Post Properties, Power Integrations, Powerwave, Principal Financial, Regal-Beloit, Rogers Corp., Rudolph Technologies, SBA Communications, SM Energy, Stereotaxis, Sykes Enterprises, Synchronoss Technologies, Syniverse Holdings, Texas Roadhouse, TNS, UDR, Unica, Unitrin, US Auto Parts, VeriSign, Vivus, Vulcan Material and Wright Medical.

Economic reports due: ISM manufacturing index (the consensus expects 54) and construction spending (the consensus expects -0.5%).

If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.

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