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Morning Matters:

Playbook Updated
by Geoff Garbacz

This is the updated playbook. The S&P 500 is down slightly since the last update on July 9th. As issues evolve each week, then audibles may need to be called with either additions or deletions to our portfolio. Cash is at 25% and we have not added or removed any positions. Recent addition Johnson & Johnson (JNJ) will report earnigns this morning.

1.Continue to watch the impact of bankruptcies and mergers on the market. Acquisitions are happening every week and there have been no bankruptcies of note in 2010. However, Innkeepers USA Trust filed bankruptcy this morning. The IPO and Secondary market is firming up as there continue to be deals on almost a daily basis. There have now been more Venture Capital backed IPOs than all of last year. General Motors will file to go public in short order. Updated.

2.Unemployment numbers are due each Thursday and continue to slow bit by bit. Monthly numbers for July were disappointing. The private sector has added jobs for six months in a row albeit at a slow pace. Pay attention to Jobless Claims each Thursday. They remain weaker than expected. Is a turn forthcoming?

3.Data shows that the economy is bottoming at a moderate pace, in an inventory rebuild. The $64,000 question is whether the recovery is played out and the U.S. economy "double dips". We do not believe a "double dip" is taking hold.

4.Energy prices are range bound which a plus for stocks as taking less money out of the consumers pocket. Energy prices are range bound as the dollar rally has stalled. The big question is as the summer driving season begins will the price of unleaded move above $3.00? The answer is no. Gold rallied beyond $1200 and now moved back below $1200 and now the next level is $1100 if $1200 does not hold. More deflation than inflation? Updated.

5.The Dow Jones is now above 10000. The S&P 500 is now above 1050 while the NASDAQ Composite moves to 2100 as support with 2200 just out of sight. Support levels remain unchanged. Updated.

6. The big question in 2009 was, "Can the S&P 500 take out its January high of 943.85?" Then we asked can the 38% retracement from the October 2007 high to the March 2009 low, 1014.14 be take out. Currently, this level has been successfully conquered. The next level recently held is 1121.44 which is the 50% retracement from the same levels already discussed. This level recently failed and is now weighing on the market. The prior low of 1040 and the "Flash Crash" low have held. Updated.

7.Erlanger's EBB moved above 0 on a daily basis which is a positive. Weekly EBB is negative while the monthly EBB is positive. For daily readings we suggest you go to www.erlangerchartroom.com for hourly or daily updates. Updated.

8. In 2010, January was a loser for the month. February turned into a winning month. March and April were higher as well. May was the worst May return since 1940 and June was a loser as well. The second quarter was the worst quarter since Q4 2008. Year to date the S&P 500 is down about -4%. For the month of July, the S&P 500 is up 3.93%. Updated.

10. Also as transports go, so goes the market according to Dow Theory. Transports remain decent. IYT is holding above $70. Can we move above $75?

11.We are adding a new measure. How small cap names are doing against large cap. Small cap buy signal remains avoid. Updated.

12.We have added a new indicator the Simon Economics "Greed & Fear" Index. Currently, it is in the fear stage which means we are beginning the bottoming process and is now improving BUT not an outright buy signal. Updated.

In a nutshell, we are coming out of an oversold situation on a daily basis but the weekly remains poor as well while the monthly trends are positive. Pullbacks have popped up in June/July,October/November and January/February. The May/June pullback was right on time and now the pattern if it is intact calls for a strong July. Updated.

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