- Market Commentary -

July 14, 2010 (FinancialWire) (By Dr. Joe Duarte) (Go to http://www.financialwire.net/?s=cmmtry for all recent commentaries.) — The S&P 500 SPDR ETF (NYSE: SPY) moved higher on Tuesday, but the real test will come if the S&P 500 finally closes well above the 1100 area in the next few days.

The bulls seem to be trying it again, as the stock market has made a third bottom since the month of May. Those who read this space on a frequent basis know that we were among the first to notice that the S&P 500 made a “W” bottom in May. That technical formation looked promising, but eventually failed on June 21st, as the S&P 500 reversed after reaching 1121 on an intraday basis. Since then the bears got the upper hand until recently when the stock market bottomed again, now delivering a triple bottom formation on the charts.  It’s hard, but not impossible, for a market to fail after making three bottoms in a relatively short period of time.

But, there is more to this story than just charts. There is something much different going on here on a fundamental and political level. Much of the mainstream media’s coverage of the recent market has been about economic worries leading investors to stay away from the stock market. But if you dig deeper, there are two real problems that have been driving this market, and they are related.

One is that the Bush tax cuts are set to expire in 2011. That means that on top of the increase in red tape that will hit businesses from the so called health care “reform” law, taxes will rise, on income, inheritances, and capital gains on January 1, 2011. That means that even more money will come out of the pockets of those people who still have jobs.

The second problem is that small investors don’t trust the stock market anymore.  That means that a steady source of liquidity has dried up. Small investors traditionally put their money in mutual funds, and mutual fund managers, who tend to have no sense of when to sell, would continue to buy stocks for extended periods of time, leading to extended market advances.

The bottom line is that business owners, who also tend to be individual investors, have two major factors aiming at them. One is the looming tax increases, and the other is the thought that the stock market is no longer a good place to look for above average returns on their money.

Now, think about this. There is a buzz building, at least in the “inside baseball” political sites and blogs that the Obama White House is considering an extension of the Bush tax cuts.   To be sure, this is only a rumor. And if Obama’s past performance is any hint of future performance, either this rumored tax cut extension won’t happen, or it will be so watered down that it will benefit two or three people in the whole country, just as the other so called “targeted tax cuts, tax credits,” and other incentives that have been passed into law by the president and his way out of touch staff and congress.

But maybe, just maybe, the White House may blunder into doing the right thing. If they do, we could see a nice rally in the stock market. In fact, what you’re seeing now is money moving into stocks on the thought that the White House has seen the light.

We think that it’s risky to bet on this White House to do something that the market wants. But, it’s also true that they are losing their grip on power.  So, it may be early to get too excited. But we’re not discounting it altogether, because it’s plausible, and because even this tone deaf White House wants to win the mid-term election and to be re-elected. So, you have to weigh the odds and act accordingly.  That means that if an individual stock or an ETF starts to show promise, this may be a good opportunity to test the waters, with a small exposure, and with the consideration that it may turn out to be a short term trade.

(Go to http://www.financialwire.net/?s=joe+duarte to see more commentaries by Dr. Joe Duarte, and go to http://www.financialwire.net/2010/04/22/about-duarte/ for more about Dr. Duarte.)

The FirstAlert(tm) “Money Index” is an indicator of the depth of market direction or indirection. While not always including the same stocks, the NYSE/AMEX/NASDAQ 25 most actives, greatest percentage losers and percentage winners (weighted against pure monetary loss/gain) indicate the direction in which the mass of money is flowing, as well as the general focus of the market. Last session’s most actives showed 21 advancers versus 4 decliners. Volume leaders were led by Citigroup, Inc. (NYSE: C) (streaming research for Citigroup available at http://investrend.stocksmart.com/ri/toc?tid=7921), YRC Worldwide, Inc. (NASDAQ: YRCW) (streaming research for YRCW available at http://investrend.stocksmart.com/ri/toc?tid=7771),  the SPDRS S&P 500 Trust ETF (AMEX: SPY) (streaming research for SPY available at http://investrend.stocksmart.com/ri/toc?tid=34430), ADC telecommunications, Inc. (NASDAQ: ADCT) (streaming research for ADCT available at http://investrend.stocksmart.com/ri/toc?tid=107), the PowerShares QQQ Trust ETF (NASDAQ: QQQQ) (streaming research for QQQQ available at http://investrend.stocksmart.com/ri/toc?tid=1044870), Intel Corp. (NASDAQ: INTC) (streaming research for INTC available at http://investrend.stocksmart.com/ri/toc?tid=3619)  Bank of America Corp. (NYSE: BAC) (streaming research for BAC available at http://investrend.stocksmart.com/ri/toc?tid=8456), the Financial Select Sector SPDRS ETF (AMEX: XLF) (streaming research for XLF available at http://investrend.stocksmart.com/ri/toc?tid=1026233) and Microsoft Corp. (NASDAQ: MSFT) (streaming research for MSFT available at http://investrend.stocksmart.com/ri/toc?tid=4652).

The FirstAlert(tm) Economics Calendar lists Retail Sales for June (8:30 am ET); Import/Export Prices for June (8:30 am ET); Business Inventories for May (10 am ET); EIA Petroleum Inventories (10:30 am ET); Treasury auctions 30-year bonds (1 pm ET); FOMC Minutes Released (2 pm ET).

The FirstAlert(tm) Events Calendar showcases CHK at the TD Newcrest Unconventional Oil & Gas Conference and the VAR Piper Jaffray Cancer Summit.

The FirstAlert(tm) Earnings Calendar lists Acergy S.A. Q2 2010; Adams Express Q2 2010; ADTRAN, Inc. Q2 2010; ASML Holdings NV Q2 2010; BANESTO-BANCO ESPANOL DE Q2 2010; DIP CORP TOKYO Q1 2011; ENERJEX RESOURCES INC Q4 2009; GERRESHEIMER AG DUESSELDORF Q2 2010; Healthcare Services Group Q2 2010; HUNG HING PRINTING GROUP LTD Preliminary 2010; iGate Corporation Q2 2010; Interceramic – Internacional de Cerámica, S.A. Q2 2010; Jackson Hewitt Tax Service Inc. Q4 2010; Landstar System Q2 2010; Marriott International Q2 2010; Peregrine Pharmaceuticals Q4 2010; Public Financial Holdings Ltd Interim 2010; SANEI INTL CO LTD OSAKA Q3 2010; Suedzucker AG Q1 2010; Texas Industries Q4 2010; UNITED URBAN INVT CORP TOKYO Q1 2010; Universal Forest Products, Inc. Q2 2010.

Quote of the Day: "He appears to have been called 'The Little Giant' more because he was little than because he was a giant." — Irving Stone (07/14/1903 – 08/26/1989), US writer (on Stephen Douglas).

Word of the Day: vestigial \ve-STIJ-ee-uhl\, adjective: 1. Relating to a body part that has become small and lost its use because of evolutionary change. 2. Pertaining to, or of the nature of anything that is no longer present or in existence.

In context: “Pixar filmmakers have to be able to tap into their vestigial child, their inner Andy. In that sense, the Toy Story series is their collective autobiography.” — Richard Corliss, "End of Innocence", Time, June 2010.

(Vestigial is from the French vestige, "a mark, trace, sign," which comes from the Latin vestigium, "footprint, trace," of unknown origin.)

Happy Birthday: 1918 – Arthur Laurents, American playwright, novelist, and director; 1924 – James W. Black, Scottish pharmacologist, Nobel laureate; 1936 – Pema Chodron, American-born Buddhist nun; 1947 – Navin Ramgoolam, Prime Minister of Mauritius; 1963 – Phil Rosenthal, American newspaper columnist; 1973 – Halil Mutlu, Bulgaria-born Turkish weightlifter; # 1977 – Victoria, Crown Princess of Sweden; 1982 – Dmitry Chaplin, So You Think You Can Dance finalist.

Today in History: 1223 – Louis VIII becomes King of France upon the death of his father, Philip II of France; 1698 – The Darien scheme begins with five ships, bearing about 1,200 people, departing Leith for the Isthmus of Panama; 1769 – An expedition led by Gaspar de Portolà establishes a base in California  and sets out to find the Port of Monterey (now Monterey, California); 1865 – First ascent of the Matterhorn by Edward Whymper and party, four of whom die on the descent; 1943 – In Joplin, Missouri, the George Washington Carver National Monument becomes the first United States National Monument in honor of an African American; 1965 – The Mariner 4 flyby of Mars takes the first close-up photos of another planet; 1969 – The United States $500, $1,000, $5,000 and $10,000 bills are officially withdrawn from circulation; 1992 – 386BSD is released by Lynne Jolitz and William Jolitz beginning the Open Source Operating System Revolution. Linus Torvalds releases his Linux soon afterwards; 2000 – A powerful solar flare, later named the Bastille Day event, causes a geomagnetic storm on Earth; 2003 – The United States Government admits to the existence of "Area 51"; 2007 – Russia withdraws from the Treaty on Conventional Armed Forces in Europe.

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