Orderly Selling Favors The Bears – Tomorrow Will Be Pivotal!

Bad news continues to pour in and the market has convincingly broken below key support. This morning, the PPI came in much higher than expected and prices rose 1.8% in the month of June. The core edged up .2%, but there are signs that producers are passing higher costs on to consumers. On an annual basis, prices were up 9.2% during the last 12 months. Retail sales rose .1% and analysts had expected a rise of .4% in June. The rebate checks did not provide the expected boost. Auto sales posted their biggest drop in more than two years and General Motors said it would cut white-collar employment costs by 20%. It will also sell up to $4 billion of assets and borrow at least $2 billion to bolster liquidity through 2009. The New York Empire index contracted for the fifth time in six months. In his semiannual monetary policy testimony before the Senate Banking Committee, Chairman Bernanke said that we are faced with a fragile economy and there are "numerous difficulties" to navigate. They include strains on the financial markets, a rising unemployment rate and housing problems. On the financial front, US Bancorp posted weak numbers and Lehman is considering going private. IndyMac bank closed its doors and some analysts believe that as many as 150 banks could fail during this washout. When the two largest government-sponsored mortgage agencies need a bailout, you know the problem is widespread. For the most part, earnings have been "light". Kimberly-Clark missed their number and cited higher costs as the reason. They manufacture a variety of consumer products and they said that they are raising prices. I expect this to be a recurring theme this earnings season. After the close, we will hear from CSX, Seagate and Intel. Overall, I think they will post decent numbers. However, tomorrow before the open, many financials will release earnings (DSL, MI, NTRS, PJC and WFC). The pendulum could swing either way. There will also be many economic releases. The CPI will be released before the open and I am expecting it to rise. Companies have been hiking prices when possible that is due to be reflected in the number. Industrial production, oil inventories and the FOMC minutes are also important pieces of information. The FOMC minutes will be released in the afternoon and if they reveal that the Fed has shifted its focus to inflation, the market will have a negative reaction. The market continues to decline in a controlled manner and I see selling into the close. We will drift lower over an extended period of time if the selling does not get ahead of itself. Big capitulation lows attract buyers and they force shorts to cover on the snap back rally. As long as the decline is orderly, shorts will comfortably hang and to their positions. Option expiration will have a negative bias this week since we are making new lows. Bulls are hoping for a capitulation low this week. It will establish a support level and it will attract bargain hunters if it happens.

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