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The Glass is Still Half Full

The markets managed to eke out another up week last week. The week was chock full of economic announcements, with more on the bad side, including the all important employment report on Friday, then there were on the good side. No matter. It seems that good news continues to make the market go up more than bad news makes the market go down. The DJIA, S&P 500, and NASDAQ all registered gains approaching 2% for the week. The first two eclipsed their June highs.

Health Care and Oil & Gas, two of the most favored industries according to First Coverage sell-side sentiment, came in with the biggest price gains for the week. Financials were at the bottom of the price gain list. Next to Financials at the bottom were Consumer Goods and Consumer Services, the two least favored by sell-side sentiment.

Sell-Side Sentiment Still In Decline

For the seventh week in a row, First Coverage Market Sentiment pointed to “bearish,” and for the tenth week in a row, the numerical value of the index fell. The drop was a modest 0.7%. Four of the 10 industry groups had a decline, led by a 7% fall in Consumer Goods. Five of the 10 industries rose, with Utilities registering a 6% gain. Sell-side sentiment appears on average not to believe the market rally is for real.

Oil & Gas Still Has Highest Sentiment Ranking

With a 4% gain last week, Oil & Gas retained the top spot on the list, but Industrials, which has been at or near the top for several months, fell from second as the result of a 4% decline. Oil & Gas finally seems to be establishing an upward trend in sell-side sentiment to add to its leadership position. The 7% decline in Consumer Goods sent it to the bottom of the list, just below Consumer Services. Both are showing well established downward trends in sentiment. The sell-side is strongly saying now is not the time to bet on companies tied to consumer spending.

Employment and Consumer Spending Show Little Progress

Last week, before Friday’s employment report, ADP provided a heads-up, estimating that only 42k private jobs were added in July. Similarly, the heads-up from the Monster employment index fell three points to 138 in July. They were on-track, with private employment only gaining by 71k, and total employment falling by 131k. Even after allowing for termination of temporary census workers, employment is not growing enough to take care of new workers coming into the work force. A gain of 36k in manufacturing jobs looked like a bright spot, but that was inflated by GM not taking its normal retooling shutdown and the impact of that on the seasonally adjust number. Unemployment did stay at an unacceptable 9.5%.

Initial jobless claims rose 19k last week, putting claims back to the range they’ve been stuck in since the beginning of the year. More importantly, it confirms the downward blip a few weeks ago, as suspected, was due to GM not taking the aforementioned normal retooling shutdown and the impact of that on the seasonally adjusted claims number. One should remember that this week’s rise in claims did not fall into the sampling period for last Friday’s employment report, so the report does not bode well for the August employment report.

Personal income, consumer spending, and the core PCE price index for June were reported as flat with May. A gain of 0.1% was expected for each. Both the core and the headline PCE price indices were only up 1.4% from the year ago June. The news in all three categories relative to expectations and in absolute terms was sweet fodder for those worried about an extremely slow recovery or worse and those worried about disinflation or worse.

Another ominous sign for consumer spending trends was that same-store sales from those retailers that report them for the month of July rose only 2%, a bit short of estimates. That’s two months in a row of lackluster results. That does not bode well for back-to-school sales in August, the second most important retailing season after the Christmas season.

Pending home sales drifted down further, but on a positive note in housing, purchase mortgage applications rose for the third straight week, although by only 1.3%.

Unit auto sales rose to an annualized rate of 8.9m, up from 8.4m in June, but flat with May. The rebound was helped by aggressive incentives. This is one of those reports that are not as bad as the headlines indicate. Year-over-year growth is from an inflated base in July 2009, the first month for cash for clunkers. However, the big discounts mean auto sales probably did not add much to the July retail sales to be reported this week.

There was plenty of good news in the ISM numbers. Both had been expected to be down. The manufacturing index was down, but by less than expected. The service index went up slightly. Both remain squarely well above 50, which means expansion. These reports were in stark contrast to most of the other reports for the week, making the week a great example of why it is so difficult to figure where the economic recovery is headed in these “unusually uncertain” times.

Last week, Procter & Gamble (NYSE:PG) reported that it had achieved 8% volume growth but price cutting left only 4% in dollar sales growth. It makes one wonder about deflation when consumer staples companies like P&G, Kimberly-Clark (NYSE:KMB), and J&J (NYSE:JNJ) are singing these kinds of tunes.

Focus This Week on FOMC Comments, Jobless Claims and Retail Sales

After the hectic week last week for economic news, we deserve a slow down this week, and we get somewhat of one. The biggest items on the docket are the FOMC meeting on Tuesday, another week of jobless claims on Thursday, and the retail sales report, CPI report and the Univ. of Michigan consumer sentiment numbers on Friday. All three Friday reports are expected to show increases over the prior month, which would be welcomed news given recent trends.

With inflation, or rather the lack of it, now a concern along with employment, any change in the comments from the FOMC meeting could have a big impact on the market. But the biggest news may come from the retail sales report on Friday. The weakness in same-store sales reported last week does not bode well for July retail sales, although a gain of 0.5% is expected. If they turn out weaker than expected, that adds to the concern about the August back-to-school season.

Reports on inflation are now moving to center stage, so not only the CPI report will be closely watched this week but also the one on import and export prices. Most retailers are on a July quarter and a few report this week, including Macy’s (NYSE:M), Nordstrom (NYSE:JWN), Kohl’s (NYSE:KSS) and JC Penney (NYSE:JCP). Guidance about the back-to-school selling season this month, especially in regard to any price cutting, will be critical. There could well be some downside surprises. Bellwether Cisco Systems’ (NASDAQ:CSCO) report also merits attention. So far, analysts continue to cut Q3‘10 and Q4‘10 earnings estimates for the S&P 500 at a rate below the average for this point in the calendar. That seems to be hard to reconcile with the economic news of late.

Stocks to Watch

Over the last week, the following stocks had the largest bullish and bearish sentiment shifts amongst the sell-side.

Bullish:

Bearish:

We wish you an enjoyable and prosperous summer.

Disclosure: No positions

Source: Weekly Street Sentiment: Climbing a Wall of Worry, But for How Long?