Let’s face it, the last two weeks have been relatively boring when compared to the sharp 30% market rally we saw from March 10 – May 8, 2009.   The market took a much needed breather this week in advance of the upcoming Memorial Day weekend.

Government intervention did not take a break however, as Treasury Secretary, Timothy Geithner continues to have a direct line to all the major news wires. Mr. Geithner was quick to respond with comment as the dollar slid to a 5 month low against the Euro and other major currencies.   President Obama signed a consumer protection bill reforming the rules on credit card company practices.   The new law will prohibit companies from issuing credit cards to those under 21, unless they can prove they have sufficient income or the parent’s co-sign.   The law will also limit credit card companies from raising consumers rates unless they are at least 60 days late on a payment and the consumer will have to receive 45 days notice before the rate is increased.   President Obama made these remarks:

“So we’re not going to give people a free pass, and we expect consumers to live within their means and pay what they owe.   But we also expect financial institutions to act with the same sense of responsibility that the American people aspire to in their own lives.”

Quarterly earnings reports rolled in with most company’s continuing to beat analysts expectations.   Analysts have severely underestimated corporate America’s ability to maneuver costs and jockey spreadsheets to boost earnings per share.   As we look at the list of companies that reported earnings this week, we are engulfed by a sea of green, indicating that most companies exceeded analysts expectations.

One of the major surprises came from Sears Holdings (SHLD) as they reported earnings of $0.38 per share vs. analysts expectations of -$.88 per share.   Yes, you read that correctly, the analysts missed by over $1.00 on earnings.   We should give them a little credit however as they pegged the companies revenues on the button at $10.06 billion. Shares flew up on the news, but trended lower throughout the session as   investors realized that there was something not quite right. We believe that it is a case of an isolated benefit from mass layoffs along with non-existant inventory additions. Also, there is the real possibility that mark-to-market accounting changes helped significantly.

We are concerned that this trend of earnings surprises will not continue into the 2nd quarter.   Companies have cut back on employees, services, inventories and anything else to help make earnings look spectacular.   Next quarter should be a different story unless the economy turns around with growth and employment staging   a miraculous move. Let’s face it, there are only so many expenses that can be cut.   Next week’s earnings calendar does not have any companies with any real power to move the markets if there is any major surprises.

As investors sober up from the long Memorial weekend, we expect continued selling pressure as well as a return to fundamentals and economic data to shape the markets direction.   From a pure technical stance, this week was the first week we have seen multiple confirmations of bearish signals as the S&P 500 finally closed below the 20 day moving average (Grey Line).   There is a significant amount of support to the downside at 880 and if we were to significantly break this level then there is a decent probability we will see retracement back to 870 ( 23.6% Fibonacci Retracement) and then further down to 830.   On the upside, if we are able to hover along the 20 day and eventually break significantly above it then there is a good possibility of making new year to date highs. Once the direction is clear, we will move to capture the momentum.

At this point the risk appears to be greater to the downside considering the recent pullback, the break below the 20 day MA, stochastics / relative strength pointing lower and the realization that eventually someone is going to have to pay for all the money our government has been spending.

Once again, this week we saw an awakining to the level of spending as the UK debt ratio was lowered and the potential for similar action in the U.S. dragged the dollar down hard.