By Jim Donnelly, Olson Global Markets

After Federal Reserve Bank of St. Louis President James Bullard noted that the U.S. economy might be getting closer to a Japanese-style outcome hinting that the risks of deflation were rising, yields on U.S. treasury securities declined once again. That said, other observers including Charles Plosser, president of the Philadelphia Fed, said that “I don’t think deflation, or sustained deflation, is a real problem at this point. It is hard to imagine how you can get that when you have got a trillion dollars in excess reserves sitting in the banking system or as long as expectations of inflation are well anchored.”

These viewpoints, as well as many others, underscore how the debate over inflation versus deflation has become more and more a front burner issue. While it is clear that wage pressures are extraordinarily muted at the moment give the employment picture, commodity prices as measured by the Reuters/Jefferies CRB Total Return Index have risen somewhat since the end of May. With that in mind, it is interesting to note that this Index is approaching a test of key trend line resistance now sitting at the 283 level. A break above it, if it occurs, would tend to raise hopes that demand for commodities is strengthening, and in turn hint that final demand and the economy are improving as well.

Nevertheless, the employment numbers due out at the end of this week will be key in sizing up whether employment and wage stability are at risk. Those factors, as well as the direction of commodity prices, are crucial to the “inflation versus deflation” debate.

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By Jim Donnelly, Olson Global Markets

Just when it appeared the equity markets might be forced into an extended period of “the summer doldrums” (typical of the season), the S & P 500 Index broke above key downtrend resistance on weekly bar charts forcing investors to take another look.

Thus far, earnings have been, by and large, better than expected. In addition, this week’s economic numbers out of Europe were refreshingly pleasing, highlighted by a survey of German business confidence that posted a sharp rise. Upbeat news on the French service sector and a surprise increase in British GDP added to the reverie.

In addition, some uncertainties that had shrouded the marketplace did get a bit of resolve last week. The SEC’s securities fraud case against Goldman Sachs was settled and the European bank stress test results were viewed as largely benign.

Notions of reduced consumer credit in the U.S., fiscal austerity initiatives in Europe, and continued worries over the soundness of many U.S. State and municipal balance sheets, nevertheless, have not gone away. Because of this, last week’s turn-around in equity prices initially triggered a round of short-covering. Mild mutual fund allocation shifts away from either cash or low yielding or money market funds and into stocks were also noticed.

Although none of the current economic concerns are likely to go away any time soon, the S & P 500 index (SPX) did manage to break above key resistance with oversold conditions still present on the weekly time frame. This technical set-up suggests that further upside gains are likely to emerge over the intermediate term despite the economic gloom that still looms.

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By Jim Donnelly, Olson Global Markets

Technicians are always looking for the birth of a trend, the maturing of a trend, or the end of one. When a series of conflicting chart elements are present however, corrective price action usually results. Such is the case for the S&P 500 Index (SPX) right now. Oversold conditions are currently present, which suggests that buying on weakness is a viable strategy. Bearish technical divergences, like the bearish MACD “non-confirmation” divergence that is now visible on weekly charts, on the other hand, suggests that bullish momentum is still on the wane.

During the past week, the S&P 500 Index (SPX) failed to break above key downtrend resistance at 1,100, but instead reversed quickly lower. Over the next few weeks, oversold conditions could persist with sellers capable of sending the S&P 500 Index (SPX) down to key support now sitting near 1,007. Worse, an eventual test of “channel bottom” support currently at 970 could well occur.

That said, an eventual break above key trend line resistance at 1,100 would likely catch a healthy number of investors off guard, which could fuel an unexpected rally in an otherwise skeptical market environment. Time will tell, but lower price action could prevail for a while until buyers sense that equity prices have been discounted enough.

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By Jim Donnelly, Olson Global Markets

Last week’s 511 point surge in the Dow Jones Industrial Average (DJIA) as well as the S&P 500 Index’s (SPX) 55 point gain caused both of those key barometers to close back above their respective “mid-channel” resistance levels. At the same time, bullish technical divergences were registered on each, suggesting more upside gains are likely heading into July’s “earnings season”.

What appears to be a leader in this surprising turn-around are bank stocks. The Keefe, Bruyette & Woods U.S. Bank Index (BKX) staged an impressive rally last week characterized by similar bullish technical divergences as well as a test of key downtrend resistance. Interestingly, both the DJIA and the SPX are now approaching similar downtrend tests.

Given that most analysts believe that a legitimate turn-around in both the stock market and in the economy requires a healthy banking system, one might surmise that a “breakout” to the upside in the Keefe, Bruyette & Woods U.S. Bank Index (BKX) would trigger similar upside “breaks” for both the DJIA and the SPX. The “breakout” level for the BKX sits very close by at 49.50. The DJIA and SPX “breakout” points sit a bit further above at 10,350 and 1,098 respectively.

It is important to point out, however, that all observations are based daily bar charts, which are short-term viewpoints by definition. Nevertheless, they all suggest that the current “summer rally”, if that is what it is, has a lot more pep left in it which might add a bit more sunshine to the upcoming earnings season.

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By Jim Donnelly, Olson Global Markets

After the release of a host of worrisome economic data, the Dow Jones Industrial Average (DJIA) closed below both “cross” trend line and “mid-channel” supports located at the 9,885 level last week. Housing sales and starts were disappointing. Consumer spending was tepid. Manufacturing ISM posted its weakest reading since November. Initial jobless claims rose unexpectedly by 18K last week with Friday’s monthly employment report showing a mere 83K increase in private sector jobs during June.

As a result, a typical pre-holiday long-weekend “short-covering” rally never materialized on Friday with the DJIA falling by 46 points instead. Dollar weakness also played a roll in tempering any investor enthusiasm.

Weekly bar charts currently suggest that the “risk” of a possible move down to key “channel bottom” support now at 8,780 over the near-term is a reasonable expectation. Weekly technical studies are not yet in an oversold condition, but should be by the time “channel bottom” support is reached, if this scenario plays out.

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