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The consolidation continues...

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• Earnings continue to offer mixed messages, reinforcing "good enough" scenario for market.
• Market still in consolidation mode with near-term trading range of 975-1015.
• All eyes are on economically sensitive sectors and therefore will keep a look out for late week economic releases.

Earnings Influence - Halfway through earnings season, the commentary continues to focus on solid improvement, coupled with concerns that earnings are not quite good enough to justify the stock market move. We believe it is important to remember the expectations for the quarter weren't exactly huge going in. The War had an important impact on the quarter and more solid growth wasn't expected until the second half. Frankly, expectations for the second half may be strong on paper, but we can't find too many people who actually believe the expected growth will come through. There remains a healthy amount of skepticism in the system.

Other Market Influences - The market has spent the last couple months digesting the extraordinary gains since March. During consolidation periods in the market and transition periods in the economy, a new shorter-term range can develop that is marked by rapid changes in sentiment. Moves to the lower end of the range coincide with calls of an imminent breakdown, while moves to the upper end of the range are marked by calls of a pending breakout.

The current range in the S&P 500 (SPX) is 975-1015. A week ago, it looked like a breakdown was coming and now the reverse seems true (Exhibit 1). We continue to believe that until the top of the range is breached, rotation is the key vs. overall market prognostication. Right now, the clear move is into the economically sensitive sectors.

In an economic transition period that moves from the perception that growth can only get better to the reality of whether it is or not, all eyes turn to economic releases in anticipation of more constructive reports. Again, there remains a healthy dose of skepticism regarding the second half recovery and as a result, strong numbers can generate more interest in the economically sensitive areas despite recent gains. The most recent example was last week's Durable Goods report and its impact on the market.

Exhibit 1 - The market remains in consolidation mode


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