Summer trading range

After an up week we are just about back to the levels in the Market we were in early June. I believe we are still defining the summer range and next week's earnings will determine if this is the top of the range or the middle.

If this is the top of the range than the market will retreat to about 875 in the next couple of weeks. If this is the middle we may go near 1000 before it retreats. I'm expecting earnings to mostly equal or beat estimates due to managerial efficiencies but top line revenue flat or possibly down some. There will of course be exceptions, but there is no great likelihood that consumer spending can resume at levels from the last few years.

The amount of consumer discretionary spending has remained relatively constant, even with layoffs as various social programs have kicked in but the loss in real estate equity is going to hinder spending for a considerable time period. Consumer credit is impacted by the fact that rising home values enabled many to tap the equity and it also made them feel more comfortable in using other credit since the housing wealth served as a safety net. With that safety net gone, the equity is no longer there to be tapped and other credit looks more ominous. Compounding the problem is the fact that with the loss of home equity there was a corresponding reduction in the value of many people's retirement savings. People are therefore saving more of their discretionary income.

So, as I've been saying consumer spending has to find a bottom. Now as there has been less spending and less lending, effectively the amount of money in circulation falls. Further we are establishing a new price expectation in many consumer areas. Prices of many products have been discounted for an extended period of time. While these discounts have been presented as "sale" prices they are so frequent that they are really becoming the "normal" prices. It would take a significant jump in demand to reverse that trend, and since I don't see a V shaped recovery in housing nor do I see a big increase coming in discretionary amounts for spending, where would this come from?

So short term, top line revenue will continue to disappoint and this will probably be interpreted in a bearish way. Of course, if you would like to see the economy return to the overheated levels of 2007 it is, but that would require a massive stimulus, properly directed that would inflate housing and prices and clearly lead to a new bubble.

So, while earnings will be decent and may beat expectations due to cost cutting, top line revenue will be flat and I expect the Market to react somewhat negatively in the next week or two.