In anticipation of my leaving, a week ago Friday, the market fell to the lower end of the support range. The S & P slipped below 1075 and immediately tested 1050, by holding 1056. However, learning of my successful summiting of Mt. Whitney on Friday, the market rallied back to close just slightly above the level when I had left, and just slightly below the resistance point. The battle is on between the economic data and earnings data. Last week it was in full force, as weak housing data was a catalyst for disappointment, but earnings continued to flow in better than anticipated. Housing Starts were ugly in June, falling 5.0% after plunging a revised 14.9% in May. However, I would contend that this is actually good news, as homebuilders reel in their expectations for post-stimulus sales. Permits were up to 586,000 in June, topping expectations for 575,000. Meanwhile, Existing Home Sales were better than expected at 5.37 million. That was still a 5.1% decline from May, but we’re moving past the stimulus skewed data, and investors will be happy to see more “real” numbers. The same can be said of the recently skewed Weekly Jobless Claims data. After the seasonal adjustments for the typical General Motors layoffs (which didn’t occur), the claims jumped back to 464,000, pretty much where we were before the adjustments. Looking back at last week’s data, they were weak, as anticipated.

On the earnings front, it’s been fairly good news. Thompson Reuters reported that of the 175 companies in the S & P that have reported, an impressive 78% beat expectations. Only 12% were below expectations. If we were to hold at 78% beating estimates for the entire reporting season, it would tie the second best quarter on record with the first quarter of 2010. The point is this; corporate profits continue to be strong due to impressive profit margins. Six months ago, the talk was all about how companies couldn’t keep cutting expenses to meet targets. While it’s true that they couldn’t keep cutting, they have kept expenses low. With stable to slightly improving gross revenues, plenty of capacity utilization, and rising productivity, companies are beating expectations. Don’t forget, the S & P 500 companies are reportedly sitting on $1.8 trillion in cash and equivalents, bracing for a double dip recession. This is very ineffective capital, although it does wonders for shoring up the balance sheets. Investors will accept these high cash levels, for a while. However, when the backdrop for the economy improves, investors will demand some action be taken with that cash. Of the options for companies, they can pay out a huge one-time dividend, like Microsoft MSFT (-0.1%) did years ago, or they can aggressively seek M & A candidates, increase their regular dividends, or increase their stock buyback programs. A perfect example came on Friday, as General Electric GE (+3.3%) announced plans to hike its dividend by 20% and extend the $15 billion buyback program through 2013. By increasing the dividend, GE is telling investors that they are well prepared for any downside in the economy and have the confidence in their business to share the profits with their shareholders.

One concern that was plaguing the market last week was the results of the European “stress test” on the banks. The criticisms have been plenty, that the details of the tests were not transparent enough and that they weren’t tough enough. However, the market is still pleased to hear that of the 91 banks tested across 20 European countries, only 7 failed. The total potential losses were projected to be $730 billion (566 Euros). That’s not exactly great news, but it wasn’t as negative as many had feared. This resulted in a nice recovery in the Euro, back up pressing 1.30 versus the Dollar. This has been a solid recovery in the Euro, very impressive. However, the resistance is light moving to 1.3260, but at 1.35 we would anticipate a major correction to 1.25. This means there might be a little more room and one more wave push to the upside in the Euro. At that point, we could see a decent opportunity to short the Euro over 1.3260. Overall, we would expect the Asian and European markets to react favorably to the limited risk assessment of the European banks.

This should be a big week for the market. There is a real opportunity for the bulls to use earnings to make an argument for a separation of corporate profits from overall economic activity. That said, our expectation was that the market would rally into the end of July or early August before struggling. Our original target was for the S & P to reach 1150 to 1170. Admittedly, that may be an optimistic target, with the lower end of that range still feasible. What we need is continued positive earnings announcements, of which we are fairly confident. This week, there are several hurdles to get over the economic data. New Home Sales for June, due out today, are post stimulus contracts. 311,000 versus 300,000 is anticipated. If better, it could attract some positive attention. Durable Goods Orders are due out on Wednesday. An increase of 1.0% is anticipated, and up 0.4% ex-transportation. Such a gain would be a relief. Jobless Claims are expected to stay above 450,000. A dip below would be greeted well. Friday will be the big day. GDP for the second quarter is officially expected to rise about 2.5%. However, the major economic reports have suggested a number closer to 2.0%. Therefore, don’t be surprised if you hear that the “whisper” number is closer to 2.0% by Friday. There are also two July reports, the Chicago PMI and Univ. of Michigan Confidence Index. Being a July reading, the market might feel like the pulse is still beating or facing further stress. I was pleased to see the way the market recovered from the big hit. It is encouraging, to say the least. Now we need confirmation that the world is not coming to an end. And speaking from one that has seen the contiguous 48 from on high, the sun still rises in the East and sets in the West. The economy may not be strong, but it is still plugging along. Don’t be too surprised to see S & P push through 1113 (the 200-day moving average) this week and make a run at a summer rally high.