While the rebounds on Wednesday and Thursday cast doubts about whether or not the market was really ready to make that overdue correction, Friday’s battle was a victory for the bears within a bigger war. The war, however, is not quite yet over.

Suspecting something of a bounce-back after Tuesday’s 2.3% dip, we optioned to stay on the sidelines until we got some clarity as to the market’s next direction. Though it’s still not 100% certain (not that anything ever is), we now have a bigger piece of evidence with which to make the bearish case.

The most damning piece of evidence is the rising CBOE Volatility Index.

Yes, the VIX moved upward on Friday, but that’s the norm when stocks are sinking. What we’re specifically looking for - but hadn’t seen yet - is a new upward trend. Now though, based on the support at the rising moving averages lines (20-day and 50-day, blue and purple) as well as higher highs and higher lows from the VIX over the last two weeks, we can reasonably call that a trend.

Likewise, one or two rough days for the broad market does not inherently mean a new downtrend is on place…. we need to see more. In the case of the S&P 500 (chart below), we now have that ‘more’. The 20-day moving average line (blue) is now pointed lower, which can only be the case of the index has been net down for the last four-week period.

Technically speaking, the SPX is still above and finding support at the 20 day average line. The fact that the average line is falling (pointed lower), however, means that support quality doesn’t actually do the market much good.

Either way, the market’s downtrend on top of the VIX’s new uptrend leaves the odds in favor of the bears at this point.

We still foresee volatility going forward… volatility that could cast more doubt on this pessimistic outlook. Just keep in mind that one day still does not make or break a trend.

No downside targets yet - let’s just focus on the materializing pullback for the time being.

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Not since September of 2008 - just a few days before the bear market went from bad to stunningly awful - has consumer confidence been as strong as it is now. The Conference Board’s consumer confidence reading scored a 57.9 for April… the first time consumer’s moods have been higher than the reading of 61.4 from September of 2008. It’s also a stark turnaround from February’s reading of 46.40, when a slight downtrend in confidence levels sparked fears that we were headed back into a recession.

The comparable Michigan Sentiment Index has yet to be reported for April, though forecasters expect to see it come in at 72.0 when it’s released on Friday, April 30th. That would be an encouraging improvement from the preliminary figure of 69.5 announced two weeks ago. Yet, it would still be under March’s level, and the second move lower in the last three months.

Between the two, the Conference Board’s measure tends to be a little less erratic and a little more reliable as an indicator for investors. In either case though, the direction of the trend (as opposed to any particular level, or even one good or bad month) is the only consistently-valuable interpretation for investors.

Generally speaking, one would need at least three months’ worth of data from these two indicators to determine an actual trend. Ideally though, six or more months’ worth of data would be factored in…. though that creates more of a delay than most investors care to tolerate. The six-month moving averages are what you’ll find plotted - in black - on top of the two confidence data charts.

On the flipside, knowing it takes three to six months’ worth of data to come to any meaningful conclusion with these charts, using this data to ’swing-trade’ may not be effective - even though some traders attempt to do so. This is longer-term data, most helpful for true buy-and-holders ….though only the buy-and-holders who are at least willing to stop holding for a decent reason when it arises. Those investors who buy and hold no matter what just to prove a point or be martyr need not bother studying economic trends.

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The heavy-hitting data we were eagerly waiting for last week was signs of life on the real estate front. And, we got it. New homes sales jumped from annual sales rate of 324K to 411K…. one of the biggest month-over-month increases ever. Existing home sales crept upward too, to 5.3 million (from 5.01 million). Home prices, however, actually slipped a tad.

On the jobs front, new as well as continuing claims sank fairly significantly last week, but don’t get too excited yet. Remember, we saw a string of upward moves for each indicator over the last few weeks; one week isn’t going to break the streak.

As was the case with consumer inflation, producer inflation (the cost that factories, builders, processors, and manufacturers pay for materials and input) was up, but just a hair - inflation isn’t rampant yet, despite the fact that durable orders (ex transportation) were up sharply, by 2.8%.

As for the coming week, we’ll round out the real estate picture on Tuesday with the Case-Shiller Index; experts expect to see a decent 1.1% move higher.

On the productivity front, last quarter’s preliminary GDP will be posted on Friday along with the Chicago PMI figure. As far as the consumer mood goes, the consumer confidence score will be posted on Tuesday, while the Michigan Sentiment Index is slated to be posted on Friday; both are forecasted to be higher.

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The two-week-old earnings season has been a fairly typical one in terms of hits and misses. A little over 2/3 have beat estimates, less than 1/4 have fallen short of forecast, and around 9% have been on target. Given that 585 companies have already reported since Alcoa kicked things off two weeks ago, that’s a pretty good cross-section of the market. We don’t foresee much variation from those hit/miss rates going forward.

In any case, here are the major earnings announcement on tap for this week.

We opened a small can of worms with the online brokerage firms a couple of days ago, though at the time all the data we wanted to look at hadn’t been published (though enough was available to make some generalizations). We got a great deal of that data in the meantime, but not a lot changed trend-wise. In short, trading activity is down compared to last year….. way down. That reality is starting to show up on the bottom line.

Not that it’s the only metric that matters, but as we said on Wednesday, revenue-bearing trades are a strong barometer of broker profits. And, considering DARTs (daily average revenue trades) were down 9% across the board in February [year over year], and down 17% in March, pitiful brokerage results for Q1 should come as no real surprise.

OptionsXpress doesn’t report its first quarter numbers until the coming week, though given that the other five major online trading firms all saw fewer DARTs in March of 2010 than they did in 2009; the same was true in February for all but one of the six brokerages.

What’s going on, and how long will these shortcomings last? Unfortunately, it could be a while… long enough to crimp the numbers [versus expectations] for a couple quarters.

There are two problems in play here. One’s now fully in the past, but the other is just now starting to dampen outlooks.

The former is simply the unfair comparison to the first quarter of 2009. Yes, the market was hitting a bottom in Q1 of last year, but it was only doing so because of stunning amount of selling. Since that comparison will no longer be used in future quarters though, future forecasts won’t be as much of a crapshoot.

The other factor could linger a bit. When the market rebounded in the latter three quarters of 2009, trading activity was very strong. So what’s that got to do with 2010? The second year of a bull market [2009 was the first year] is rarely as brisk as the first. Analysts tend to operate under the assumption that the current pace will last indefinitely, and based 2010’s forecasts on 2009’s numbers. Now though, it’s becoming clear that the original targets are too aggressive.

Confirmation of the excessive aggressiveness became clear last quarter.

Charles Schwab Corp. (SCHW) not only saw its Q1 profits nearly cut in half, but earnings of 10 cents per share was a penny shy of forecasts. Even more troubling was the 12% dip in revenue despite a 36% in customer assets compared to the same quarter a year earlier.

And Schwab’s not the only broker doing less with more. Interactive Brokers (IBKR) posted a 70% decline in year-over-year earnings, stemming from to a 28% decline in revenues. TradeStation Group (TRAD) earned seven cents… well short of last year’s eleven cents.

Even the potential bright spots were dimmed by footnotes.

E*Trade (ETFC), for instance, whittled its first quarter loss down from $0.04 last year to $0.02, while TD Ameritrade (AMTD) reported a 21% increase in earnings relative to last year. Don’t get excited though…. E*Trade is still taking losses with no plausible end in sight, and had it not been for a tax-related accounting help, TD Ameritrade’s earnings would have actually only been even. Moreover, Ameritrade  and TradeStation backed off on their second quarter and/or full-year outlooks.

OptionsXpress (OXPS) will post its first numbers on the 27th, but don’t look for wildly different results….. for Q1, or for a while.

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Earnings season may have officially kicked off last week, but there are by for more companies reporting this week. Below are just some of the major ones in the lineup for this week. Since many of them have the ability to move the market (or at least the sector), you may want to keep tabs on things as each one unveils last quarter’s numbers. [By the way, 68% of companies beat last week, while 21% fell short of EPS foprecasts. That’s rouglhy in line with last quarter’s beat/miss ratio.]

In last week’s newsletter “Making a Bullish Mountain Out of a Molehill“, we compared Standard & Poor’s prior EPS expectations for the S&P 500 to the revised ones that came out after last earnings season ended. Let’s just say the ‘then and now’ was a little conflicted…. the ‘actual’ last quarter was shy of the original forecasts, yet the forward-looking forecasts were actually increased. As a result, forward-looking P/Es were really cranked up as a result of the market rally between then and now.

Today we’re going to look at the same number from a different perspective, in additional to adding the data for the mid caps and small caps.

Though the same data was displayed on the charts we posted a week ago, sometimes the raw numbers have more meaning than a chart. So, here’s the latest operating EPS forecasts for not only the S&P 500, but for the S&P 600 (small cap) and the S&P 400 (mid cap). [The earnings per share figure treats the index itself as one share, thus allowing investors to make an assessment of its relative value and progress.]

Don’t worry about the variance in the EPS figures from one index to the next - the dollar amounts themselves don’t mean anything when compared to one another, because the three index values aren’t at the same level. The S&P 500’s ’share price’ is at 1209, while the S&P 400’s and the S&P 600’s share prices are at 850 and 382, respectively. The P/E ratio comparison is the only one that really matters from one index to the next.

In any case, the reason we bring all of this up today is to illustrate the expected earnings levels by the end of 2011.

Between the current quarter and the last quarter of 2011, Standard & Poor’s expects the S&P 500’s earnings to be 48% better. That’s a lofty goal to be sure, possibly to the point of implausible. It gets even worse for the other two indices though. The mid caps (S&P 400) are expected to be generating 64% more in quarterly profits two years from now, while the small caps (S&P 600) are expected to improve quarterly earnings by 95% over the next eight quarters.

Far be it for us to say what’s possible and impossible, but we still know a long shot when we see one. And, that’s where our opinion starts to diverge from the broad market opinion that’s unfolded over the last six weeks.

Most investors believe in the outlooks, and have pushed stock prices upward as a result. We have doubts about achieving those lofty earnings forecast (though we still contend we’re in a bull market as well as an economic recovery), and view the market as very vulnerable right now.

Where you fall in the spectrum is up to you, but bear in mind that the second year of an economic rebound is never as good as the first. Year three (2011, in this case) isn’t a barn-burner either, typically. Yet, EPS forecasts say the growth rate isn’t going to slow at all… an unlikely outcome.

Just something to think about. And, now you have some hard numbers from which you can calculate current and future P/E ratios.

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As shocking as it may sound, not every group of stocks is actually up for the last twelve months. Though the broad market itself - and about 98% if its industries - have seen almost double-digit gains since March of 2009, the agricultural chemical and fertilizer names are stunningly in the red since then.

Whether or not that weakness persists is largely a function of whether or not the reason for the market’s pessimism and doubt will persist. And, the early batch of last quarter’s earnings numbers isn’t helping the matter any.

It wasn’t all bad. Cargill (not publicly-traded) saw a 175% increase in earnings last quarter, with a sizable bump in revenue as well. Converted Organics (COIN) managed to generate a 65% increase in revenue. So, clearly growth is possible.

The problem is, those two companies are small, and by extension, obscure - and don’t represent an adequate cross-section of the fertilizer industry like Monsanto (MON) and Mosaic (MOS) do.

So how did those higher-profile names do last quarter? Monsanto saw a 19% dip in earnings. The company’s $1.70 earned per share was also shy of the average estimate of $1.73. Mosaic earned of 50 cents per share last quarter. Though it was an increase over last year’s figure (a tepid comparison, by the way), it still fell short of the expected 61 cents per share.

In other words, the industry doesn’t appear to be coming out of its funk, even though most other industries are at this point.

While two names don’t make up the entire agricultural chemical industry, the problems these two have in common are likely to be inescapable by any of the other companies in the industry. And, investors know it.… which explains how the S&P 1500 Fertilizer & Agricultural Index is down 10% for the last twelve months, and off by 12% year-to-date, while most other groups are easily in the black.

And what exactly is the common problem among fertilizer companies right now? In simplest terms, it’s a lack of pricing power. In more detailed terms, these outfits are being forced to choose between weak sales and strong margins (which shrinks the bottom line), or strong sales and weak margins (which also shrinks the bottom line).

There are a couple of pieces of evidence in support of this idea.

First, Monsanto’s weakness last quarter largely stemmed from the company’s decision to drop prices of its Roundup weed killer in an effort to compete with generic competition. The target market is mostly the home consumer, though Roundup has some bulk/farm applications as well. Either way, the recession is lingering long enough to force buyers to question the need to pay premium prices for premium brands if the end result isn’t significantly better than cheaper alternatives.

Second, farmers - and therefore suppliers and distributors - are backing away from fertilizer and chemical usage…. a trend that started before last year’s growing season.

Ironically, even without the abundant use of fertilizers last year, large numbers of bumper crops actually drove produce prices down by more than productivity went up. In other words, farmers were victims of their own crop’s success. [Welcome to the world of bitter irony and very thin tightropes between supply and demand.] That trend is still being felt, so not only do farms not need much fertilizer this year, they don’t even want it, nor do they want other farms to use it either (and they’re for the most part sticking together on that front).

Both pieces of evidence point the same direction though… .since there is minimal demand, fertilizer and ag chemical manufacturers have very little - if any -  pricing power.

Investors are picking up on this, recognizing the condition could last this whole growing season as well. That’s why the average forward-looking P/E ratio of 14.4 for these stocks - which would normally inspire buying - isn’t doing so now…. investors just have doubts about these companies being able to achieve those anticipated results in this supply/demand environment.

It’s not a crazy decision either. When something seems too good to be true, or when expectations don’t jive with the way things currently are, those stocks aren’t an asset - they’re a liability. It would be crazy for investors not to steer clear.

Until demand picks up enough to give these companies some real pricing power, these stocks are apt to continue lagging. That could be a while though.

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Despite the mostly-bearish data we were handed on the economic front, the market still managed to make some bullish progress last week. Will the coming week’s data (of which there’s a lot more) lead to the same result? That remains to be seen, but we do have a pretty robust collection of realities - good and bad - about the recent and pending economic snapshot.

The only good news last week was the strong (+8.2%) increase in pending home sales. The ISM Services Index was up moderately. However, it doesn’t have a great deal of measurable impact on the market or economy.

Thursday’s jobless data was the media’s big focus, but it was a mixed message. Initial claims moved to 460K, topping the anticipated 435K, and ending what appeared to be an emerging downtrend over the prior three months. On the flipside, continuing claims fell to 4550K, versus the estimated 4630K. The small downtick in continuing claims offers hope at a time hope was needed….the number had been increasing since mid-February.

Note that the continuing claims data is one week behind the initial claims data (the cont. claims number was for the week ending March 27th, and the new claims number was for the week ending April 2nd). So, the disparity isn’t mind-boggling.

The biggest announcement on the economic front didn’t get much attention at all… the drastic contraction of consumer credit availability. Not only was January’s $5.0 billion increase in consumer credit levels the first increase in years, the number was revised a month later to a hefty $10.6 billion. Now, it’s all gone - February’s consumer credit availability actually shrank by $11.5 billion.

Economic Data (04/04 - 04/10)

As for the coming week, inflation numbers will be unveiled on Wednesday…. and it should be a market mover. Analysts continue to look for very minimal increases (0.1%), despites a low interest rate environment in a growing economy. If inflation remains in check - and if retail sales for last month are as strong as expected (up 0.5%, ex-auto) - it could be a major upside prompt. That said, March’s same-store ( on a year over year basis) sales results were higher by an average of 9.1%, according to last week’s early numbers.

On Thursday, look for capacity utilization and industrial production numbers. The unemployment claims data comes out that day as well, but it’s well understood where we are on those fronts. The capacity utilization and production data is monthly data, doesn’t get much attention from the media, yet has actually demonstrated a great deal of value to us as a long-term market indicator. Both are plotted below, as evidence. Look for an update of the chart next week. (Note we’ve plotted the production index rather than the actual percent change the Federal Reserve generally references in the release.)

Capacity Utilization and Industrial Production, as of 04/10/10

On Friday, we’ll finish things up with the building permits and housing starts figures. The former is expected to fall, while the latter is expected to move upward.

Economic Data (04/11 - 04/17)

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It’s that time of year again - earnings season. Alcoa is the official beginning of it, though a few others have and will chime in prior to the aluminum company’s announcement of last quarter’s numbers. Here’s a list of the major ones for the coming week.

While the mainstream media has done a fine job of covering the month-to-month changes of all the major employment data, they haven’t done a particularly good job with offering more meaningful, longer-term perspective. We’ll pick up where they left off, and take a closer look at the actual trends for things like unemployment claims, the unemployment rate, and jobs added or lost. Best of all, we can do all of this with minimal words…. we have a chart to do most of the work for us.

You may want to glance at the chart below as we offer some brief comments about each data set, moving from top to bottom.

Continuing Claims: They were basically flat last week, but the 4.66 million ongoing claims level from last week is nothing but higher than the 4.5 million we saw in mid-February. You can even tell this from our low-detail chart below… ongoing claims are creeping higher again, after an encouraging downtrend throughout most of last year.

Initial Claims: On the surface, the fact that the number of new layoffs continues to sink (to 439K last week) is encouraging. But, we can’t help but wonder if the number is shrinking simply because there’s no one left to lay off…. work crews and staffs may already be at minimum levels. But, we’ll remain optimists and assume it really is a case where employers are able to keep more employees now - an idea supported by the next data set.

Non-farm Payroll Changes: Like it or not (and the perma-bears don’t), jobs are being added… and not just census jobs. The bulk of last month’s 162K (net) new jobs came from the private sector.

One month doesn’t make a trend, but the number of lost jobs has been shrinking for more than one month. It just happened to shrink its way into positive territory last month. This is clearly the ray of light the market desperately needs right now.

Unemployment Rate: For the third month in a row, the unemployment rate (by the U3 definition) remained at 9.7%. Other unemployment standards have been stagnant as well; all of them support the ‘not getting any worse’ optimism…. though that’s about it.

Take a look at the chart, then we’ll offer up some final thoughts. (Here’s a full-screen shot, with more historical data.)

If we had to give the unemployment scenario a grade, it would probably be a C… bordering on a D. That could be upgraded to a B if unemployment would just move a tick lower, and if continuing claims would just move lower for a couple of consecutive weeks. Those are tall orders though.

How long can the economy improve and the market go higher without a rebound on the jobs front? We’re already pushing our luck, though we’ve actually seen worse over the last 40 years. Employment tends to improve about six months to a year after the market as well as the economy make a turn for the better; we’re now at the extreme end of that window. Bear in mind, however, that we’ve seen as much as a two-year delay between the economic rebound and a jobs revival. Let’s hope we don’t have to test that possibility this time around.

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Since we opened this can of worms a couple of weeks ago, we want to see it through to the end of…. well, the end of the trend this data is suggesting (though the bulls have staved it off for so long now, the clues are starting to dissipate).

In short, Thursday’s bearish depth (volume) data for the NASDAQ was above trend, while its bullish depth data was below trend. In fact, there was more bearish volume for the NASDAQ’s stock than bullish volume. Yet, the composite closed higher for the day? Yes, it can happen, and it did. How? Because there were more advancers (1526, to be exact) than decliners (1154).

Doesn’t make much sense, does it? That’s the point we’ve been trying to make - and the red flag we’ve been trying to explain - for a couple of weeks now.

Though this is the first time we’ve actually seen this disparity play out since March 17th, this breadth/depth trend has been more bearish than bullish for quite some time. Yes, the market’s been headed higher for the bulk of that time, but it’s a case where very few players are actually lifting stocks higher - the bulk of investors are actually selling…. subtly.

Clearly one day doesn’t make a trend, but enough bearish messages over a short period of time do foretell of an impending trend. We’ll continue to monitor all of this information, and continue to expect its suggested pullback even though the majority of the market doesn’t see it coming. And just for the record, the NYSE’s equivalent data was decisively bullish across the board. Go figure.

Here’s the chart, and if this premise is brand new to you, be sure to read our prior commentaries on the same matter (which offers a complete explanation).

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Call it a fad if you want to, but America’s ridiculous love for its pets continues to make for one of the market’s most reliable investment ‘mega-trends’ we’ve come across since we’ve started looking for them.

It’s no secret that consumers all but died in 2008, and weren’t much more active in 2009. ….except for pet owners. The dollar amount we laid out for our pets in 2008 was 4.8% better than 2007’s total; 2009 pet-related sales topped 2008’s number by 5.3%. In 2010, industry experts expect another 4.8% bump. Not that 5% increases are earth-shattering, but look at when they happened - in the heart of the recession!

An explanation? There are two possibilities. The first one is, American consumers are crazy. The second possible explanation is, pets are recession proof. [Perhaps it’s a combination of both, but note that we observed the same kind of pet sales growth in 2001 and 2002 as well, so we’re leaning towards the recession-proof idea.]

So, it goes (almost) without saying, we’re deeming pet spending as one of our long-term (buy and hold) investment-worthy mega-trends. Add it to the current list, which as of right now also includes SaaS (software as a service), and a whole myriad of clean energy ideas.

As for where the biggest and best opportunities are within the micro cap names in the pet industry, let’s first look at were the bulk of this year’s projected growth is expected to come from.

• Products or Service: 2009 actual, to 2010 projected (% change)
• Food: $17.56 billion, to $18.28 billion (+4.1%)
• Supplies/OTC Medicine: $10.41 billion, to $11.01 billion (+5.7%)
• Vet Care: $12.04 billion, to $12.79 billion (+6.2%)
• Live animal purchases: $2.16 billion, to $2.21 billion (+2.3%)
• Pet Services (groom & board): $3.36 billion, to $3.45 billion (+2.7%)

With that kind of growth on the horizon, it seems like it would be hard to go wrong by making a bet on any of these product lines. There are two clear standouts though…. vet care, and supplies/medicine. As it just so happens, there’s an impressive micro cap name in each of those arenas.

The first one is PetMed Express (NASDAQ:PETS) - an online pet pharmacy, though the company’s website sells  supplies, over-the-counter medicine, and other pet items. It’s expected that websites selling medicine for pets - as opposed to vets or mainstream pharmacies - will improve their market share of animal pharmaceutical sales from 11% to 20% within a few years. PetMed Express, however, has already positioned itself as a growth leader. How so? The company has posted six straight year-over-year increases in quarterly profits. How much more proof can the market need?As for the vet care space, VCA Antech (NASDAQ:WOOF) is probably pushing the definition of micro cap with a market cap of $2.4 billion. But it’s still an obscure name playing an obscure game very well, which qualifies it as an undervalued and unnoticed stock - the kind we constantly seek out.

VCA Antech manages about 500 veterinarian offices and labs across the country. The company saw a 3% revenue increase in 2009, and is expected to boost the top and bottom line in 2010.  That’s not huge growth, but the growth rate should improve in time. And, considering the company has met its positive EPS estimates in each of its last four quarters, the forward-looking P/E of 15.4 a very believable target.

Those certainly aren’t the only micro cap and pet-oriented names out there, but those two are at the top of the ‘value’ pile, and at the bottom of the ‘noticed’ pile - just the kind of scenario that leads to major moves. The pet-spending mega-trend, however, is just as important as the two individual picks.

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