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It was a day when hopes for a sustainable summer rally continued to fade into the sunset. The much hoped for earnings season driven rally is failing to materialize. Stellar earnings by General Electric and Yahoo! have been greeted with profit taking rather than further buying, a scenario which is likely to continue throughout earnings season.  With the majority of market participants having already placed their bets on the side of superlative earnings before earnings season, there is no one left to enter the market and push prices higher when the good news is announced.

When expectations for the best of all possible worlds are at a fever pitch, any disappointments can lead to a mass race for the exits.  We have seen this vividly played out in the case of Waste Management, Visio, and New Era   Networks.

With hopes for an earnings fueled rally rapidly dissipating, the market's movements will be left increasingly at the whim of the bond market and each economic report in the coming weeks.  Next week's CPI, PPI, and Retail Sales data will determine the next path taken by the market. The odds that the next path taken will be down the hill, rather than up, increased with the release of June same store sales data, which showed that the consumer's urge to splurge is continuing to rage on at full force.  We would pay close attention to next week's retail sales figures, and expect a surprise on the upside.

Yesterday's headline grabbing new highs in the major averages and bellwether GE obscured the true picture of the market: overbought and holding a stack of party invitations with no one in sight to give them to. Everyone who wants to put money into this rally already has, and the pool of new converts to the cause who are needed to keep the rally going is fast drying up. True, the Dow did move a step closer to its rightful Labor Day home at 12,000, but someone forgot to give the rest of the market directions to the path up Rally Hill.

Losers outnumbered advancers by a 3 to 2 margin yesterday, and we think we've seen this same story played out somewhere before.  It's called A Narrowing of Breadth.  The broad based advance is no more, and that spells trouble for the expected summer long rally.  After an initial relief laced buying spree following the Fed bias error last week, the big money has moved increasingly to the sidelines.  In its place, the traditional last ones in and last ones out are now piling into the familiar: the same narrow strata of well known blue chips and speculative growth issues that they always gravitate to near the end of a move.

Rather than a sign of technical strength, we see yesterday's new high by GE as a sign of weakness.  Near the end of a rally, at that point when dry rot has begun to gnaw away at the rest of the market, the big cap blue chips keep chugging right along the rally trail because investor's tend to gravitate to what they know best: the bluest of blue chips.  If the transports had made a new high yesterday, then you would hear us singing songs of market staying power, but they didn't even come close, because like many stocks, they've been left behind to breathe in the exhaust fumes of a narrowing group of surging stocks.

Signs of underlying trouble also appeared on the earnings front. The fate of Alcoa in the wake of its better than expected earnings report is a saga that we are likely to increasingly see played out as this earnings season progresses. It is a saga  of a market which has already discounted the best possible outcome, and needs the actual event to exceed the best of dreams if it is to move higher.  When everyone expects spectacular earnings and have already placed their bets before the event, earnings must surpass the brightest of expectations in order to entice new investors to push up prices.  Alcoa's crime yesterday was it surpassed the consensus, but it failed to impress the brightest of optimists.

After a short hunt, two new sources of inspiration soon appeared to ignite a morning rally: The Sunday New York Times and Quotable Market Guru Ralph Acampora.  A very positive story on AOL's future prospects (prospects that include a CEO's wish to rank #1 in market cap) in the Sunday Times ignited an Internet stock feeding frenzy that soon pulled the rest of the market up on its coattails.

The rally was given added fuel after Acampora upped his targets for the Dow to 12,000-12,300 by Labor Day and 12,500-13,000.  When a Quotable Market Guru speaks the buy orders pour in, and yesterday was no exception.  Talk of Dow 13,000 soon ignited talk of a different sort: talk of the Fed's reaction if the Dow hit Acampora's targets.

With Fed fear once again in the picture, the institutional money on an extended holiday, the bond market sinking, and only .Com enthusiasm holding the market aloft, the urge to take profits soon overcame the urge to splurge, and what had been a rally soon turned into a down day.

While the major averages finished the day on the downside, sentiment continued its upward march.  The CBOE Equity Put/Call ratio joined its cousin VIX in the danger zone, ending the day at an alarmingly bullish .297.

With the equity put/call ratio and VIX flashing the traditional warning signs of an onrushing top, the market enters earnings season with the odds now stacked against it. The market has already factored in superlative second quarter earnings, and in many cases has already discounted a beating of estimates.  The mere meeting of analysts' estimates will likely not be enough to propel the market higher.

For those of you who are unfamiliar with our town's hot dog eating contest, it is an annual rite where contestants gather at the Coney Island boardwalk to gorge themselves on hot dogs: the winner this year eating 20 1/4 of the morsels in 12 minutes. The participants' desire for hot dogs knows no bounds, the ability to acquire (eat) them is limited only by the ticking of the clock. The winner takes home a mustard colored belt, and all of the participants return home with a severe case of indigestion following their gastronomic feeding spree.

A desire to acquire, a feeding frenzy, a ticking of the clock, and an inevitable case of indigestion--a description of the chain of events in this past weekend's wiener bingeing contest, and a description that is equally applicable to the present situation developing in major global stock markets.

After a brief one month respite, the desire to acquire, in this case equities, once again knows no bounds.  The stock market is once again seen, by individual and professional investors alike, as "the only game in town".   The road ahead seems clear to all, with a global recovery and a benevolent Fed helping to create one United Nations of Goldilocks, an environment in which the path to eternal higher stock prices and prosperity has been unfettered from potential stumbling blocks.

The return of the days of wine and roses has brought with it an unquenchable feeding frenzy for equities.  "To not partake in the market is to lose out on a chance for riches" is once again the mantra sung from rooftop to rooftop.

The feeding frenzy has set in motion the ticking of the clock.  The widespread urge to splurge on equities is fast creating a dangerous sense of complacency. In the wake of the Fed's severe error in judgement last week, the risk of a serious market setback is now seen as slim to nil by many people who are rushing to put hard earned money into the surging stock market.  The inexperienced new breed of "traders", who view the market's risk-to-reward ratio as 100% reward to 0% risk, are once again leveraging their bets with margin without hedging for the inevitable risk that is inherent in all trading situations.  Extreme levels of bullish sentiment, and the parallel decline in bearish sentiment are creating a situation in which the risks of a trend ending emotional letdown are being multiplied with each uptick in prices.  Each surge to new highs in confidence, and the corresponding upward pressure applied to stock prices, helps to create a situation in which today's benevolent Fed will be forced to become tomorrow's Fed Bull Wrecking Crew.

The ticking of the clock has created an environment in which the arrival of the inevitable case of  indigestion is being hastened as each new upsurge in sentiment increases the risks. The Volatility Index ended last week in the danger zone at 18.85, a level last seen just before last summer's market decline.

The complacency surrounding the upcoming earnings season, which kicks off with the release of earnings from General Electric and Yahoo this week, is also increasing the dangers that today's smiles will turn to tomorrow's tears.

One potential monkey wrench in the sunny outlook for corporate earnings which could make its presence felt  is the strength of the U.S. dollar. We expect the dollar's strength, and the corresponding record low in the Euro, and 3 year low in the pound, to impact the earnings of multinationals with heavy European exposure going forward.

We would also keep a wary eye on the price of oil, which has surged to over $20 a barrel.