RTTNews - A true test of a bull market is how it handles bad news, notes Cantor Fitzgerald strategist Marc Pado. The main upside catalyst has been earnings and forward-looking projections by key companies. Dow component Microsoft MSFT (-8.3 percent) was the bearer of bad news. Where Tech earnings had been the main catalyst, with net, gross revenue, and raised expectations, Microsoft looked to undermine the recent enthusiasm. The company reported 34c per share, 2c light of estimates. Revenue was a real disappointment, just $13.1 billion, well below the $14.37 anticipated. The CFO did say that they see some stabilizing on a sequential basis. However, the company did not offer any guidance, which might be a good thing.

Since the recession began, the company, known for low-balling its estimates, has opted not to forecast earnings. Microsoft's Windows 7 is due in October. They expect that the near-term due date for release will impede short-term sales, and that doesn't bode well for earnings in this third quarter. The stock had run from 15 to 25 since March, a hefty appreciation in terms of percent over that short period. This is a disappointing setback, but not a devastating one. The other disappointing quasi-Tech/Retail report came from Amazon.com AMZN (-7.9 percent). Expectations were high, after eBay EBAY (-1.3 percent) reported better numbers the day before. The company reported 32c, matching estimates, but there was a gain included that would cause the net earnings to miss slightly. This was more of a case of missed expectations after investors looked for the company to exceed official estimates. Earnings expectations were in line with the consensus.

Another temporary blip of good news from falling personal debt filings may turn out to be something more, according to Moody's Economy.com. The chief economist at Moody's reported on Friday that the number of mortgage, credit-car, and other consumer loan payments that were delinquent fell nearly 1.1 million to 13.9 million. He called this an early-stage indication, in that the existing filings currently working their way through the system will likely still turn into defaults.

If we see sustained declines in delinquencies, it could mark a turning point for household credit conditions by this time next year. There were some conflicting data within the report. The number of mortgages past due by 30 days slipped in June to 2.31 percent from 2.35 percent in May. Some analysts pointed out that modified loans are said to be current, improving the number. Another potential negative was that there was an increase in the number of credit card borrowers who had never been late before, suddenly falling 30 days past due. So the jury is still out. Improvement is in the eyes of the beholder.

This week's economic calendar isn't too busy, but it has a few gems. We start with New Home Sales for June today. Expectations are for improvement to 358,000 from May's reading of 342,000. After seeing Housing Starts pop, we'd like to know that there are commensurate sales to go along with that optimism. Durable Goods Orders for June are expected to back off after popping 1.8 percent in May. Weekly Jobless Claims are unwinding seasonal adjustments again this week. Therefore another increase back up toward, but still under, 600,000 is expected. The big news will be the 2nd quarter GDP. Looking at earnings and sales figures for the past several months, there is little reason to believe the estimate will be far off.

Expectations are for a decline of 1.2 percent in the second quarter, following up on the 5.5 percent decline in Q1. The second quarter will likely show further drawdowns in inventory, as indicated by the monthly data and company commentary. We think that will be very good news for the third quarter, as inventories are rebuilt heading into the back-to-school and holiday shopping seasons. We've heard from core manufacturing companies, those that make the component parts that orders are on the rise. Intel INTC (-0.6 percent) said that it will begin building inventories this quarter. The just in time construction of PCs means that the lead-time for construction and sales of notebooks and desktops are tighter than they had been in previous years. The orders don't need to roll in 6-months ahead of time, just one or two will keep up with demand. The week finishes with the Chicago PMI. This has been a very disappointing survey on manufacturing in the Midwest. The reading is expected to improve in July, but not show growth, rising from 39.9 percent in June to a projected 45.0 percent.

Technically, last week's market action was impressive. Breadth expanded and continues to lead this rally to new high ground. It is a sign of strength to see the Breadth Index, the cumulative advance/decline line, move higher ahead or coincident with the broader indices. Tech dragged down the NASDAQ on Friday, hurt by the aforementioned Microsoft and Amazon earnings. Even though the NASDAQ was down on the day, it did close on its high. Even more impressive was that the very broad NYSE Index gained 0.55 percent, playing catch-up after finally making a new rally high on Thursday. The Russell 2000 was in the same boat, lagging in breaking out, but finally confirming the bull run. We are overbought on a short-term basis, no doubt. Friday's turnaround in the Dow was led by three defensive Pharmaceuticals, Merck MRK (+2.5 percent), Johnson & Johnson JNJ (+2.1 percent), and Pfizer PFE (+2.0 percent).

Financials were a drag and Tech was mixed. Therefore, what we were seeing late in the week was a definitive move toward seeing more believers that the economic turn is for real. We are in the rising tide lifts all boats phase. Even crude has rallied back up through resistance at $66, despite bearish indications on inventory and demand. It is all about expanding the risk trade and focusing on future positive economic data. We have another week left for the month. We may be seeing some monthly portfolio window dressing by those still long lots of cash. So, while the NASDAQ and NDX clearly look extended, the other major indices just broke out last week. Sure, we could see a little healthy pullback, but July is living up to its historical reputation of being one of the best performing months. It has been an impressive ride. Imagine what would have happened if the news was good!

For comments and feedback: contact editorial@rttnews.com