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Chugging Higher

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DOW + 41 = 18,355
SPX + 6 = 2163
NAS + 22 = 2159
10 Y + .02 = 1.55%
OIL + 1.64 = 41.15
GOLD – 5.10 = 1358.70

US services companies expanded more gradually in July, with job gains slowing in a key gauge of economic growth. The Institute for Supply Management says its non-manufacturing index fell to 55.5 in July from 56.5 in June, although any reading above 50 signals growth. New orders increased over the past month, while the index’s employment and production measures remained positive but downshifted. The ISM services index has shown growth for 78 straight months.

Friday morning, we will cover the government’s update on non-farm payrolls for July – the monthly jobs report. This morning we saw a preview (of sorts) as ADP reports private-sector hiring held steady in July, and employers added 179,000 jobs in July after a revised 176,000 job gains in the prior month. Most estimates for the Friday Jobs Report are running around 185,000 new jobs. If the labor market is able to build on its recent strength, it could make the case for the Federal Reserve to raise interest rates later this year.

Atlanta Fed President Dennis Lockhart is not ruling out a rate increase at the U.S. central bank’s next meeting in September, saying “at this point… we just have to wait and see how the data comes in.” He also expressed concern about what he called lofty asset valuations in the financial markets.

When the Fed held off hiking rates in July, equity markets surged. However, the credibility of the Fed eroded, due to their verbal chatter signaling a desire for higher rates leading up to their meeting, only to be followed by no action. The economy is not a runaway train; it is a slow moving train that has been very consistent at just chugging along. If the Fed is going to actually raise rates in September, chatter makes no difference; they are going to have to start pounding the table; and they aren’t.

Valuations in financial markets are lofty, but we aren’t seeing frothy markets. For more than two weeks, the S&P 500 has been virtually stuck in an amazing, maddening range of less than 1%. This is an almost unheard-of level of inaction.

The S&P 500 is overbought, which would normally play out in one of two ways: The market continues in a sideways consolidation where the bears balance out the bulls and put the market back into a more normal condition or we get a profit-taking pullback (where traders and investor decide to cash in on some of the profits they’ve made over the past three to four weeks). And while August is a historically volatile month, the consolidation pattern we’ve seen would argue for a breakout to the upside – again, it might be preceded by a slight pullback.

The bull stayed on track yesterday, chugging just a bit higher, once again frustrating naysayers crying “what goes up must come down.” The S&P 500...