Howdy folks, and happy Friday. Does everyone agree that even a lousy Friday is better than a great Monday? (That is, unless you work on the weekends.) Anyway, as far as stocks are concerned, Friday was plenty lousy. What may have been obscured is the fact that the whole week was a crummy one too. It was the biggest weekly loss we'd seen in the last seven, and would have been the only loser in the last seven weeks had it not been for the 0.02% dip three weeks ago. I'm not telling you this to scare you. Frankly, it's not that big of a deal. I'm just telling you the truth so we all know what we're dealing with now that the market's shown its vulnerability. We'll take a look what Friday's breakdown really means for stocks in a second. First, we need to get to the Q2 earnings-season report card I promised you in yesterday's newsletter. Earning Season Winding Down in Lackluster Fashion It's not officially over yet, but with 91% of the S&P 500's constituents having reported in, earnings season for the second quarter is all but done. The final grade is something around a C+, or maybe a B-. As of August 7th, the S&P 500 is on pace to earn $26.43 for Q2. That's three cents better than the $26.40 the pros were looking for when earnings season started, but more than a little beneath the projections of $26.66 we were buzzing about a couple of weeks ago. It's also 3.9% stronger than the year-ago figure, which isn't bad, but doesn't exactly bode well for Q3's and Q4's lofty expectations. You'll probably recall a month ago I was worried about the fact that Standard and Poor's was expecting 15% growth in Q3 and 26% earnings growth in Q4. Those outlooks have been dialed down in the meantime. They're still pretty big though, with Q3's growth forecast still at 13.2% (a projected $27.17), and Q4's growth outlook of 25.8% (a projected $29.13). Whatever the case, as it stands right now, the S&P 500's trailing P/E is 17.09. It's been higher, but when it's been higher it's usually been because of unusual (and pre-bearish) circumstances. The saving grace for the market has been the forward-looking [twelve-month] P/E ratio of 14.7, but remember, that lower valuation presumes double-digit earnings growth in each of the next four quarters. I hope my pessimism is off-base and that the market can put up that kind of growth, but I just don't see how it's going to happen with QE going away and employment still lethargic. Just so there's no misunderstanding, I'm NOT calling for a bear market. I'm still a long-term bull. I do think the indices have gotten ahead of their underlying earnings though, and an adjustment - via a normal, healthy correction - is in our future. You gotta wonder if today was the beginning of it. Stocks Log First Major Losing Week in Last Seven Just in case you were wondering, no, the Dow didn't close under that key floor at 15,420 today. It traded under that level for a little while, but the bulls had no intention of letting the blue chip index close under a major line in the sand. However.... For the first time since June, the S&P 500 closed under its 20-day moving average line, and the VIX closed above its 20-day moving average. That's subtle, but significant. Some optimists will counter that the late-in-the-session fade was just pre-weekend, precautionary, defensive positioning. I get that. It wasn't just today we started to see glimpses of weakness, however. The sellers have been working on this all week long, and finally made measurable progress today. Indeed, the fact that traders are too worried to stick with bullish positions over a weekend IS a sign that the undertow is turning bearish. All of that being said, I'd still like to see one more 'down' day from stocks to say the market had passed the point of no return. For the S&P 500, that's a close under this week's low of 1684.91; it was also a key turbulence area in July. Such a dip will probably coincide with the VIX finally closing above its upper 20-day Bollinger band, currently at 14.30. For the record, I'm expecting a correction here, though we still don't have convincing evidence a correction is underway. The Last Word A couple of parting thoughts, or maybe I should say follow-ups on recent points we've made. The first one is something I've been talking about for a while that somehow started to resonate with the market today - Apple (AAPL) isn't innovating anymore. We first shared our doubts with you guys way back on August 29th, 2011, saying: ... at some point, Tim Cook will have to thrive. Consumer technology experts say that time is two to three years down the road, when the current product mix becomes old-hat, and 'new' is needed ....Mr. Cook, while your (Apple's) technology is at least slightly more functional (though perceived as much cooler) than the competition, know that when you're leading the pack, EVERYONE else is gunning for you. That makes it tough to be number one forever, especially if you don't continue to out-innovate your peers. No offense, but not too many people see you pioneering the next great technology. So what? The Board of Directors is starting to agree. After a recent board meeting, it became pretty clear the company's directors are getting fed up with a lack of real innovation. I stress 'real' because Tim Cook responded to concerns about the lack of innovation in the last conference call by telling us new products would be coming near the end of the year. What products? The iPhone 5S, the lower-cost iPhone 5C, and a new iteration of the iPad. I don't know where you stand on the debate, but I don't see anything particularly innovative about an update of an old product (even if it was a game-changing product when first unveiled). Even the much-ballyhooed iWatch is just a really small iTouch. Steve Jobs was a hero because he created a new category of product. Tim Cook is just trying to refresh past successes, and can't even really do that. Apple is losing market share in the tablet as well as the smartphone race. Like I predicted a couple of years ago, with Tim Cook at the helm, "Three years from now [two years of which have passed], Apple is just another garden variety consumer technology player." The idea didn't go over at the time, but it seems like the idea is starting to stir some serious consideration now. Just remember you heard it here first. The only other comment I want to make is, boy am I glad we shed J.C. Penney (JCP) from the portfolio when we did. We got out at just a tad better than a breakeven, right before another round of internal turbulence sucker-punched the stock. In case you didn't hear, hedge fund manager and major JCP shareholder Bill Ackman is now putting pressure on the board of directors to find a new CEO. The acting CEO Mike Ullman - who's held that job before - was never really seen as a long-term replacement for the ousted Ron Johnson, but we may want to give the new guy more than four months to turn the ship around. The irony is that it's largely Bill Ackman's fault J.C. Penney imploded in the first place. Exerting way more pressure than he had a right to exert, he pushed for Ron Johnson - who had little relevant experience - to take the helm two years ago, and it ended up being a disaster. Now he's saying the former CEO isn't qualified to get the company back on the right course? Geez. I completely agree with Jeff Macke on this one... "Ackman's tantrum will kill the company." At the very least it leaves investors wondering if they need to brace for another round of disruption. At worst, it leaves investors wondering who's really in charge of the company. If Ackman can bully the board of directors into picking a new CEO, that's a terrifying situation. He was the guy who picked Ron Johnson, and pretty much killed the company in the process. Dear Mr. Ackman, the best thing you can do at this point may be to just stay out of it. The more you talk, the more worried the market gets. I know we won't be recommending it anytime soon, mostly because Bill Ackman's over-involved. So whaddya think? Do you agree or disagree with our stances on Apple or J.C. Penney? Sound off at the site. Just click on each company's link back to its home-page. Or, send us an e-mail. By the way, a bunch of people chimed in about J.C. Penney when we stirred that pot a couple of days ago. Thanks for sharing. If you didn't see any of those comments, they're worth a look; just click in the link to the JCP research page. I though Elston11's take was, if nothing else, funny: This might be out of the realm of INVESTOR TALK, but here it is...for years, when shopping with my family we've been to practically in every retail chain department store there is. And JC Penny is among those that have the look and smell of the living dead: Sears and Radio Shack are two other examples. Few customers knocking around spacious stores. Sales people just kind of hanging around talking with each other with little to do and looking a bit desperate. A lot of inventory that looks either cheap or out of style. And then there's that smell ...indescribable really. Kind of like a ghost town of the old west where once thrived a frenetic piano, dancing girls, hardy cowboys and drunken bar fights. But now that's all a memory. If you'd like to se your thoughts on a company featured in the newsletter, you know what to do. In the meantime, Osamah has worked his (her?) way onto the stock-picking leaderboard. And for what it's worth, IZEA Holdings (IZEA) has been building a lot of steam and interest from the community lately. Feel free to make a similar bullish or bearish case for one of your picks. That's it for today. Everybody have a great weekend.