On this day in 1939, The Wizard of Oz opened in U.S. theaters.  How do we know this?  Well, we must admit that we saw it was the Aflac trivia question on CNBC this morning.  Nevertheless, it is a serendipitous fact considering the 4.7% decline in the S&P 500 last week has been erased in the last three days.  In essence, then, what was experienced last week was just a bad dream.

Even so, the images from that bad dream are not soon forgotten.  The wicked witch that is the European debt crisis has not melted away and her pesky legion of scary-looking monkeys continue to fly about in the form of softening economic reports.

The market, meanwhile, is hoping the Wizard of Fed (i.e. Ben Bernanke) will pour a bucket of water on the witch and her monkeys this Friday when he speaks at the Jackson Hole Symposium. 

From our vantage point, we think he is likely to pour a bucket of cold water on this rally rather than on the witch and her monkeys. 

Bernanke does not have to hint QE3 is on the way primarily because the bond market has already implemented QE3 for him.  Since QE2 ended on June 30, the yield on the 10-year Note has dropped 88 bps to 2.29%, so if the design of QE3 is to hold down long-term rates with additional asset purchases, that is an arrow the Fed can keep in its quiver for the time being.

In addition, we think the following factors also argue against any clear-cut hint that QE3 is on the way:

• The Fed already altered its communication to indicate it thinks economic conditions will likely warrant an exceptionally low level of the federal funds rate through at least mid-2013
• The market does not have a liquidity problem
• Inflation and inflation expectations are not falling like they were at this time last year
• The cost-benefit trade-off of additional action will not be considered favorable at this point
• The Fed recognizes it needs to wean the equity market from relying on a Fed put
• The Fed needs more time to assess how much impact structural changes in the economy, versus temporary forces, have had on the recent slowdown
• The Fed will want time to assess how government spending cuts, and other fiscal measures -- proposed or otherwise -- will influence economic activity

Shifting gears, the top headline this morning is that Steve Jobs has resigned as CEO of Apple (AAPL).  This news has caused quite a stir for obvious reasons, although shares of AAPL have held up reasonably well.  They are indicated 2% lower in pre-market action.

The weakness in AAPL will weigh some on the Nasdaq at the start of trading, yet the AAPL indication is improved from last night as a number of analysts have come to the stock's defense, pointing to the competent leadership shown by Tim Cook, the apparent successor, during past periods in which Mr. Jobs has taken a leave of absence.  Moreover, Mr. Jobs is going to maintain a role at the company as Chairman of the Board.

The broader market is showing some resilience this morning, too.  Granted the current futures indication points to a modestly lower open, yet that qualifies as resilient given the Apple news, the fact that the market has rallied 4.8% in the last three days, and the arrival of another tepid initial claims report.

Specifically, initial claims rose 5,000 for the week ending August 20 to 417,000 (Briefing.com consensus 400,000).  Continuing claims for the week ending August 13 dropped by 80,000 to 3.641 mln (Briefing.com consensus 3.700 mln).

The Department of Labor said that the strike at Verizon (VZ) accounted for at least 8,500 claims in the latest week, so the headline number is not as bad as it first looks.  If we exclude those claims, though, we're still above 400,000 on initial claims.

The current level of claims is consistent with payroll gains closer to 100,000.  That is the good news.  The bad news is that payroll growth of that magnitude is not enough really to move the dial on the unemployment rate.

The market did not show much reaction to the initial claims report, as it appears to be concentrated on whether there will be a grand pronouncement from the Grand Tetons or a grand disappointment to see the Wizard of Fed acting his part but not being all the market was hoping he is.

--Patrick J. O'Hare, Briefing.com

Patrick J. O'Hare is Chief Market Analyst for Briefing Research, Briefing.com's institutional research service. To request a free trial, please email researchsales@briefing.com.