Global economic health issues returned to the forefront once again and knocked world markets for a substantial loss.

Market Stats Table

The market started off in the tank after a new debt worry surfaced in Europe. European banks are due to pay back 442 billion euros in emergency loans on Thursday. Analysts are worried there will be a liquidity shortfall of 100 billion euros if everyone makes those payments to the ECB on time. In order to repay these emergency funds that were loaned to banks one year ago on Thursday, the banks will have to have raised private capital, sold assets or accumulated the cash over the last year. Given the economic conditions in Europe there is considerable worry that many banks will be unable to pay back the loans. How many banks will roll over the loans and why is the key question.

Earlier this morning the Conference Board corrected its leading economic index for China to an April gain of only +0.3% from a previously reported rise of +1.7%. The sharp revision brought China's growth rate back into question. That +0.3% was the smallest gain in five months. The Shanghai Composite sold off sharply ending the day with a -4.3% loss.

If the problems overseas were not bad enough the U.S. Consumer Confidence for June posted a massive drop to 52.9 from 63.3 in May. The expectations component led the decline with a drop to 71.2 from 84.6 in May. The present conditions component fell to 25.5 from 29.8. The percentage of respondents planning on purchasing a car fell from 6% to 3.7%, homes 2.1% to 1.9% and appliances fell from 26% to 22.9%.

There was a major decline in confidence over the last month as the various news outlets hyped the chances for a second dip to the great recession. The number of respondents expecting the stock market to rise over the next 12 month fell to less than 25% from more than 33% in April. The decline in the markets since mid May was also blamed for some of the drop in confidence.

The drop in core job growth in the May report was also blamed along with the stubbornly high weekly jobless claims. This suggests jobs are still hard to get and the expectations for job growth in Q2 have been dashed. The news of the worst new home sales numbers in 40 years also weighed on homeowners who are already depressed about the value of their largest asset.

This was a dramatic report that seriously impacted stock market sentiment. When added to the debt worries from Europe and growth worries from China it was a triple portion of bad news.

Consumer Confidence Chart

The Case Shiller Home Price Indexes for the three-month period ended in April showed that prices rose 3.8% over the same period in 2009. This report is seriously lagging and I don't believe it is relative to today's market.

Tomorrow we will get the ISM-NY and ISM-Chicago reports and a decline in those regions will again pressure the markets. Thursday is the national ISM and another potential pothole.

Of course the big challenge is the nonfarm payrolls on Friday and they will be a cloud over the markets all week. The job estimates are all over the ballpark. A blind monkey throwing darts would have as good a chance as the current analyst consensus. Estimates range from a loss of -450,000 to as much as a +400,000 gain, excluding census terminations.

The census is expected to have terminated 350,000 workers. That suggests those estimates for a -450,000 job loss are actually expecting -100,000 jobs lost that are not census workers. The analysts projecting a gain of 400,000 jobs are obviously delusional or on drugs. The official consensus estimate including the census terminations is -110,000. With such a wide range of estimates there is a risk of a large surprise. Obviously quite a few analysts are significantly wrong and are guiding their clients into a severe shock of some form.

In stock news Tesla Motors (TSLA) shocked analysts and naysayers with an outstanding performance on their first day of trading. Tesla had a range of $14-$16 on their IPO and priced it at $17 last night. It opened at $19 and rallied to close at $23.73 for a $7 gain on a really bad day in the market.

Tesla has lost $290 million since inception and raised $220 million in their IPO. They also received another $50 million in a post IPO private placement from Toyota. Not bad for a company that was near bankruptcy just a few months ago. They have only sold 1,083 of their high performance electric sports cars with a price tag of $100,000. The key to the IPO was their expectations to sell 20,000 of their new Model S sedans in 2012. In theory those sedans will have a 300 mile range between charges. The Tesla roadster is powered by laptop batteries. Specifically 6,831 batteries per car and the Model S will use Panasonic laptop batteries.

Tesla is facing some formidable competition from Ford, Chevrolet, Nissan and Toyota which will all debut cheaper mainstream electric cars in the $30K to $45K range over the next two years. Let's hope the Tesla does not become the next version of the DeLorean, which despite the novel technology failed to turn it into a real business.

Micron Technology (MU) lost -13% today after reporting earnings and warning that DRAM growth could be flat to only slightly higher in the current quarter. Wedbush Securities was quick to tell investors that the warning was misunderstood. They guided lower because of slower than expected transitions to process technologies versus a slowing of market demand. Wedbush said the new processes will lower Micron's costs by 50% on DRAM chips in the second half of 2010 while selling prices will decline only 15%. If you believe Wedbush then this should be a buying opportunity.

Micron Chart

Citigroup became the first stock to trip the new single stock flash crash triggers today. Citi was trading at $3.80 on the NYSE when a trade on another exchange crossed at $3.31 and triggered the -10% in five minutes stop rule. Citi restarted trading after five minutes and the trade was busted as an erroneous trade. However, the event proved that the new single stock trading halts enacted after the flash crash actually worked.

Apple (AAPL) lost -$12 and closed near the low of the day after Cisco (CSCO) announced it was launching a tablet PC like the iPad but for office use. The tablet, named the Cius, will have a camera both front and back and run the Android operating system. The tablet will connect to the Internet through both WiFi and cellular broadband networks. The Cius will be able to use external monitors, mice and keyboards so it could be used as a desktop PC while at work and then a portable PC after hours. It will also have high definition video and sound. Perfect for downloading those movies while traveling or waiting for appointments. With the Cisco tablet entry Apple now has some real competition.

Cisco Cius Tablet PC

Late in the afternoon Bloomberg broke a report from Barclays saying Apple would debut a Verizon iPhone in January 2011 and Verizon rocketed higher into positive territory. Barclays claims a Verizon iPhone would net Apple another 8 million sales because of people with Verizon contracts and because of people moving from AT&T to Verizon and buying a new phone. Eight million additional iPhones is a strong incentive for Apple to finally make the break. However, this rumor has made the rounds several times before. Research in Motion (RIMM) dropped another $2 intraday when the Bloomberg news hit the wires.

Google (GOOG) is down -24% from its high and closed at a new ten month low today at $454. It was the fourth worst performer on the Nasdaq. Google announced it was going to stop forwarding Chinese traffic to its uncensored Hong Kong website in order to keep its Chinese Internet license. China threatened to cancel their license to operate in China if they continued the process. China said Google must continue to provide mapping and music services in China if they wanted to keep their license. Google said they had no plans to filter search results for things China deemed subversive, which is pretty much everything relating to freedom of speech.

Google Chart

Only one S&P-500 stock finished positive today and all 30 Dow components closed negative. The Dow was down -338 at its lows at 9811. Despite the recovery to only -268 for the day that was not a rebound. That was only traders who had been short taking profits before the close. There was no sentiment reversal and the internals were horrendous. The up volume was only 640 million shares and down volume was 10.6 billion. Volume was high at 11.2 billion shares. There were 671 advancers and 5,849 decliners. The S&P posted its lowest close since October at 1041.15.

Dow Components Table

The talking heads were all a twitter about S&P 1040 as the end of the world as we know it should that support be broken. For a few minutes the S&P did trade lower to 1035 but rebounded on short covering at the close to edge back over 1040.

That level is critical to technicians for multiple reasons. S&P 1043 is the 50% retracement level of the July to May rally. June 2009 was the first material decline after the March bounce. The 1042 level is two standard deviations away from the normal S&P trend. Lastly, the 1040 low in May was book ended with a 1044 low in February and a 1042 low in early June. To put it simply the 1040+ level has been pivotal on three prior dips and the tide was turned. A breakdown below 1040 would be a major sentiment change from minor correction of -14% to a return to a bear market. A break below 1040 could target 880 on the S&P.

S&P-500 Chart

S&P-500 Chart Longer Term

The Dow has fallen -7% or -724 points since last Monday's high at 10,595. That is a mini correction in only a week. The Dow did not close at a new low today but remained above 9800. The prior low on June 8th was 9757 and 9774 back on May 25th. The slightly better performance by the Dow today (-2.6%) compared to the S&P (-3.1%) or Nasdaq (-3.85%) was due to minimal declines by Verizon, thanks to the Bloomberg news, and the four drug companies, JNJ, PFE, MRK and PG. Those defensive plays helped keep the Dow from plunging further. Merck was the biggest loser of that group at 50-cents.

While the Dow may be the most visible market indicator with triple digit moves it is not really a representative indicator of the market because of its narrow breadth. However, a drop below 9800, while not as technically important as 1040 on the S&P, would still be a serious blow to market sentiment.

Dow Chart

The Nasdaq dropped a big -3.84% because of the hits to Google, Apple and RIMM among others. The chip stocks lost -4.64% thanks to the slaughter in Micron and the DRAM sector. Sandisk lost -7% and KLA-Tencor (KLAC) lost -6%. With chips leading the tech sector down and the big cap techs adding double-digit losses the Nasdaq had no chance. Techs are not normally favored over the summer months so the outlook here is not positive. The next support will probably be in the 2050-2063 range but that would mean the Dow and S&P broke below critical support levels. Those indexes would probably drag the Nasdaq lower with them.

Nasdaq Chart

I have been bearish since the S&P broke below 1100 and I see no reason to change my fur coat now. However, the S&P 1040 level is a bullish magnet. If the bulls decide to make a goal line stand this would be the place. However, I believe any rally from here will be short lived. I have heard many times there is no such thing as a triple bottom. Many technicians believe that is a bullish fairy tale and the third test of critical support is normally a prelude to a bullish head fake followed by a bigger decline.

Despite the Q2 earnings cycle being only a week away we have some critical economic reports later this week. Negative news there could negate positive earnings hopes. Lastly, we have seen weak guidance from several early reporters and analysts are worried that could become a pattern that leads to lower lows by the end of Q3. This is a known historical pattern in normal economic cycles.

For these reasons I see no reason to be long the market for more than a trade should we get a bounce from 1040. As I said in the weekend wrap you would be better off fishing or playing golf.

Jim Brown