The Dow and S&P ended their losing streak at six weeks but the S&P only avoided a weekly loss by a half a point. This microscopic technical break lacked a significant amount of conviction and remains uninspiring.

Market Statistics

I think I will start ordering in Greek food every Friday so I can get completely into the spirit of the market. The Greek tragedy playing out in Europe acts like it is never going away or at least not in the way everyone would like. The market rallied on Friday morning after French and German leaders agreed in principal to some less stringent terms for another Greek bailout. A deal has not yet been struck and the Greek government is also less than inspiring with their musical chair routine last week and a change in faces and positions.

I don't know why the market appeared to be encouraged by the news because even if they get another bail out deal done it will only delay the inevitable. Greece will default. The country is broke, the citizens in revolt and leadership is falling apart. The IMF and the EU blinked as the week ended and reportedly will agree to give Greece funds already approved as part of last years bail out package despite Greek failures to meet all the required considerations for the next round of funding and the potential for the government to implode over the coming weeks.

By dispersing the money it allows Greece to avoid a default for another couple months but it does nothing to fix the problem. This is just another kick of the proverbial can down the road to an eventual default. An ECB official said the European bail out fund for Greece, Ireland and Portugal should be doubled to $2.15 trillion in order to calm the markets. Because of the impending default by Greece none of those troubled countries can borrow from the debt markets at anything resembling a reasonable rate. Greek two-year bonds are now over 30% and that assumes that anyone would actually buy them. They need to boost the fund to allow for Italy, Belgium and potentially Spain as well.

About the only way Greece is going to avoid a future default is if the ECB forgives their debt in order to avoid a default on outstanding debt to banks and institutions. The EU is not likely to take this action. Germany and France will not allow it. European banks held nearly $190 billion in debt from Greece, Ireland and Portugal at year-end and the ECB holds another $65 billion in Greek bonds. The EU can't afford for the debt to those banks to be restructured for pennies on the dollar. It would bankrupt the EU banks and cause even more havoc to the EU economy.

Lastly if Greece ends up getting a debt forgiveness program or some kind of structured default then Ireland, Portugal and others will want the same deal. What goes around comes around. Greece is only the first chapter of a very long book.

The current chapter would take between 12-20 billion euros to smooth over the current Greek problems for another 60-90 days. The real challenge will be the July meeting to work out a longer-term solution. This will take another 150 billion euros for a total of 340-350 billion or so and the outlook is not good. If they are having this much trouble handling the small problem you can imagine the challenge when there is real money on the line. The decisions the EU finance ministers will make in July will determine if their governments are reelected.

When the next chapter of the Greek problem arrives we could have an entirely new different cast of characters sitting around the conference table. If their predecessors were voted out of office for lending money to Greece that will never be paid back you can bet the new crop of finance ministers will have some strict marching orders and rules of engagement. Greece may end up on the short end of that deal if the governments in the Eurozone finally decide they would rather use their hard earned money to bailout their own banks rather than send it to Greece never to be seen again.

The reason these weekly episodes create so much volatility in our market is due to the impact on the currencies and the risk of U.S. banks taking it on the chin from the credit default swaps they wrote on Greek debt years ago. U.S. banks only hold about 6% of the outstanding Greek debt but they are rumored to be holding another 6-10% of the outstanding credit default swaps. The combined liabilities could be in the $60-$70 billion range. However, U.S. banks also hold debt on the European banks. If Greece defaults, as most believe they will, some European banks could go under or at least default and then be nationalized. Bank debt and those pesky swaps on the bank debt would then compound the losses to U.S. banks from the Greek default. European banks are reportedly holding $165 billion in Greek debt. That is about the same number as the amount of loans Greece is at risk of defaulting on this July.

Fitch reported that as much as 43% of U.S. money market funds are invested in or held by European banks because they were paying more interest than U.S. banks. The company said 55% of this money is invested in commercial paper of French banks with exposure to Greece including Societe General, BNP Paribas, etc. French banks hold 33% of the $165 billion in Greek debt. See how the dominos are lining up?

Greenspan said last week a default by Greece is "almost certain" and could drive the global economy into recession. According to Greenspan that may leave U.S. banks "up against the wall" because of their loans, investments and swaps to these banks.

This is really a can of worms because nobody really know how intricately intertwined all these debts and swaps really are. When banks hold debt on banks that own debt on other banks and all the parties may or may not have sovereign debt on Greece, Ireland, Portugal, etc there is no way to really know how the event will shake out until it does. It is like the subprime crisis all over again. Nobody knew who owned the subprime loans and mortgage-backed securities until they were forced to take monster writedowns and ask for handouts to keep from going under. Lehman, Merrill Lynch, Wachovia and Bear Stearns were just the headliners in the press. There were hundreds of smaller banks and institutions that were caught in the same trap. The ECB is turning into Europe's toxic waste dump because they have bought so much paper on the PIIGS countries to solve short-term problems. A Greek default could have serious repercussions to the ECB.

We won't know the final outcome on Greece for years to come and that means event volatility in some form will be with us for a long time. There are analysts who believe an eventual Greek default will start the dominos falling that create another recession similar to the subprime crisis. Let's hope they are wrong.

On the economic front the U.S. had a mild calendar with the Consumer Sentiment report the biggest headline. Sentiment for June fell sharply to 71.8 from 74.3 after two consecutive months of gains. Consensus estimates were for a small decline to 74.0. The recent low was 67.5 in March. The present conditions component declined to 79.6 from 81.9 and the expectations component declined from 69.5 to 66.8.

Slower job growth and the falling stock market were given as the two main drivers of the decline. Add in the debate over the debt ceiling and the constant warnings of dire circumstances if the ceiling can't be raised, plus the continued crisis in the Middle East and Northern African countries, European debt crisis and high gasoline prices and I am surprised sentiment was not significantly lower. With home prices sharply declining again the odds are good sentiment will continue to decline.

Consumer Sentiment Chart

The Risk of Recession report for May rose to the highest level since December at 23% and a +2% increase from the 21% in April. This is far from predicting a recession since the prior two downturns reached probability levels over 60%. Friday's report may be at a five-month high but it is still well away from critical levels. This report predicts the probability of a recession over the next six months by factoring in critical data from other reports.

A quick note on the two manufacturing surveys from last week. On Thursday the Philly Fed survey fell sharply again and this time into contraction territory at -7.7 from +3.9 in May and a two year low. This extends the drop from the March high at 43.4 to more than 50 points! New orders fell from +5.4 to -7.6. Back orders went even further negative from -7.8 to -16.3. The employment component fell from 22.1 to 4.1. This was a VERY negative report.

Philly Fed Chart

On Wednesday the NY Empire Manufacturing Survey for June fell sharply from 11.9 to -7.8. That is the lowest level since November, which was a data glitch and not a real decline. New orders fell from 17.2 to -3.6 or better than a 20-point drop. Back orders fell to zero from 9.7 and the employment component fell from 24.7 to 10.2. Even worse the average workweek fell from 23.7 to -2.0. That is an index value not hours worked but what it means is that hours worked fell off a cliff probably as a result of layoffs.

Empire Manufacturing Chart

This sharp decline over the last two months in the New York area is very troubling. It is especially bad when combined with the identical drop in the Philly Fed Survey. Having these manufacturing reports fall into negative territory will increase fears of a double dip recession.

The economic calendar is headlined next week by the FOMC meeting on Tuesday and Wednesday and the Bernanke press conference after the FOMC announcement on Wednesday. This is a two-day meeting with the FOMC announcement at 12:30 on Wednesday and the Bernanke press conference to follow at 2:15. Considering the Fed is likely to lower its economic outlook at this meeting and the end of QE2 in June this could be a highly volatile Wednesday. The Fed is not expected to announce any new stimulus until they see how the bond market is going to react to the end of QE2. Nobody expects a major reaction since the Fed will still be buying some treasuries every month as existing assets mature and are paid off. The Fed will use the funds from those payoffs to purchase more treasuries. The FOMC is expected to further define how that program will continue and approximately how much will be spent per month.

The Fed releases their quarterly economic forecast at this meeting and analysts will be expecting a downgrade in the estimates. In April they were predicting economic growth of 3.1% to 3.3% and higher than the estimates of the top 50 economists, which averaged +2.6% growth. That means the Fed was actually more bullish than everyone else. When they release their quarterly economic forecast on Wednesday the odds are good they will lower those bullish estimates significantly.

Bernanke has already said growth will be lower than previously expected, "uneven" and "frustratingly slow." Some analysts are expecting growth more in the 1.5% range for Q2 and maybe only 2.0% for the rest of the year. With the manufacturing surveys falling like a rock the actual Q2 growth could be a shocker.

Bernanke's press conference will be the equivalent of talking suicidal investors down from the ledge over the probable impact of the end of QE2 while at the same time telling them "oh by the way, growth could be +1.5% through year end and unemployment could be 9.5% instead of the 8.4% we previously predicted."

Fortunately the market has been pricing in the potential for another disappointment and maybe Bernanke will surprise us with a bullish outlook. As the cheerleader for the economy he can't really afford to be negative. Regardless of the numbers he MUST deliver them in the context of "things are going to get better soon" in order to avoid crashing the markets.

This makes Wednesday a potentially pivotal day for the markets and that suggests Monday and Tuesday could be a setup for whatever the Fed reveals. We know from the many "reveals" on reality TV that what is behind door number three can be either an all expenses paid trip to the Bahamas or something worthless like a pair of burros. While I doubt uncle Ben will give us the equivalent of a wooden nickel in his comments I seriously doubt he will have the capability to promise us an all expenses paid trip down the yellow brick road to higher economic growth. This meeting should be negative but some of that is already priced in.

The other reports of note are the home sales for May and the GDP revision for Q1. The last GDP revision was an upgrade from 1.75% to 1.84% growth in Q1. That is down from +3.1% in Q4. Estimates for this revision are basically flat. The next big GDP report will be on July 29th when the first reading on Q2 GDP is released. What the Fed says on Wednesday will definitely color analyst estimates for that July report.

Economic Calendar

Also on the calendar will be some earnings reports and more than likely some earnings warnings as we head into the warning cycle for Q2. High profile earnings will come from FedEx, Oracle, Micron and Adobe.

The financial sector is currently undergoing some anxiety as worries over warnings and charges emerge. The banking sector is struggling to deal with the new financial regulations and earnings are expected to take a hit. The sector ended the week flat after four months of declines but a few high profile guidance warnings could send it down again.

In stock news Research in Motion (RIMM) was knocked for a -21% loss after slashing guidance again and posting disappointing earnings. The guidance downgrade was the third time in the last quarter and probably not the last. The lowered guidance launched a downgrade parade that had nearly every analyst covering the stock slashing prices and earnings estimates. RIMM is suffering from execution problems. They can't seem to get their products to market in a timely fashion, which causes continual user frustration when the products are delayed. Even the new generations of the BlackBerry Bold have been delayed several times.

The competition from the Android and iPhone is causing them serious grief. If enterprise customers ever begin defecting in large numbers the BlackBerry's fate is sealed. Today, the enterprise space is still largely a BlackBerry market but nobody knows how long that will last. RIMM still posted 67% revenue growth in the international market so sales are still there. However, price targets for RIMM were dropping faster than anyone would have believed 36 months ago. RIMM hit $148 in June of 2008 and closed at less than $28 on Friday. Several analysts lowered targets to $20 and $25.

Barclay's Capital was the sole standout saying they maintain an overweight rating but they cut the price target from $77 to $52 and about twice today's closing level. Barclay's said the Bold 9900, that has slipped more than once, is now in certification with 31 carriers so further slippage is not likely.

The mighty RIMM may not be dead but it will need a stiff shot of adrenaline and a jolt from the paddles soon or it will find itself in the same category as PALM.

I am reminded of the famous quote from Cool Hand Luke, "What we have here is a failure to communicate." RIMM has a great product but it can no longer convince users that it can do what it says. There have been too many promises and not enough production.

RIMM Chart

Pandora (P) got a wake up call from investors on Friday. The IPO was priced at $16 on Tuesday night and hit $26 at the open on Wednesday. Since that big debut it has been downhill from there. Pandora sank to $12.16 intraday and closed just over $13 on its third day of trading. BTIG Research put a SELL rating on Pandora with a price target of $5.50. While customers are expected to rise to as many as 193 million by 2015 and revenue to quadruple to $1.1 billion the company will still lose money through 2013. Competition is also growing with Spotify and Turntable.fm expected to come to market soon.

Pandora Chart

Recent IPOs are having a tough time in the market. LinkedIn is the only major winner still trading significantly above its IPO price. RenRen went public at $14 in May and traded as high as $24. It closed at $7 on Friday. The much-touted IPO bubble appears to have burst only a couple weeks after it formed.

RenRen Chart

LinkedIn Chart

Apple (AAPL) shares closed at $320 on Friday and well under prior support at the 200-day at 325. The $320 level marks the last significant support before $300. Should that level break the next material support would be $240. Apple has not closed below its 200-day average since early 2009. The decline in Apple shares suggests the market weakness may not be over. Funds are selling their winners and Apple has been a safe deposit box for mutual fund cash since March 2009 when it was trading for $85. The rise to $365 has been remarkable and it created a lot of profits for the Apple faithful along the way.

Apple is currently involved in several patent suits over its iPad and iPhone products. Apple sued Samsung in April saying the company copied its devices. The suit was 38 pages long. Samsung filed a counter suit claiming Apple had copied the Samsung devices. On Thursday Apple filed an updated 63-page complaint listing 14 additional products Samsung was alleged to have produced as copies including the Galaxy Tab 10.1 and Galaxy S II tablets. Apple said Samsung had blatantly copied the iPhone. This battle could run for years but Apple should be the winner. Numerous technical sites have mentioned in the past in great detail on how Samsung had cloned the Apple products. For Apple this is just noise because they will eventually win the suit if the third party claims are true. Getting a monster judgment from the Korean company could be a different challenge.

The decline in Apple is not related to the daily news headlines on the Samsung suit but more to the lackluster iCloud presentation a couple weeks ago and videos of a frail Steve Jobs visiting cancer treatment centers. Apple will continue to rule the tablet world for sometime to come and the iPhone 5 will eventually be released. However, in this market where the major indexes were down for six weeks there are plenty of profits to be taken. While everyone may eventually believe Apple will move over $400 there are very few willing to give up -10% to -20% in order to ride out the volatility. You can bet there are tens of thousands of investors watching Apple's decline with their finger on the mouse just waiting for signs of a bounce to convince them to buy. Until then Apple and Google will continue to drag the Nasdaq lower.

Apple Chart

A more pressing problem for the Nasdaq is the drop in Google. Shares of Google fell -3% or $15 on Friday as the news over the Google-Oracle suit begins showing up everywhere. Oracle claims it is seeking $6.1 billion in a patent and copyright infringement suit against Google. Oracle claims the Android software uses technology related to the Java programming language. Oracle filed a motion in a San Francisco Federal court seeking to prevent Google from filing its response documents "under seal." Oracle said its claims were based on both accepted methodology and a wealth of concrete evidence. They should not be hidden from public view." Google said Oracle's own damage expert had estimated Google would owe Oracle between $1.4 billion and $6.1 billion. Oracle seems to have latched onto that $6.1 billion claim.

Google responded saying the $6.1 billion was "a breathtaking figure that is out of proportion to any meaningful measure of the intellectual property at issue." Google said even at the low end of $1.4 billion that was ten times what Sun Microsystems made each year for the entirety of its Java licensing and 20 times what Sun made for Java based mobile licensing.

Oracle got Java when it bought Sun Microsystems in January 2010. They filed the suit against Google in August seeking a court ruling that would ban all further use of its intellectual property and force the destruction of all products that violate Java-related copyrights on the code, documentation and specifications.

Oracle claims Google's Android operating system uses a virtual machine software called Dalvik that infringes on Oracle's patents and Google did not obtain a license to use Java in its products.

Obviously this is a battle between a pair of 800-pound gorillas but Oracle shares rose 40-cents on Friday while Google shares fell -$15.

Another problem for Google is the Dept. of Justice review of the $400 million acquisition of AdMeld. Google claims it is just a formality but others believe the acquisition could give Google a lock on buying and selling of display advertising through AdMeld's Invite Media advertising platform.

Google suddenly found itself up against a flurry of bidders as it tried to buy the 6,000 plus wireless patents from Nortel. The patents were supposed to be auctioned off in a bankruptcy last week but the court postponed the auction due to a "significant level of interest" by new bidders. Those bidders now include Apple, Intel, Ericsson and patent solutions provider RPX. Google had bid $900 million for the patents but with the sudden increase in competition the final price could be over $1.5 billion according to analysts. Google went from a position as the sole "Stalking Horse" bidder recommended by Nortel to a real competitive situation. A stalking horse bidder is selected by the bankrupt company to make the first bid based on a level of expressed interest. Once the stalking horse bidder makes an offer the rest of the bidders can submit competing bids. This allows the bankrupt company to prevent a low ball bid for their assets by picking somebody with deep pockets to initiate the bidding.

Google initially entertained the idea to buy the patents to prevent others from attempting to sue them for infringement. With a portfolio of 6,000 additional patents for wireless devices they could make life tough for anyone attempting to sue them over a wireless issue. Call it suit insurance. If they owned the Nortel portfolio there are probably some patents in the portfolio, which would allow them to sue a company like Oracle for some form of infringement. The two giants would then have to weigh the cost of offsetting patent fights against the potential outcome and decide if it is worth the effort. This is a kind of corporate "mutual assured destruction" threat. You sue me and I will sue you and we will see who has the best lawyers and the most money.

Google is also suffering from a loss of business from the slowing economy. Raymond James said checks with search-engine marketers showed paid-search spending has been less than expected due to weakness in Europe and the USA. Raymond James said retail, auto, consumer electronics and technology ads were weaker than expected. According to their research U.S. paid search was up in the high single digits year over year and well below Google's expectations of 15-20%. Those expectations are well below 30% growth rates in prior years. There are growing worries that Google will disappoint on Q2 earnings.

Google Chart

Another Nasdaq big cap was also declining on Friday. NetFlix (NFLX) said Sony (SNE) had pulled its movies off the NetFlix distribution system. Starz, the company that actually has the distribution agreement with Sony and Disney said the halt was temporary and due to a technical problem with the Sony contract. Starz said the number of downloads had exceeded those specified in the contract and Sony had removed its movies until a new contract could be negotiated. The Starz contract with NetFlix is up in 2012. However, the $30 million a year contract is expected to be renewed at something more than $200 million thanks to the explosive growth at NetFlix. The availability of the Sony and Disney movies from Starz has been a valuable asset for NetFlix.

NetFlix Chart

The growing worries over the potential for another recession are weighing on the energy sector and commodities in general. Gold and silver are flat due to their value as an inflation/recession hedge idea but other commodities are weak. Corn declined sharply over the last week as lawmakers discussed canceling the ethanol subsidies. On Thursday the Senate voted to end three decades of ethanol subsidies costing $6 billion a year. They were scheduled to expire at the end of 2011 anyway but by voting to cancel them six months early the lawmakers can claim they were saving money and cutting spending. The subsidy provided 45-cents per gallon for every gallon that was mixed with gasoline.

Pacific Ethanol (PEIXD) said it would not hurt their business since ethanol was now so ingrained in the fuel process but Pacific is already tanking. They had to do a 1:7 reverse split in May in order to remain listed on the Nasdaq and that only got them back to $1.50. The consolidation in the ethanol space has been extreme plus a lot of outright failures.

You may remember just a week ago Morgan Stanley was predicting corn at $10 a bushel because of the bearish crop report saying 1.5 million acres previously planned for corn were too wet to plant. With 44% of the corn crop going to ethanol you have to wonder how that will impact corn production without that 45-cent per gallon subsidy.

Corn Chart

Crude oil declined on what the TV reporters claimed was lowered expectations for demand due to the declining economy. They were reporting on WTI crude and its drop to $92 intraday. They were gushing on how this would push gasoline prices lower. Unfortunately they were wrong. The drop in WTI is technical not fundamental. WTI futures expire on Tuesday and there is limited storage space at Cushing to physically deliver the oil.

Secondly, this was a quadruple option expiration and long fund positions in the commodity indexes/baskets had to be closed. Quarterly expirations always produce volatility in the physical commodities.

Look at the Brent futures at $113. That is the true price of oil today. That is why the price of gasoline will not decline much. Coastal refineries buy oil based on Brent prices not WTI. Only Midwest refineries can benefit from the cheap WTI. There are a few exceptions but that is generally the case. Gasoline only declined a penny to $3.69 nationwide because the coasts are still high and will remain high.

Granted, slower economic growth would push oil prices lower but that slow growth would have to be in Europe and Asia. The problems in Greece and austerity programs in the PIIGS could dampen demand but Asia is growing at a +10% rate and they have a lot more people consuming oil products.

Bottom line don't believe everything you read about energy in the news.

Brent Oil Chart

WTI Crude Chart

The Dow and S&P may have saved themselves from a seventh week of losses with a fractional gain but it was not material. Having the S&P close up half a point for the week was simply a result of expiration pressures slowing the volatility. The volume was a lot stronger at 8.2 billion shares but still weaker than a normal quadruple witching Friday. Volume over the prior two days was also elevated at 7.6 billion shares. Higher volume on days with declines is never a positive sign.

There has been no capitulation day. The Dow is only down -6.1% and the S&P -6.6% from the recent highs. This may look and feel like a horrible sell off but in reality it has been rather tame. Since the decline began seven weeks ago the economics have gotten progressively worse with the Philly Fed and New York surveys the sign of a sharp deterioration in an already slowing economy.

We can blame it on Japan, the Greek crisis, Libya or the Middle East but the end result is a suddenly slowing economy. The markets reacted to the worsening data AND to the calendar. We had a solid sell in May event and when they occur they normally last until mid July or longer.

Analysts will tell you the S&P is going to earn $100 this year but now they are starting to question that number. Guidance cuts are starting to become more frequent and we are heading into the busiest three weeks of earnings warning season beginning next week. Odds are good we are going to see some companies confessing problems.

Add in the FOMC meeting and Greek drama and the volatility cloud should continue to linger over the markets.

If the Greek can gets kicked down the road over the weekend we could see another bounce on Monday. However, remember the pictures of 20,000 rioters in Athens last week? They have not gone away. They are still mad and they will continue to vent. Any agreement by the EU this weekend is only temporary. The real crunch comes in July when the bigger problem is tackled by the full EU committee. That means unless we have an extra ordinary deal cut this weekend the problem will be back several weeks from now.

Once past the FOMC meeting we can start setting up for the end of quarter window dressing and the earnings cycle. It depends on how many warnings we get this week on how excited investors will be over the earnings cycle so it would be hard to predict it today.

The last five years have seen declines in early June followed by a bounce into month end and then another decline in mid July. If the pattern repeats I would look for a rebound to begin after the FOMC meeting assuming uncle Ben does not spoil the party with a bearish outlook.

The S&P found solid resistance at 1280 and closed -9 points off its highs and only +3 points off its lows. Is that a bullish day? The half point gain for the week was only a technical anomaly and not a bullish event other than it relieved the strain of keeping a heavily reported streak alive.

The S&P came within one point of the 200-day average on Thursday before rebounding from the 1258 level. Analysts were targeting the 200-day at 1257 as a potential bounce point so a rebound there was not unexpected. One rebound day does not make a trend. We were oversold and at critical support. No surprise there. However, the rebound from 1258 lacked any decent follow on confirmation on Friday.

That 1250-1257 level remains real support followed by 1175. This should be our support range to watch next week. A break below 1250 could get ugly very quickly but a dip to 1250 and a rebound could be bought ahead of the quarter end window dressing.

S&P Chart - 60 Min

S&P Chart - Daily

The Dow fell out of its downtrend channel on June 2nd and the lower channel support has now turned into solid resistance. Friday's opening spike to +111 was quickly sold but the Dow fought off an end of day bout of selling to cling to 12,000 for the close. That was a minor victory but definitely not bullish. The Dow would have to move back over 12,200 before anyone could have any confidence in the rebound.

The short-term chart below shows very clearly the resistance battle now in progress. With the quadruple witching volume behind us and weak economics ahead the most likely direction is down. However, the markets remain oversold and a short covering bounce is a daily possibility. Having spent much of the week under 12,000 the Dow is already telegraphing another dip.

Dow Chart - 60 Min

Dow Chart - Daily

The Nasdaq made a new three-month closing low on Friday thanks to the severe weakness in the big cap techs like Apple and Google. Neither of those stocks appear to have found a bottom so the Nasdaq is likely to continue lower.

Friday's close at 2616 is the upper edge of the 2600-2615 support from March. The March closing low was 2616.82 compared to Friday's close at 2616.48. On an intraday basis the Nasdaq tested 2600 in March and again on Thursday. This makes 2600 a critical level to watch for next week. A break below that level could be serious. The Nasdaq is down -8.9% from the May highs and definitely approaching normal correction levels. A break below 2600 would begin to suggest a bear market rather than a normal correction event.

Nasdaq Chart - 60 Min

Nasdaq Chart - Daily

The Russell 2000 small cap index is -9.6% off its May highs. The support at 775 and the roughly 10% correction level is holding firm but the last three days have not seen a resistance test. That suggests investors don't yet have any confidence for the future. Bargain hunting has not yet begun and that is troublesome. A break below 775 could get ugly fast.

Russell Chart - 60 Min

Russell 2000 Chart - Daily

The Nasdaq is not going to rebound until the semiconductor index ($SOX) quits sinking. Normally the SOX leads the Nasdaq and in June that has been almost straight down. The SOX is below all recognizable support levels until 370 and that one is very light. Warnings from chip companies have been common and research firms are slashing estimates for PC sales.

Semiconductor Index Chart

In the broadest measure of the market the TSM Index has held just above support for a week. The 200-day average was tested on Thursday and held. With the SOX and Nasdaq already below their 200-day averages this is a pivotal test for the TSMI. A break here might not find support until 12,400 and 1,000 points lower.

The current support level would also be an ideal spot for a rebound if news events cooperated. This week will be critical for the markets and the Fed economic outlook a key to market direction.

Wilshire 5000, Total Stock Market Index Chart

I don't believe the markets are giving us any bullish signals. The slight gain for the week in the Dow and S&P to prevent a seventh week of losses was just a technical fluctuation and not a signal the decline was over. Markets rarely go straight up or down for six weeks in a row so a pause was in order. Obviously a half point gain for the week on the S&P had no technical significance after declining nearly -7% over the prior six weeks.

Europe, the FOMC and earnings warnings will be the major focus for the week. Of the three the best chance of a positive market boost could come from the FOMC if Bernanke performs his best imitation of a cheerleader without any foot-in-mouth errors.

This is going to be a critical week for market direction with the broader market holding right at support. A break there could further sour sentiment but fortunately we have the end of quarter window dressing that may boost the market after the FOMC meeting.

I would continue to be very cautious. Enter passively, exit aggressively.

Jim Brown

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"Try to learn something about everything and everything about something."
Thomas Henry Huxley