They say market bulls like to climb a wall of worry but today they ignored the bad news completely.

Market Statistics

Investors came back from the three day weekend with bargain hunting on their mind and good news from Greece helped push the markets higher. The jump in the Greek polls for the pro-austerity New Democracy party removed some of the worry that Greece will leave the euro sooner rather than later.

The markets opened with another short squeeze but news just after 11:00 that Egan Jones cut its rating on Spain for the third time in less than a month nearly ended that rally. Egan Jones cut Spain to B from BB-minus. The company pointed to deteriorating public finances and expected payments necessary to support the banking system. Spain is going to issue new debt to bail out its banking sector despite yields approaching 7% on that debt. Just a few days ago Moody's downgraded 16 Spanish banks.

This third downgrade in a month by Egan Jones caused the euro to collapse and the dollar to spike to new two year highs. That crushed commodities including oil and gold and pushed the stock markets to their lows for the day.

Euro Chart - Intraday

Dollar Index Chart - Intraday

Gold Chart - Intraday

Oil Chart - Intraday

On the U.S. side of the pond the economic reports were all negative but investors ignored them all. The worst was the Consumer Confidence for May. The headline number fell from the April's previously reported 69.2 to 64.9. That April number was also revised down to 68.7.

The -3.8 point decline was the third consecutive decline in confidence. This survey is impacted more by the stock market than the consumer sentiment survey which was reported last week at a four year high. Both surveys have different sampling methods and different questions.

The biggest hit to the confidence report came from the present conditions component, which fell from 51.2 to 45.9. The expectations component fell from 80.4 to 77.6. Despite the decline in confidence the buying plans by respondents actually improved. Those planning on buying a car rose from 9.9% to 10.4%. Appliance buyers rose from 44.6% to 45.3%. Home buyers declined only slightly from 4.5% to 4.4%.

The stock market component was evident with those expecting stocks to rise falling from 35.0% to 30.8% and is now the lowest level since January. The herd is turning bearish.

Consumer Confidence Chart

The Texas Manufacturing Survey for May declined from -3.4 to -5.1 and the third consecutive decline from the February high at 17.8. The new orders component was negative at -0.6 and backorders -4.0. The employment components also declined with the employment component falling from 11.8 to 8.5 and the average workweek was negative at -2.2.

This is just one more regional survey that has shown a decline in economic activity since March. The weakness in Europe is weighing on U.S. manufacturing.

Moody's Texas Manufacturing Chart

The Case Shiller Home Price Index showed that home prices declined -2.6% from year ago levels. This was actually the third consecutive month of improvement and better than the -3.6% decline in the prior month. This data was for the three months ended in March so it is old data as far as the market is concerned. It was ignored.

Europe controlled our fate for the first two days of the week but the magnitude of the U.S. economic reports out later this week should refocus investor attention back on the USA. That may not be a good thing for equities. There is a strong possibility there will be some disappointments in the data.

The combination of the GDP, ISM Chicago and ADP Employment on Thursday is going to be a potent combination. Friday's Payrolls and ISM Manufacturing could be the knockout punch or the spark that sends us a lot higher. In this case the devil will be in the data.

Economic Calendar

After the bell today Research in Motion (RIMM) announced they had retained JP Morgan and RBC Capital markets to "review" strategic options. That normally means "find a buyer for the company or its assets." CEO Thorstein Heins said in late March he was exploring all options including sale of the company.

RIM noted in its "business update" the company is facing challenges and financial performance in future quarters will also be challenging. The company said it now expects to post a loss for the current quarter. Analysts had been expecting a profit of 42 cents. Reuters reported on Sunday that RIM could announce job cuts of as many as 6,000 workers out of its workforce of 16,500.

RIMM shares declined -14% in afterhours trading and traded as low as $9.50.

RIMM Chart

Faecbook (FB) options began trading today with over 100,000 contracts traded in the first hour. That increased to more than 313,000 for the full day. That represents 31 million shares or roughly 7% of the float. Volume in the stock rose to 78 million shares.

Analysts believe that funds hoping to see a rebound back over $32 as an opportunity to sell their shares finally gave up in the face of persistent declines and threw in the towel.

Mark Zuckerberg has lost nearly $5 billion in stock value over the seven days. That leaves him with $14 billion so I am not feeling sorry for him. He and his wife of a week are vacationing in Rome while his wealth melts away.

Reportedly FaceBook is considering building its own smartphone and investors are not encouraged about the company getting distracted into a field that is extremely competitive and already full of losers.

There is also speculation Facebook may be getting ready to make an offer for Face.com a facial recognition company with a price tag of less than $100 million. They have an app that automatically tags photos you put on Facebook with the person's name based on their recognition software.

There was another rumor that Facebook could make an offer for Opera Software. That is the maker of the Opera browser and quite a bit of advanced mobile phone technology. Opera makes web browsers that work across a variety of platforms including mobile phones, tablets, PCs and TVs. The price tag could be over $1 billion but the CEO said while he would love to further integrate with Facebook he wants the company to remain public and grow organically. The founder Jon S. Von Tetzchner said basically the same thing. The company has 200 million users today and they expect 500 million in 2013. Google also has extensive relationships with Opera and any Facebook bid would surely spark a bidding war. Opera is listed in Oslo Norway.

Facebook Chart

JP Morgan (JPM) said it sold an estimated $25 billion in high yielding, profitable securities in an effort to increase earnings to offset the trading loss. The move will produce more than $1 billion in profits for JPM but analysts were not happy. They said the sales will trigger higher taxes and costs and the portfolio of high quality, high yielding securities will be hard to replace and the sales will reduce future earnings capability. The sale could generate a $380 billion tax bill but Dimon had previously said the bank would likely sell assets where the taxable gains would be offset by the loss. That suggests the tax impact could be minimal. The securities sold yielded between 3.15% and 3.41%. Since JPM has more than $300 billion in cash they did not need to sell the securities. It was done to generate profits to offset the trading loss so the quarterly earnings were not impacted. Some analysts believe they should have just taken the earnings hit and kept the high yield income. $25 billion at an average of 3.3% a year is $825 million in earnings a year. It will be very hard to replace that.

JPM shares have held at just under $34 since the news broke two weeks ago. Investors don't seem to be ready to bargain hunt here until the trading loss is completed. Dimon said at the time it could grow to $3 billion. Some analysts believe it could be as high as $5 billion now that the hedge funds understand how badly they want to close these trades.

JPM Chart

The CME cut margins for crude oil by -13% and gold by 10%. Volume in the products had declined along with the volatility. The new margins will be effective after the close of business today. Initial margin on the E-Mini crude (QM) declined to $3,274 for contracts 60-120 days out. Initial margin on a gold contract declined to $10,125.

Goldman Sachs upgraded the coal sector after the recent plunge to new lows. Goldman said the sector was "attractive" due to the severe oversold conditions and the equalization of natural gas and coal prices to a neutral state. The cost to burn gas or coal for electrical energy is about even today. Goldman raised Peabody Energy (BTU) to buy from neutral.

DollarTree (DLTR) announced plans for a 2:1 stock split for shareholders of record on June 12th to be paid on June 26th. DLTR shares closed at $102 after stalling at that level since mid April. The company said the spilt was designed to increase the liquidity of the company stock and provide an attractive entry point for shareholders as they attempt to broaden the shareholder base.

DLTR Chart

The S&P broke through resistance at 1325 at the open to touch 1334 and then dropped back to use that 1325 level as support on the 11:00 dip. If the S&P can hold that level on the inevitable retest on Wednesday it would be bullish. Don't be mistaken, today was a short squeeze. Aggressive traders went home short over weekend on expectations of more negative news out of Greece. The release of the polls showing the surge by the pro-austerity pro-euro party caught those shorts off guard and the race was on at the open.

I am surprised the 11:00 dip did not have more traction. However, as I reported in the weekend commentary I saw a lot of stock charts in my Friday research that appeared to be trying to form a bottom. While I am not expecting an early summer rally after the big May decline I still believe there are serious problems in Europe and having the New Democracy party win the election is just one step in keeping Greece in the euro. They may not be able to form a ruling coalition and the entire process start over. Since Greece is going to run out of money at the end of June there is a timing problem to consider.

My key ahead of the major economic reports late this week is for the S&P to hold over 1325. A break there restarts the entire cycle with a potential retest of 1295. Resistance is now 1340.

S&P Chart

The Dow managed to surge over resistance at 12,575 at the open but almost immediately fell back below that level and only managed to close +5 points above that level. The Dow chart is less bullish than the S&P. The major Dow movers were CAT +2.58, IBM +2.16, UTX +2.07 and CVX +1.38. All others produced much smaller gains with MCD and XOM negative on the day.

The Dow needs to hold its gains at the open on Wednesday in order for this rally to have a chance.

Dow Chart

The Nasdaq managed to post a decent +33 point gain and break above the trendline I showed in the weekend commentary. It did not change the overall formation. This is still a bearish continuation pattern until it moves over 2900.

Google closed slightly positive at $593 but still under the 200-day average. Apple managed to add +10 points and is trying to break above the $575 level that has been resistance since early May. Should Apple succeed in that breakout it could drag the Nasdaq higher. That would be a key event to watch for on Wednesday.

Apple has a developer meeting coming up in a few weeks and this rebound could be speculation on coming events.

Apple Chart

Nasdaq Chart - 30 Min

Nasdaq Chart - Daily

I view Tuesday as a throwaway day. Volume was only mediocre at 6.0 billion shares and it was basically a short squeeze due to the Greek polls. Thursday and Friday have some heavy duty economic reports that could change the focus of investors from Europe to the USA and depending on the data that could be very good or very bad.

I would be cautious about entering new longs unless we see a move higher on strong volume. The mess in Europe has not gone away.

Enter passively, exit aggressively!

Jim Brown

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