So much for summer doldrums. This feels more like a summer roller coaster ride with all the ups and downs. The S&P 500 managed to bounce back from the edge of the cliff after dipping toward the 1040 level (support) on June 8th. On a weekly basis the U.S. markets managed to end a three-week losing streak with the S&P 500 up 2.5%, the Russell 2000 up 2.8%, and the NASDAQ composite up 1.1%. Yet if you take a step back from the daily volatility stocks have been range bound the last few weeks. The U.S. dollar remains in an up trend thanks to continued weakness in the euro currency. Fearful investors continue to favor gold, which has managed to maintain its bullish up trend.

There are a lot of crosscurrents in this market and it's challenging to try and sift through what is important and form some sort of trading bias. We are going to briefly touch on the positives and negatives affecting the market and then check out what the charts are telling us.

China had a big influence on the global markets this past week and this time it was positive. The Chinese government said exports surged +50% in May compared to a year ago. Economists were only looking for a rise of +32%. The number of new loans also rose significantly above expectations, which is surprising since the government has been trying to slow down their growth by putting stricter requirements on the banks. Investment and factory output in China did slow somewhat but the trend is still positive. This positive news was tempered by signs of rising inflation. China's National Bureau of Statistics said consumer prices rose 3.1% in May up from 2.8% in April. This headline number was powered by a 6.1% jump in food costs, which is a bad sign for the large lower class in China, many of whom already spend half of their income on food. Analysts are still a little worried that growth will slow as the record-breaking 4 trillion yuan ($586 billion) stimulus begins to fade. Plus, there is the ever-present concern that China will take more stringent steps to cool down their red-hot economy (+11.9% growth in the first quarter) before it overheats. Overall I find the export news VERY promising. Someone has to be buying all of those exports, which is a positive sign for global growth.

Another BRIC country that is doing well is Brazil. The country announced their Q1 GDP came in at +9%, which is the highest level of growth since they started keeping records back in 1995. Brazil has seen a successive trend of quarterly growth numbers. While growth is expected to slow down for the rest of 2010 the full year estimates are for +6% growth.

Here at home in the U.S. there are more signs that the struggling economy may be stronger than we expect. On Friday traffic numbers for the port of Los Angeles and the port at Long Beach, California came in way above estimates. The number of incoming (full) and exiting (empty) cargo containers surged by double-digit percentage points. Traffic is approaching levels not seen since 2006, when the economy was booming. All of these goods have to be going somewhere and we haven't hit the busiest months of the year yet.

Consumer sentiment can help forecast consumer spending patterns. On Friday the preliminary University of Michigan Consumer Sentiment report came in better than expected. Economists were looking for a reading of 74.5 but June's advance number surged to a two-year high of 75.5. I'm a little surprised by the strength given the ongoing stream of weekly jobless claims and the disappointing non-farm payroll numbers. Maybe consumer attitudes brightened with the weather.

Geopolitical risks remain an issue for the global markets but last week the spotlight on North Korean, Iran, and Israel all faded. We never know when something is going to boil up to the surface. A week ago they were predicting war on the Korean peninsula. Fortunately the situation seems to have cooled and hopefully the longer we go without any incidents the better chance the markets have of staging a recovery.

EDIT: I may have spoken too soon. Late Saturday there were new reports that N.Korea threatened an "all-out military strike" if S.Korea continues their plans for psychological warfare with loudspeakers and large electronic displays along the border to N.Korea.

Meanwhile there are several negative factors having an impact on the market. Negative headlines from Europe seem to have slowed but the sovereign debt crisis in the EU remains a dark storm on the horizon. EU's inability to solve these debt challenges is the biggest problem and it's being compounded by the deterioration in the banking system. European banks are scared to lend to one another because they don't know if their neighbor banks are going to go under or not. It's very similar to what happened to our banking system in 2008. Investors are concerned that we could see debt defaults by Greece, Hungary, Portugal, Italy, Ireland and Spain. Even Britain has received some negative press with the credit rating agencies voicing their concern over Britain's deficits.

Spain made headlines late last week with rumors it was secretly asking for support from the EU to avoid a Greece-like meltdown. Remember, Spain is suffering from 20% unemployment and a severely depressed real estate market with years worth of inventory on the market. Several days ago there were headlines about potential cracks in the Spanish banking system when the government forced a handful of banks to merge together to strength their balance sheets. Now one of those banks, Caja Madrid, is looking at another government-sponsored merger with Bancaja. You may recall a few weeks ago when the EU put together their trillion euro bailout fund to help stave off future defaults. It looks like Spain may have been their primary target since the country's economy is four times the size of Greece.

The situation in Europe is pretty gloomy. Many of their economies have stalled and on the verge of falling back into a double-dip recession. Several countries are going to struggle seeing growth given their new strict austerity measures. Now add a banking system that is scared to lend. Credit is drying up and without credit economic activity slows down even more. This combination of factors (slow/no growth, potential debt defaults, vanishing credit) could last years. Plus Europe could see a banking washout like we did that forced major banks to recapitalize.

Several analysts are very worried about EU's impact on the global markets and they're telling investors to get out of stocks. Actually there has been a flurry of market calls advising investors to exit the stock market. I wonder if traders should avoid Europe and the U.S. and instead take another look at Brazil, India, China and Latin America where growth is still strong. Another thing that makes you wonder is China's recent comments about its exports rising +50% in May. The EU is China's number one trading partner. If China's business is so good are things really that bad in Europe? Keep an eye on the euro currency. The euro has become the proxy for investor sentiment regarding the EU's future. Last week the euro managed a meager oversold bounce from four-year lows to close near 1.21 against the dollar.

While we are on the subject of Europe let's talk about BP, formally known as British Petroleum before merging with Amoco back in 1998. BP's attempts at plugging the leak in the Gulf of Mexico have not been effective. The latest strategy does allow BP to collect about 15,000 barrels a day from the gushing well. Unfortunately, the U.S. government has recently increased their estimates for the leak to 40,000 barrels a day. The growing environmental disaster is fueling a hurricane of political rhetoric against BP. Many are worried that BP may be forced into bankruptcy to pay for the clean up costs. There is certainly a growing chance that BP will cut its upcoming cash dividend to shareholders to help pay for the clean up efforts. I'm not so sure BP will be forced into bankruptcy. The company has annual sales in the neighborhood of $230 billion with an after tax profit around $13 billion. I heard the latest estimate on clean up is around $70 billion. They are not going to have to come up with that money all at once.

Once the well eventually gets plugged and the clean up costs are more accurately defined there is a chance that someone could try and scoop up BP as a takeover target given the 50% haircut in its market cap. It will be interesting to see what headlines emerge over the weekend. The political rhetoric against BP is having an effect on U.S./U.K. relations. President Obama is due to meet with the British Prime Minister on Saturday (June 12th). Meanwhile BP's CEO will be facing questions from angry U.S. lawmakers when he appears before congress later this month. The bigger concern is how the oil spill and the damage in the Gulf will affect economic activity for years to come. There are already estimates that property values around the Gulf will be damaged for a long time.

I am not just concerned about housing values around the Gulf but across the nation. The pace of home sales is likely to plummet now that the tax-credit has expired. This may be prime time residential real estate selling season but with unemployment still stubbornly high and mortgage lending qualifications still strict the pace of improvement is likely to stall. Foreclosures remain at record highs and will continue to plague the economy for the next 12 to 24 months. The senior vice president at RealtyTrac offered his opinion that foreclosures might peak in the second half of 2010 but that remains to be seen. The chief economist at Fannie Mae, Doug Duncan, said that housing values may not bottom until the third quarter of 2010. Again, we'll have to wait and see. Zillow.com's chief economist, Stan Humphries, believes that even when we do hit bottom we're not going to see a sharp recovery. Home values could drift sideways for years.

The major influence on the housing market is going to be jobs. Stocks got a bounce on Thursday thanks in part to a drop in continuing unemployment claims, which fell to their lowest level in a year. Yet I strongly suspect that number is dropping because people have used up their unemployment benefits and they're falling off the list. Meanwhile initial weekly jobless claims are not improving. They continue to hover around the 450,000 level.

If consumers are nervous about their jobs then they're not going to spend very much. That was evident in the May retail sales number. Economists were expecting the May retail sales number to dip but still come in positive. Instead retail sales fell -1.2%, this was the first drop in eight months. Retail sales could end up being a sore spot in the economy until we see the back to school rush in August.

Technically the markets are mixed. This past week provided another oversold bounce and short squeeze from support. If you're bullish this looks like a possible double-bottom. I'm concerned the S&P 500 could be setting up for a rally toward resistance near 1150 that eventually rolls over and forms a huge bearish head-and-shoulders pattern. On a short-term basis the S&P 500 is facing resistance near 1100-1110 and its simple 200-dma. Active traders could try bullish strategies on a move over 1110 but look for resistance at 1150. You'll also want to keep an eye on the 50-dma. If the 50-dma crosses under the 200-dma it is normally a very bearish sell signal but that may not happen for another few weeks. If the S&P 500 closes under 1040 I think we're looking at a multi-week decline toward 950 with a pause near psychological support near the 1,000 level.

Chart of the S&P 500 (daily):

Chart of the S&P 500 (weekly):

The chart of the NASDAQ Composite looks similar with a bounce near the 2150-2140 zone. Unfortunately there is plenty of resistance in the 2300-2400 area. Right now I'm not very optimistic on the fate of the NASDAQ but I will point out several of the technical oscillators have turned bullish from oversold levels.

Chart of the NASDAQ:

The small cap Russell 2000 index managed a nice bounce from the 607 mark on Tuesday and closed back above its simple 200-dma (resistance) but has yet to break the bearish trend of lower highs.

Chart of the Russell 2000 index:

I want to draw your attention to the semiconductor index (SOX). The longer-term trend in the SOX is still bullish in spite of the correction from its April highs. Thus far investors have continued to buy chip stocks when the SOX nears support around the 325 area. Unfortunately the trend of lower highs makes this look like the SOX is coiling for a bearish breakdown lower. If the SOX can close over the 375 area it would really strength the NASDAQ but a breakdown under 325 could be a signal we're headed lower.

Chart of the Semiconductor Index (SOX):

The last chart I want to show you tonight really concerns me. During the 2008 crash, when money managers were desperate to park their money some place safe, there was a flood of buying in the short-term 13-week treasury bill. There were several times the yield on the bill was essentially zero but traders didn't care because it was "safe". In the last two weeks the yield on the 13-week bill has plunged. I see that as a sign money is moving into the short-term treasury as a safe haven because money managers don't trust the market.

Chart of the Short-term 13-week Bill (IRX):

This coming week we'll see another round of economic data but I'm not expecting any of them to be a market mover. The biggest reports are the Producer Price Index (PPI) and Consumer Price Index (CPI), which analysts will dissect for signs of inflation (or even deflation). Thus far inflation remains very low, which contributes to the Federal Reserve's stance to keep interest rates low for the foreseeable future.

Since 1927 the S&P 500 has seen 58 corrections of -10% of more. The current drop from the 2010 April highs to the May-June lows has been more than 14%. Out of those 58 corrections there were 33 times (56%) where the index did not hit the -20% boundary where most market technicians declare a new bear market has been born. I suspect that if we see the S&P 500 close under 1040 the odds of us hitting the -20% bear-market territory will skyrocket. On a short-term basis, last week's bounce from support just upped our chances of seeing some end of quarter window dressing but I doubt we'll actually see it until after the quadruple-witching option and future expiration on Friday, June 18th. Until expiration we may be stuck trading sideways.

LONGER TERM OUTLOOK

Previous Comments on my Long-Term Outlook:

My long-term outlook has not changed. I still expect the economy to see a double-dip, "W"-shaped rebound with the second dip in late 2010 (some analysts are predicting it will not show up until 2011). Lousy consumer spending, rising foreclosures, and lagging job growth will be the main culprits. Several weeks ago there were some comments out of the U.S. Treasury concerning foreclosures. The Obama administration's HAMP loan modification program can only help a certain number of homeowners and one official said that even if the HAMP program was a total success we should still expect millions of new foreclosures. Estimates were in the 3 to 5 million foreclosures over the next three years but a White House advisor was quoted with estimates in the six to ten million range over the next three years. This only reinforces my own belief that we will see another tidal wave of foreclosed homes in 2010 and 2011. What is that going to do to consumer confidence and consumer spending? It's not going to help! You can review my long-term outlook here. It's the second half our my "Two Months Left" commentary.

~ James Brown