The post-holiday bounce on Tuesday didn't last very long. Equity markets immediately turned south again. The sell-off is picking up speed both in Europe and the U.S. as investors start betting on Eurozone break up and a global recession. Nearly every piece of economic data released last week was negative or worse than expected.

The euro currency continues to plummet and hit a new two-year low near $1.23. This is helping fuel a rally in the U.S. dollar, which is up five weeks in a row. Gold managed to rally on Friday as stocks broke support. Oil is in freefall thanks to a rising dollar and lower demand as economic activity slows down. Crude oil prices hit new 2012 lows, trading under $83 a barrel. Money is rushing into the safety of bonds with the yield on the U.S. ten-year note hitting 1.44% intraday and closing at 1.46% on Friday. In the 66 years they have been keeping records on bond yields, that is an all-time low.

Europe, Greece, and Spain remain in the spotlight. A recent poll showed that most Greeks want to stay in the eurozone while most investors are expecting Greece will exit the euro. An Greek exit would cut the country's income in half and exacerbate the country's unemployment problem. The problem is the country has been in recession for years and the strict austerity is not going to help spur any growth. It seems the anti-austerity political party is gaining the lead as we near the June 17th elections.

Meanwhile money is rushing for the exits in Spain as the bank run continues. The region is extremely worried about the health of Spanish banks. Spain's leaders have called for the banks to shore up their balance sheets and raise more capital. Investors and consumers are not waiting around to see if the banks will fail or not. In the month of May more than 66 billion euros left the country.

China was making headlines last week. On Tuesday there was hope that the government would offer some new stimulus to help their slowing economy. Yet those expectations were dashed given recent comments in the state-run papers. The HSBC Chinese manufacturing index showed a drop from 49.3 in April to 48.4 in May. This is a new five-month low. Readings under 50.0 indicate contraction, over 50 suggests growth. The official Chinese PMI data came in at 50.4, down from 53.3. Most analysts don't trust the "official" numbers. The government is expected to cut the bank reserve ratio again this weekend but so far their cuts haven't been enough to stop the economic slowdown. Meanwhile China's neighbor, India, made headlines with their quarterly GDP growth rate falling to 5.3%. Yes, they are growing at +5% but that was the lowest quarterly growth rate in nine-years. India is also concerned that their economy is slowing down too fast.

The parade of economic data in the U.S. this past week was pretty dismal. The ISM index fell from 54.8 in April to 53.5 in May, which was lower than expected. The Q1 GDP estimate was revised down from +2.2% to +1.9%, also lower than expected. The Chicago PMI unexpectedly fell from 56.2 in April to 52.7 in May. Economists were expecting the ADP employment report to show a gain of +157,000 new jobs but it came in at +133,000. The weekly initial jobless claims rose from an estimated 368,000 to 383,000. The pending home sales data for April plunged to -5.5% compared to estimates for +0.6%. The Consumer Confidence index for May fell from 68.7 in April to 64.9 in May. This doesn't match up well with the four-year high in the University of Michigan Consumer Sentiment report issued last week. Vehicle sales in the U.S. were expected to rise from a 14.4 million pace in April to 14.5 but May saw a drop to a 13.8 million pace, the slowest pace in five months.

The mother of all economic reports is the monthly nonfarm payroll (jobs) report. Economists had been expecting growth of +150,000 to +175,000 new jobs. Yet May's report only showed a gain of +69,000. Pouring salt on the wound was a downward revision of -49,000 jobs for the prior two months. Meanwhile the unemployment rate ticked up to 8.2% after months of being at 8.1%. The U.S. unemployment level has been at 8% or higher for 40 months, which is the longest streak since 1948.

Add up all the headlines and it was nothing but bad news and traders decided to hit the "sell" button.

Major Indices:

The S&P 500 index is down -3.0% for the week, which reduced its year to date gains down to +1.6%. The index is also down -10% from its 2012 highs near 1,422. Unfortunately this past week saw the S&P 500 index breakdown under support at the 1300 level and its simple 200-dma at 1285. A lot of traders were keying in on the 1280 level, which has also been broken.

All of these broken support levels are now new overhead resistance. If the sell-off continues the next level of significant support is probably 1250. The index started the year at 1257.

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The NASDAQ was hammered for a -3.1% loss on the week, which has reduced its year to date gains down to +5.4%. Technology stocks, especially the semiconductors, have really been underperforming. This past week saw the NASDAQ composite index break support near 2800, 2750, and both its 200-dma and 300-dma. This trend of lower lows would suggest the NASDAQ is headed for the next level of support at 2700. If 2700 fails then the next significant support level is probably 2600.

Daily chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

The small cap Russell 2000 index fell -3.7% last week and is now down -0.4% for the year. The oversold bounce failed at prior support near 780. Friday's plunge saw a new breakdown under its 200-dma. The next level of significant support is probably the 700 area. Coincidentally the bearish head-and-shoulders pattern is forecasting a drop toward 710.

Daily chart of the Russell 2000 index

Weekly chart of the Russell 2000 index

After last week's rush of economic data the calendar slows down a bit this week. The major events will be the European Central Bank (ECB) meeting on Wednesday and Ben Bernanke's testimony before congress on Thursday. There is a good chance the ECB could announce a rate cut or potentially some hint at future QE.

It's not on the calendar this week but some time during the month of June we are expecting the U.S. Supreme Court's decision on Obamacare.

FYI: The IMF's quarterly review of Greece has been postponed from the end of May until after the June 17th elections.

Economic and Event Calendar

- Monday, June 04 -
Factory Orders for April

- Tuesday, June 05 -
ISM Services for May

- Wednesday, June 06 -
Federal Reserve Beige Book report
ECB meeting (interest rate decision)

- Thursday, June 07 -
Weekly Initial Jobless Claims
Fed Chairman Bernanke's testimony before Congress

- Friday, June 08 -
Wholesale Inventory data for April

Upcoming events:

Supreme Court ruling on Obamacare (some time in June)
June 14th OPEC meeting
June 17th, Greek elections
June 18-19th, Iran/multi-nation talks (Russia, U.S., China, France, U.K.)
June 19th, FOMC meeting
June 28-29th, EU summit
mid June 2012, IMF quarterly review of Portugal and Ireland

The Week Ahead:

Looking ahead the future looks stormy. Stocks are sinking but eventually the markets will see an oversold bounce. The challenge is that it will just be a bounce. It could take a while before stocks see a bottom. Financial stocks could be serious underperformers if the troubles in Europe escalate. One concern I have is the volatility index (VIX). Normally during periods of fear we'll see a capitulation day in the markets with big volume to the downside for stocks and a big spike higher in the VIX. The VIX is rising but it's nowhere near the levels we've seen a major bottoms. It used to be that spikes above 30 suggested a market bottom. Yet in 2010 and 2011 the VIX spiked past the 45 level.

Weekly chart of the Volatility Index (VIX)

It seems that Europe has some significant soul-searching to do. Are they willing to bite the bullet and do what needs to be done to save the euro? Or will Greek exit and thus paving the way for countries like Portugal, Spain and an potentially Italy to exit as well? This past week the ECB President, Mario Draghi, suggested that the current situation is unsustainable and the Eurozone was on the verge of "disintegration". Those are pretty strong words coming from a head of the ECB. It will be interesting to see if the ECB cuts rates on Wednesday or announces some new form of QE.

Federal Reserve Chairman Ben Bernanke speaks before Congress on Thursday and he could hint at some new plan. Operation Twist is scheduled to end at the end of June. If all they do is extend twist I doubt it's going to have much impact. Last month PIMCO head Bill Gross suggested that the Fed will announce QE 3 if we see a few months of worse than expected jobs data. Well May certainly qualifies as "worse" but is one month of bad data enough to spur the Fed to action? Or will the Fed, as many believe, hold on to any ammo it has left to stimulate the economy, and save it until the Eurozone starts to implode on a Greek exit?

The next big trigger for the market could be the June 17th election in Greece. If the anti-austerity crowd wins they've already warned they will renegotiate all the prior bailout agreements. Eventually the EU or maybe just Germany, will say "no" but it's possible Greece could try to hold the EU hostage for more "financing" as they like to call it.

Meanwhile in the U.S. the economic picture seems to be slowing down. Home sales should be on the up swing considering that we're in the major selling season but the most recent data showed pending home sales were falling. That doesn't bode well. Mortgage rates are at all time lows, under 4%, but most people can't qualify for those rates or they can't move because their own house is under water.

The market's trend is down. It's likely to stay that way until something happens. It could be the announcement of a new QE program from the Federal Reserve or it could be some new QE program from the ECB (maybe another LTRO program). Or maybe the Greeks will vote to stay in the Eurozone after all. Elsewhere in the world we're going to hear more about Iran as we near the EU oil embargo set to begin on July 1st. This could spark a bounce in oil prices.

Cash is a valid position. There is no need to rush into new bullish positions now. Trying to catch the falling knife usually results in injury.

- James