The S&P 500 just delivered one of its best weeks of the year with a +3.7% gain after touching a -10% correction the week before. The trend in currencies saw a brief reversal with the euro ending a five-week slide and the dollar snapping a five-week rally. The overall trend for both remains unchanged at the moment. Gold and silver failed to see much progress and oil's oversold bounce for the week gave back most of its gains by Friday's close. Yields on the U.S. ten-year note bounced from record lows to end the week at 1.6%.

Much of the market's focus remains on Europe and China. Two weeks ago China denied that they would add any new stimulus to their slowing economy but on Thursday the Chinese central bank announced a surprise rate cut to interest rates. This is the first cut since 2008 and suggests that May's economic data might be worse than expected.

Meanwhile in Europe the ECB left rates unchanged at 1.0% due to worries about rising inflation. German factory orders and exports came in worse than expected. Eurozone retail sales also disappointed. Spain was making headlines with its successful 2.1 billion euro debt auction. Shortly after this successful debt sale the country's credit rating was downgraded from A to BBB. We'll talk more about Spain in a bit.

At home in the U.S. the economic data was relatively anemic. The weekly initial jobless claims were virtually in-line with estimates at 377,000 yet continuing claims ticked up from 3.25 million to 3.29 million. The ISM services index improved from 53.5 to 53.7 in May, which was better than expected. The Federal Reserve's Beige Book was a non-event with the report suggesting the same modest to moderate economic activity across the 12 districts. There was some hope that Fed Chairman Bernanke might hint at further stimulus during his testimony this past week but he failed to offer any new signs of further QE other than "being prepared to act".

Major Indices:

Two weeks ago the S&P 500 index plunged -3.0%. The weakness continued on Monday until the index managed a little double bottom near 1266. The index reversed into a 4-1/2 day bounce posting a +3.7% gain on the week. After hitting a -10% correction from its 2012 highs an oversold bounce isn't a surprise. Unfortunately the gains last week have the sharp, volatile characteristics of a bear-market rally.

The S&P 500 is back above key levels at 1280, 1300, 1320 and its 200-dma. The next hurdle for the bulls is likely resistance at the 1340 level. Beyond that is technical resistance at the 50-dma and 100-dma just under 1360.

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The NASDAQ composite produced a very strong +4.0% gain, helped in large part by a +5.5% surge in the SOX semiconductor index. The NASDAQ is back above key levels like its 200-dma, 2750 and 2850. If this index can rally past 2880 it could signal further gains although technically 2900 should be resistance. I'd watch for a rebound to 2950 and its 50-dma if the NASDAQ can close over 2880.

Daily chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

The small caps tend to be more volatile than the big caps and this week was no different. The Russell 2000 index delivered a +4.3% gain. It is back above its 200-dma. Yet the rebound has failed to breakout past key resistance at the 780 level. Thus the bearish head-and-shoulders pattern is still in effect and suggesting a drop toward the 710 area.

One thing you'll notice on the weekly charts is that on the S&P 500 and NASDAQ the big bounce almost created a bullish engulfing candlestick reversal pattern. Yet on the $RUT's weekly chart it did not.

Daily chart of the Russell 2000 index

Weekly chart of the Russell 2000 index

There are a number of headlines to watch for this week. On Monday the markets will be reacting to generally disappointing economic data out of China. Plus, the EU bailout for Spanish banks. Once we get past Monday the focus will turn to the upcoming Greek elections on June 17th. The OPEC meeting on Thursday could produce headlines. Meanwhile in the U.S. the major reports will be the PPI and CPI readings on inflation.

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 11 -
(nothing significant)
except reaction to Chinese economic data and Spain's request for help with their banks.

- Tuesday, June 12 -
import/export prices for May

- Wednesday, June 13 -
U.S. retail sales for May
PPI for May

- Thursday, June 14 -
Weekly Initial Jobless Claims
OPEC meeting
CPI for May

- Friday, June 15 -
New York Empire Manufacturing survey
industrial production and capacity utilization
University of Michigan Sentiment for June

- Sunday, June 17 -
Greek Elections

Upcoming events:

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
Supreme Court ruling on Obamacare (in June)

The Week Ahead:

This weekend (June 9-10) one of the major events is new economic data out of China. Economists were estimating that China's factory output would rise to +9.9% growth, up from +9.3%. On Saturday May's report only showed a +9.6% growth, which lends weight to the idea that the world economy is slowing. Another disappointment was China's retail sales growth in May, which came in at +13.8%, worse than the +14.3% estimate. Economists are estimating that China's 2012 GDP growth will slow to +8.2%, the lowest reading in 13 years. India and Brazil are also seeing their GDP growth slow, which reinforces the worry of a global slowdown.

The really big event this weekend was a bank bailout for Spain. I mentioned earlier that Spain held a successful debt auction of 2.1 billion euros. Unfortunately Spain sold most of that debt to the country's own banks, all of which are struggling. The rumor on Friday night was that Spain would officially ask for help to recapitalize their major banks. The country is struggling with massive unemployment and a busted real estate market. Their banks are sinking under a flood of bad real estate loans. Spain has already spent 15 billion euros trying to save their banks. There has been a monumental exit of money leaving the country over the last several weeks.

The rumors were true. Spain did ask for help. A conference call on Saturday with the 17 EU finance ministers concluded with the group promising a 100 billion euro ($125 billion) bailout for Spain's banks. Since the IMF can't loan money directly to individual banks the money will likely come from the Emergency Financial Stability Facility (EFSF) or the European Stability Mechanism (ESM), which is scheduled to be active a month from now.

The question is will this bailout news soothe worries over Spain or will it merely fan the flames that Spain is inching closer to the financial abyss? There have been worries hovering over Spain for a while now and speculation was growing that Spain's banks needed help. The EU leaders wanted to do something about Spain prior to the upcoming Greek elections on the 17th. We'll have to wait to see how the market reacts on Monday. Fortunately Asian markets and European markets will get to react first so by the time the U.S. markets open the reaction might be muted. It will be interesting to see how the Spanish bond market reacts. Will yields on Spain's 10-year notes rise or fall on this news? A rise toward 7% yields would signal more trouble.

Looking ahead the economic storm on the horizon isn't going away. J.P.Morgan issued some concerns that the three-month trend in the economic reports (mainly PMI reports) has turned negative. Euro-area PMIs could fall toward 40 by this fall. Numbers under 50 indicate contraction. Goldman Sachs says their global leading indicator is already suggesting the world's economy is contracting. Echoing this sentiment were a number of revisions for U.S. GDP growth where Barclays, Deutsche Bank, and Goldman all lowered their estimates. With the global economy slowing there is going to be little incentive for U.S. corporations to increase hiring. Meanwhile we still have an ugly U.S. presidential race ahead of us and the looming "fiscal cliff" for January 2013 that has not been addressed by U.S. lawmakers.

The focus this week will be the Sunday, June 17th, Greek elections and if the anti-austerity Syriza party wins or not. If Syriza wins it will signal a Greek exit from the eurozone. How soon an exit we don't know but the market reaction will likely be swift and ugly since a Greek exit could pave the way for additional countries to exit the euro.

I would not be surprised to see stocks churn sideways (to down) as we wait for the Greek elections. The results from this vote could determine market direction for the rest of the summer.

- James