New central bank rate cuts overseas could not overpower another round of disappointing economic data. The low-volume holiday week gains in the U.S. market were erased with the S&P 500 index plunging on Friday in reaction to a dismal jobs number. Currencies were making big moves and a rise in the U.S. dollar was taking a toll on commodity prices. Meanwhile traders suffered through another round of earnings warnings as we approach the Q2 earnings season. For the week the S&P 500 index lost -0.5%. The NASDAQ is down -0.5%, the Dow Industrials are down -0.8%, yet the Russell 2000 index managed a +1.0% gain. One of the worst performers for the week was the SOX semiconductor index with a -2.4% decline.

The U.S. markets closed early last Tuesday and were closed all day on Wednesday for the fourth of July holiday. This led to a serious lack of volume that probably exacerbated both the move up and the move down. Some of the biggest headlines of the week were overseas. ECB President Draghi lowered his outlook for EU growth and to help stimulate their economy the European Central Bank cut their interest rate by 0.25% from 1.0% to 0.75%. This is a new all-time record low rate for the ECB. The ECB's peer, the Bank of England, left rates unchanged but raised their QE asset-buying program by $78 billion. One of the biggest surprises of the week was a rate cut by China's central bank, which lowered rates to 6.0%. The New York Times speculated on some global central bank cooperation since the announcement of these moves all came out within an hour of each other. Draghi denied any teamwork with his peers.

While we're on the subject of Europe the bond market is still flashing the "no confidence" signal. The big EU summit was only a week ago but yields on Spanish bonds have rallied again. Remember, the key level to watch is a 7% yield on 10-year bonds, which most economists believe is an unsustainable level for any country to service their debt. By Friday's closing bell the 10-year Spanish bond had a yield right at the 7.0% mark. Italy's bond yields are also in the rise with the Italian 10-year bond yield near 6.0%. In contrast money is surging into the safety of German bonds. The German 10-year bond yield fell to a new low under 1.5%. The German 2-year bond yield actually went negative for a moment on Friday with a minus 0.001 percent yield.

It was the first week of July so there were a number of economic reports. The U.S. ISM manufacturing index fell from 53.5 in May to 49.7 in June. Readings under 50.0 indicate contraction and suggest a potential recession. This was the first time the ISM closed under 50 since July 2009. The ISM services index fell from May's 53.7 to 52.1, which is the lowest reading since January 2010. Thursday brought the June same-store sales numbers from the few retailers still reporting (about 20) and most retailers missed analysts estimates.

It wasn't all bad. Gas prices have been falling the last several weeks, which may have helped auto sales. June vehicle sales hit an annual pace of 14.05 million, which was better than the 13.9 million estimate. Construction spending rallied in May and Factory Orders came in better than expected with a +0.7% gain. Consumers may not have been spending money in the stores but they were spending it in restaurants with the National Restaurant Association saying sales were rising to levels not seen since 2006.

On the job front the weekly initial jobless claims came in at 374,000. This was the first time initial claims were under 380K since mid May. The ADP employment report for June showed +176,000 new private payroll jobs, which is must better than the +133,000 estimate. This ADP news was such a surprise that many analysts were raising their forecast for the Friday morning nonfarm payroll report. Unfortunately that was a mistake. The biggest economic headline of the week was the June jobs number. Prior to Thursday the consensus estimate was for +90,000 jobs. After Thursday's ADP number many analysts were raising their estimates into the +125K to +150K range. Unfortunately the nonfarm payroll report came in at +80,000 jobs for June. May's numbers were revised up but April's were revised down and the net revisions was a loss of -1,000 jobs. The jobs data is very disappointing for everyone. It's not strong enough to suggest the economy is improving but it's not weak enough to spur the Federal Reserve into action.

Major Indices:

Last week the S&P 500 produced a bullish breakout past resistance at the 1360 level. Unfortunately it didn't last. The Thursday-Friday pullback dragged the S&P 500 back below 1360 and its 100-dma. You can see on the intraday chart that the index bounced at its Fibonacci retracement of the recent rally.

At the moment the S&P 500 has an intermediate trend of higher lows and higher highs (since early June) but this is within the larger bearish trend of lower highs and lower lows (since April). Yet you could argue the longer-term trend is still one of higher highs and higher lows from its 2011 low.

On a short-term basis I would expect the 1340 level to act as support since this area is bolstered by the simple 50-dma. The 1360 and 1380 levels are likely resistance. If the 1340 level fails then the S&P 500 might see another drop toward its 200-dma near 1300.

Intraday chart of the S&P 500 index:

Daily chart of the S&P 500 index:

The NASDAQ composite produced a similar pullback. Friday's market sell-off pushed the tech-heavy NASDAQ to its 38.2% Fib retracement of its most recent rally. Plus, you can see on the daily chart that the NASDAQ has yet to conquer the 61.8% retracement level on the rebound higher. Short-term levels of resistance remain 2950, 2975, and 3000. Potential support is at 2900 and 2880.

Intraday chart of the NASDAQ Composite index:

Daily chart of the NASDAQ Composite index:

The small cap Russell 2000 index has seen the strongest move. That fact is rather surprising. Normally small caps are seen as more risky than their big cap rivals. Given the trend of weak economic data and trouble in Europe why would the small caps be outperforming? We might be able to explain away last Monday and Tuesday as follow up short covering that was exaggerated by the low volume week. The index saw its rally reverse at resistance near 820. The 800 level might be short-term support but I would focus on the 780 level instead. If this rally somehow continues then 820 and 840ish would be overhead resistance.

Daily chart of the Russell 2000 index

After last week's parade of economic reports the flow of data slows down this week. The main economic events will be the PPI and University of Michigan sentiment numbers, which both come out on Friday. The FOMC minutes on Wednesday could be a market mover if there is any hint of new QE plans by the Fed. The real market moving news will be earnings. Dow-component Alcoa (AA) launches Q2 earnings season on Monday but the real bellwether to watch is J.P.Morgan (JPM), who reports on Friday. Earnings don't really pick up speed until the following week but JPM will have a big impact on the financial sector.

Economic and Event Calendar

- Monday, July 09 -
Alcoa (AA) begins Q2 earnings season

- Tuesday, July 10 -
(nothing significant)

- Wednesday, July 11 -
Wholesale inventory data
FOMC Minutes from the last meeting

- Thursday, July 12 -
Weekly Initial Jobless Claims
Import/Export prices for June

- Friday, July 13 -
PPI for June
University of Michigan (consumer) Sentiment
J.P.Morgan(JPM) reports earnings

The Week Ahead:

Looking ahead the market is facing a number of obstacles. The situation in Europe remains troubled. Last week's euphoria over the new plan to save the Eurozone has already faded. German chancellor Merkel is facing a lot of opposition back home after caving into peer pressure at the last EU summit. Meanwhile Italian and Spanish bond yields are climbing and they are a clear sign the bond markets do not have any faith that the EU members can come together and save the union. The 17 nations that use the euro currency will need to ratify the new changes and that could take months. Finland is already considering the cost of leaving the Eurozone instead of having to pay up to save their less fiscally responsible neighbors. Meanwhile the IMF has already warned that they will likely have to downgrade their global growth forecasts because manufacturing data in U.S., Europe, and China is all slowing down. Look for that IMF announcement in the next two weeks.

There does seem to be some growing speculation that the Federal Reserve might offer some sort of new stimulus at the upcoming July 31st-August 1st meeting. What form that stimulus might take is unclear. That's why analysts will be analyzing the FOMC minutes this Wednesday. Then again this might just be another big disappointment for the market.

Assuming that Iran doesn't do anything stupid and actually try and close the Straits of Hormuz this month then the market's focus will be on the Q2 earnings season. I warned readers last week that we could see more earnings warnings and we have. Wall Street continues to lower their estimates and it's possible that they might lower them too far, which would create the opportunity for an upside surprise. However, the trick will be corporate guidance. America is facing a fiscal cliff in January. No one knows who is going to win the presidential election in November. All of this uncertainty has businesses on the sidelines. That means they're less likely to hire people. They are less likely to spend money until some of this uncertainty goes away. It also means that corporate management might be too cautious with their guidance and that could tank the stock market.

I suspect there is a good chance we'll see the market retest its June lows over the next six to nine weeks. I hope I'm wrong but I would be cautious when it comes to new bullish trades.

- James