Market Stats for 06/09/10:

Wednesday turned out to be rather disappointing for investors. Stocks initially rallied on strong economic data out of China, generally positive comments from Fed chairman Ben Bernanke, and another round of improvement in the Beige book report. The U.S. markets were up 1% midday, the Dow Industrials traded back above the 10,000 mark, and the energy sector helped lead the way with a 2% rally. Unfortunately the oversold bounce ran out of steam. The euro's early strength failed near resistance. Geopolitical risks remain high. Shares of oil giant BP sank on fears of potential bankruptcy. Energy stocks reversed to close down over 1%.

Foreign markets were mostly higher by day's end. A government official in China disclosed that the country's exports for May 2010 were up +50% from last year's levels and the number new loans were significantly higher than expected. Economists were looking for a +32% jump in exports. This better than expected export number eased fears that the global economy was stalling, especially given the low-growth environment in Europe. The sharp rise in new loans alleviated some concern that China's actions to slow down their economy had not gone too far. The Chinese Shanghai index rallied 2.7% after hitting new one-year lows yesterday. The Shanghai is still off 18.4% from its April highs. The Hong Kong Hang Seng index gained +0.69% for the session and remains more than 11% off its 2010 highs. The Japanese NIKKEI index underperformed to close at six-month lows.

Stock market gains were widespread in Europe. Yesterday the British market was hammered after credit rating agency Fitch issued cautious comments about Britain's debt burden and budget deficits. This was not new information and England's FTSE index recovered with a 1.1% gain on Wednesday. Banks were showing leadership after a Citigroup analyst issued positive comments for European banks and suggested that bank dividends in Europe are poised to rise significantly. France's second largest bank Societe Generale SA also made headlines after the company said recent rumors about their derivative losses in the second quarter are unfounded. They are not expecting any "bad surprises" this quarter. The French CAC-40 rallied 1.96% for the day. Germany's DAX index managed a 1.98% gain for the session. The DAX has shown the most relative strength amongst its peers over the last several weeks with the German market only down -5.4% versus -12.7% for the FTSE. Yet movement in the DAX has been very volatile with huge whipsaws up and down since April. I suspect today is more of an oversold bounce and short-covering move. European stocks have been down three days in a row so today's move looks like a reaction to strength in banks and the Chinese export news. Traders remain on the defensive against new regulations with both French President Nicolas Sarkozy and German Chancellor Angela Merkel trying to convince European Commission President Barroso to impose an EU-wide ban on naked short-selling of stocks and bonds.

The euro currency remains the proxy for investor sentiment regarding Europe's chances to solve their debt problems. Unfortunately the early morning strength in the euro faded with a failed rally near the $1.20 level against the U.S. dollar. Naturally the dollar moved the opposite direction with a sharp move lower this morning only to rebound from prior resistance (now new support). Commodities like copper gapped open higher, presumably on the China news, but faded lower throughout the day on the dollar's intraday strength. Gold hit some profit taking with a $10 drop to $1,235.00 an ounce after hitting a new high on Tuesday. Crude oil bucked the trend in the dollar and managed a 2.7% gain to $73.91 a barrel. Ben Bernanke issued comments that EU's problems wouldn't have a big impact on the U.S. Now combine this with the China's strong exports and suddenly investors were more optimistic about demand for oil. Plus, it didn't hurt that oil supplies fell more than expected. The Energy Department reported their weekly oil inventory data this morning. Economists were expecting a drop of 1.3 million barrels but the report showed a decline of 1.8 million barrels.

Chart of the U.S. dollar ETF (UUP):

Chart of the Euro ETF (FXE):

There were multiple economic releases today. The biggest one was the Federal Reserve's monthly Beige Book report, named for the color of its cover. This morning's report showed improving economic activity across all 12 Federal districts, which is an improvement. Last month (April) the St. Louis district did not show any growth. The pace of growth in May was considered moderate and the Fed made note that negative headlines from Europe has raised the level of uncertainty for our own economy. The report also showed that inflation remained under control, which should allow the Fed to keep interest rates low for the foreseeable future. Meanwhile Federal Reserve Chairman Ben Bernanke spoke before the House Budget Committee today. His comments that EU's challenges would not have much impact on the U.S. economy helped fuel the rally this morning. I do want to point out that Bernanke stated an economic "double dip" in the U.S. could not be "ruled out".

The other economic reports today was the wholesale inventories data and the MBA mortgage applications report. Wholesale inventories rose +0.4% in April, which continues the trend for March (+0.7%) and February (+0.6%). Sales continue to outpace inventory growth as April sales rose +0.7%. The stock to sales ratio slipped -0.1% to an all-time low of 1.13. The MBA purchase applications index is another clear indicator that the real estate market is slowing down now that the tax credit has expired. Mortgage purchase applications fell -5.7% from a week ago, which pushes the four-week change to -35%. Refinancing applications plunged -14.3% in spite of 30-year fixed rate mortgage rates hovering under 5%.

Fueling the market decline this afternoon was weakness in the financials and the energy sector. Investors have a wait-and-see attitude on the banks as we wait for the latest version of the financial reform bill. The White House, Senate and the congressional leaders are all trying to shape the biggest reform for the banking industry since the 1930s. Former Federal Reserve chairman and current White House advisor Paul Volcker made headlines this morning with his comments that the next version of the bill will probably have the "Volcker rule". This rule limits proprietary trading at big banks, limits their sponsorship of hedge funds, and limits their growth to avoid a too-big-to-fail scenario.

Oil stocks were probably a bigger drag on the market and the strength in crude oil provided no help today. One analyst suggested that BP might be forced into bankruptcy as soon as a month from now over costs and liabilities associated with the oil spill in the Gulf of Mexico. The markets are also concerned that BP may have to cut or eliminate their cash dividend to pay for the spill. Today's 15% plunge in shares of BP pushed the stock under the $30.00 mark. Shares are down 21% this week and down 50% from their highs near $60 when the leak occurred. Anadarko Petroleum (APC) only has a 25% stake in the leaking well but shares fell more than 18% today. APC was trading near $75 prior to the leak and closed under $35 today. The political rhetoric against BP has risen to hurricane levels, which only adds to the selling pressure on the stock. Average volume on BP is normally about 47 million shares a day. Today BP traded over 241 million shares. Combine today's oil sector weakness with Goldman Sachs' downgrade of the oil drillers yesterday and you can see it hasn't been a good week for energy stocks.

Chart of BP:

Technicals on the market don't look so good. It's easy to argue that stocks are oversold but just because they're oversold is not a reason to buy. The S&P 500 is down -13.3% from its closing 2010 highs. When we get into the -15% to -20 levels investors start to worry that stocks have moved into a bear market. If you are feeling optimistic then today's bounce near 1040 in the S&P 500 could be a possible bullish double bottom or at least a bounce from a new 1040-1100 trading range. Unfortunately, the oversold bounce failed under 1080 near the descending 10-dma. Bears could argue that the S&P 500 is coiling for a breakdown and a new move lower. If the 1040 level breaks then we are looking at drop toward the 1,000 level or even 950, which should be strong support. The 1,000 level would line up closely with the 38.2% Fibonacci retracement of the bounce from early 2009 and the 940-950 area is close to a 50% retracement.

Weekly Chart of the S&P 500:

Daily Chart of the S&P 500:

The Dow Jones Industrial Average has a similar pattern with a bounce on Tuesday near the May lows and the same bearish reversal near the simple 10-dma this afternoon. If the DJIA breaks down under support near 9750 I think we're headed for the 9400 area. Today's decline leaves the DJIA about 11.6% off its 2010 highs.

Chart of the Dow Jones Industrials:

The tech-heavy NASDAQ has underperformed both the S&P 500 and the DJIA with a 14.7% correction from its 2010 highs. Yesterday's bounce from the 2140 level has reversed and the index looks poised to hit new relative lows soon. The next level of support is the 2100 level, which was the low back in February.

Chart of the NASDAQ Composite:

The small cap Russell 2000 index has gone from outperformance during the spring rally to underperformance during the sell-off. The $RUT is off -16.7% from its 2010 highs and we're getting close to bear-market territory, which is traditionally -20% or more. The intraday rally reversed at technical resistance near the simple 200-dma. If the downtrend continues we're probably looking at the next level of support near 580 and the February low.

Chart of the small cap Russell 2000 index:

In summary the path of least resistance is still down. Stocks appear to be coiling for a breakdown into a new leg lower. Tomorrow's economic data with the trade balance report and the weekly initial jobless claims will probably not offer any market support. Investors remain very concerned over Europe's inability to solve its debt problems. A recent Bloomberg poll showed that 73% of investors expect Greece to default on its debt in spite of all the aid it has received. Until stocks quit reacting to negative news out of Europe we're going to have trouble sustaining any stock market gains.

Traders should remain concerned about the geopolitical risks simmering around the world. The United Nations Security Council just voted 12-to-2 in favor of imposing new sanctions against Iran. The countries of Turkey and Brazil voted against the measure with Lebanon choosing to abstain from the vote. A Bloomberg article said this is the fourth round of sanctions against Iran since 2006 and today's sanctions are designed to "restrict financial transactions" and further tighten the arms embargo including seizure of any cargo related to Iran's missile or nuclear technology.

There is still a chance the market could bounce on window dressing as we near the quarter end on June 30th but I wouldn't bet on it. I don't see any significant reasons for investors to buy stocks. The disappointing jobs data a few days ago reinforced the idea that the U.S. could roll over into a double-dip recession. We may not get any clarity on how corporate America is doing until second quarter earnings season begins in July.

- James