Despite gains at today's open the big short squeeze on Monday failed to see any follow on buying.

Market Statistics

The Dow rallied +70 points early Tuesday after the home sales came in better than expected but those gains failed to hold and the Dow and Nasdaq both closed negative for the day. The "sell the close" trend returned although a small buy program in the last ten minutes of trading did rescue the indexes from a bigger loss.

The economic report providing the morning lift was the Existing Home Sales for April. Sales rose to an annualized rate of 4.62 million homes compared to 4.48 million in March and estimates for 4.59 million. That was a +3.4% rise over March. The median home price rose a whopping +10.1% year over year due to a declining share of distressed homes. Home prices m/m rose a whopping +6.5%. Listings declined by more than -20% year over year.

The months of supply rose from 6.2 months to 6.6 months but supply normally rises in April-May. Sales are nearing at the same pace as early 2010. The spikes on the chart were the two versions of homebuyer tax credit stimulus programs. The impact of the pull forward into Jan/Feb by the warmer weather now appears to be over.

Improving home sales and prices is bullish for the economic outlook. Home sales and the associated activity in remodeling and moving will ripple through the sales chain. Nearly everyone has to sell a house in order to buy one so the economic activity will increase dramatically if the trend continues. However, we need to remember that this is the hot selling season. In August sales should begin to fade as the summer moving season ends.

Existing Home Sales Chart

Unfortunately the home sales report was the only positive economic report for the day. The weekly chain store sales declined -1.7% following a -0.8% reading the prior week. Mass layoffs for April rose unexpectedly to 1,388 events from 1,273 events in March. Workers impacted by those events rose to 135,600 from 121,310. While the numbers represent the second consecutive month of gains it is somewhat lagging data since the market already reacted to the Nonfarm Payroll reports for the same period. Manufacturing was responsible for 19% of all the layoff events and 23% of the new claims. The longer term trend remains downward.

The Richmond Fed Manufacturing Survey for May declined to 4.0 from 14.0 in April. That headline number is a five month low compared to a cycle high of 20.0 back in February. The new orders component declined from 13.0 to 1.0 and back orders plunged to -18.0 from +2.0. Shipments fell from 18.0 to zero.

Anything over zero represents expansion so activity in the Richmond area did increase in May but at a much slower rate. On the positive side the employment component increased from 10.0 to 16.0 and the average workweek increased to 11.0 from 3.0. Apparently manufacturers are expecting business to increase soon.

Richmond Fed Chart

The economic calendar for Wednesday has new home sales as a point of interest for the U.S. but the biggest challenge will be the EU summit. The topics there will be recession and a Greek exit from the euro. Late Tuesday the former Greek prime minister warned that Greece was considering plans for an exit and the threat was real. He also warned the economic impact would be catastrophic. Papademos warned that Greece has no choice but to stick to the austerity program or see the economy crumble even further, send inflation soaring and generate new civil unrest. He also said the economic consequences had profound and far reaching implications for the rest of the euro zone.

The Papademos comments accelerated the already declining markets late in the afternoon. The euro closed at a new four month low at 126.18.

Euro Chart

Also of interest is the six-nation meeting with Iran over their nuclear program. The head if the IAEA returned from Iran on Monday and said although there was no signed agreement they had made a decision to reach an agreement. Since Amano had traveled to Iran to sign an agreement on Sunday the "unspecified differences" he encountered was just one more red flag that Iran is trying to delay as long as possible in order to buy time just like they did in every set of negotiations over the last four years.

The White House said the "proposed agreement" was a step forward but Iran would be judged by their actions not their agreements. Iran has a tendency to agree to anything when the negotiations get tough but then once everyone high fives the agreement and goes home Iran goes right back to whatever it was doing before. Iran is probably trying to appear cooperative ahead of the six-nation meeting on Wednesday.

Iran has said they will expect the sanctions to be lifted before they grant the IAEA access. The six-nations have said repeatedly that no sanctions will be lifted without unlimited access to sites, documents and people regarding their past and present nuclear program. I would be extremely surprised if Iran ever allows unfettered access and there is no way sanctions are going to be lifted without a major change in Iranian actions. This meeting is destined to fail but the negotiators will probably claim "progress" in order to not cast Iran in a bad light. They will also want to downplay any problems so that oil prices don't spike and create elections problems for more than one government.

Hewlett Packard will report earnings after the bell on Wednesday and they are expected to announce layoffs of 30,000 or more.

Economic Calendar

The news of the aborted Iranian agreement signing did not lift oil prices. I suspect the problem was related to the expiration of the current contract at the close today. With storage at the Cushing Oklahoma futures delivery point at record highs there was no place for traders to store oil if they wanted to bet on higher prices in the months ahead. The dollar index rebounded back to the 18-month high levels we saw last week and that also pressured oil, metals and other commodities.

Crude Oil Chart

Dollar Index Chart

Thousands of investors clicked "unlike" on their Facebook shares this week with the stock price falling to $31 at the close. That is an 18% decline from the listing price and a 31% decline from the highs. The stock dropped -9% today alone. Volume is slowing but still brisk. On Friday there were 573 million shares, 186 million on Monday and 102 million today.

FINRA and the SEC are investigating allegations that Morgan Stanley, the lead underwriter, shared negative information on Facebook with institutional investors in the days just before the IPO. The Massachusetts Secretary of Commonwealth has subpoenaed Morgan Stanley over the discussions with investors and releases of information. Reportedly the bank's consumer Internet analyst, Scott Devitt, told some investors he was reducing his revenue expectations for the company.

It is highly unusual for anyone at an underwriter to make statements about a company during the blackout period prior to the IPO. All of the pertinent information is supposed to be in the SEC filings by the company itself.

In a related case Phillip Goldberg, a Maryland resident, has sued the Nasdaq and is requesting class action status on the behalf of every investor that lost money on the IPO shares. The Nasdaq does have some liability but how much is unknown. Nasdaq said on Tuesday it would have cancelled the IPO had it known about the problems ahead of time. The exchange "by no means would have gone forward" if it had known the problems would disrupt a "normal trading day." The Nasdaq has "set aside" $13 million to compensate customers but the biggest hit is the damage to the reputation. Companies planning to IPO soon may not be willing to take a chance on the Nasdaq. Also, $13 million is not even going to pay the down payment on their legal bills. Brokers are claiming they put in sell orders on Friday that were not accepted or "lost" in the system. Conspiracy theorists believe the Nasdaq did not want the price for their biggest IPO to go negative on the first day so those orders were not "found" until Monday. I would be extremely surprised if there was activity of that type but the accusations are flying.

Facebook is also taking a lot of heat for how it managed its own IPO. They hyped it, raised the price then raised the shares to be distributed and appeared greedy. Some cited the rush of early investors to exit the stock at the IPO was a sure warning sign. If the investors who had bought in at a much lower number thought the business was sound and would be able to grow profits significantly they would have wanted to stick with the company for greater returns ahead. Instead they raced to the exits while employees faced long lockup periods and retail investors, mostly novice, bought in at the top. I would not be surprised to see a suit against Facebook as well if the shares continue moving lower. Given the almost daily downward revisions on earnings expectations the odds are good it is going lower.

FaceBook Chart

After the bell Dell (DELL) reported earnings and shares were crushed back to January 2011 levels at $13. Dell reported earnings of 43 cents compared to estimates of 46 cents. Revenue was $19.42 billion compared to estimates of $14.91 billion. Q2 guidance was in the range of $14.85 billion and analyst estimates were around $15.5 billion. Dell blamed weakness in the public sector, weakness in Europe and slowing sales in the enterprise space. The company said there was serious weakness in Europe, Middle East, Africa and parts of Asia. Dell called it a "challenging economic environment." These are the same factors that hit Cisco when they reported earnings on May 9th.

Dell said notebook sales fell more than 10% due to higher utilization of tablets. They said there was a strategic shift underway in the enterprise arena to a higher focus on mobile. Dell shares fell -13% on volume of more than 4.15 million in afterhours trading.

This is a bad omen for Hewlett Packard when it reports on Wednesday after the close.

Dell Chart

Ariba (ARBA) was a big winner today with a +19% gain on news SAP was going to buy the company for $4.51 billion. SAP is trying to raise its exposure to the cloud computing environment as it competes with Oracle to take over the database world. SAP is offering $45 per share for ARBA and the board has approved the offer. Ariba has a business to business network that connects 730,000 companies with transactions in excess of $319 billion per year. Ariba's profits rose +40% in its latest fiscal year.

Ariba Chart

Google (GOOG) was the biggest lower on the Nasdaq today and the company is in danger of a break below critical support at $600. That support has held for three months but the acquisition of Motorola is pressuring that support. The acquisition was complete on Monday but Motorola executives are racing out the door like the building is on fire. Just to name a few the CEO, CFO, strategy Chief, Senior VP Alain Mutricy, Supply Chain head Mike Ogle, HR head Scott Crum, COO Juergen Stark and Enterprise head Christy Wyatt.

Google is also causing waves saying Motorola will have a simpler and more focused strategy, which analysts see as a much narrower product offering menu. Many analysts are worried that Google may have bitten off more than they can chew without taking some serious charges to earnings in the coming quarters.

Google Chart

The markets tried to extend Monday's short squeeze today but the 10:00 rally on the Home Sales peaked at 11:AM and it was all downhill from there. The news from the former Greek PM that Greece is considering an exit from the euro was just grease for a slide already in progress.

The Dell news tonight and the worry over Hewlett Packard posting the same kind of result on Wednesday has already pushed the futures to -5.00 tonight. That is not a big loss given the news but I believe investors are hoping for some positive news from the EU summit on Wednesday. The warm and fuzzy statements from the G8 over the weekend managed to fuel the Monday short squeeze and investors may be hoping for a similar result on Wednesday.

Merkel and Hollande are not going to join arm in arm and sing Kumbaya while walking to the next press conference. The austerity now plan versus growth through social spending and bigger deficits approach is just not going to find any common ground in the near future. While there may be some positive sound bites from the summit may provide a temporary bounce the June election in Greece will continue to be black hole in the market's future.

The Organization for Economic Cooperation and Development (OECD) warned EU leaders on Tuesday the eurozone risks felling into a "severe recession." Chief Economist Pier Carlo Padoan warned the eurozone could see GDP decline by 02% in 2012 and grow by a minimal +0.9% in 2013. He said the current situation in the eurozone was approaching the worst case scenario the OECD laid out in November. If it comes to pass Padoan believes it will have serious repercussions for the rest of the global economy. He called on the EU leaders to implement a "growth compact" (social spending) to promote growth. He also called on the ECB to issue euro bonds, debt issued jointly by the countries in the currency bloc. Lastly he called on the ECB to print more money through additional LTRO programs as well as provide support to banks currently on the endangered species list.

The IMF also warned Europe of impending doom if the current situation was allowed to continue. Seems it was a big day for the alphabet agencies to grab the headlines. Since a divided Europe over how to proceed will probably keep any material program from being implemented until it is too late the pressure on the global markets should continue.

This is going to weigh on the U.S. markets this summer as we wait for another decision on Greece. I believe the S&P is going to retest the lows from Friday and a failure on that retest is going to open the door for another significant drop.

That low from Friday was 1292 and that is now the number to watch.

S&P Chart - Daily

The Dow has the same problem as the S&P only the Dow is going to take a serious hit from HPQ at the open. The low from Friday that counts is the 12,365 level and it will take a decent drop to retest that on Wednesday. Without big declines in IBM or the major oil companies it will probably take more than one day to retrace our steps. That will give traders time to digest the news from the EU summit and decide if there is hope or the EU situation is hopeless.

Resistance today was 12,575 and it was pretty solid. Support was 12,450 so those are the numbers to watch for Wednesday.

Dow Chart

The Nasdaq posted a minor decline of 8 points to close at 2839. Resistance was solid at 2865 and 2830 was initial support. Dell is going to weigh on the Nasdaq on Wednesday and possibly Google. GOOG was a major problem on Tuesday with a -13 point loss. If GOOG breaks support at $600 it could trigger technical selling and it may not be pretty.

On the bright side Apple only gave back -4 points after a +30 point gain on Monday. After the Facebook debacle Apple suddenly looked cheap again.

Converging worst case support is 2750.

Nasdaq Chart

I theorized in my weekend commentary that we could expect a very oversold short squeeze any day. That happened on Monday and the pressures have been equalized. The market direction from here will be determined by the headlines or lack of headlines depending on your view.

The EU summit is going to be the key point on Wednesday and like the Fed they will try and talk the market up with positive sound bites. If they are successful it will probably only be temporary.

Dell has poisoned the well for Dow component Hewlett Packard so the market will probably open negative. There is a lot of darkness before morning so anything is possible. I would hesitate entering any new long positions until the EU smoke clears.

Gold and silver are imploding in the futures markets overnight so that suggests another rocky day for the euro.

Enter passively, exit aggressively!

Jim Brown

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