The markets posted a minor gain today on low volume but there was no catalyst to provide any real direction.

Market Statistics

This should be a short commentary because there was very little of importance happening. Nothing changed in Europe and U.S. economics were lackluster. The hot topic was again Facebook and you know how that news has been positively worn out in the preceding weeks. This was a wait and see day. The event calendar is chock full of major events but they are still in front of us.

The only major economic report was the ISM Services, which actually rose slightly but it was still below consensus estimates. The services ISM came in at 53.7, which was a minor +0.2 higher than the 53.5 in April. It was below the consensus of 53.9 but the whisper numbers were closer to 53.0. As far as the market was concerned it was neutral.

New orders rose slightly from 53.5 to 55.5 but employment declined from 54.2 to 50.8 and barely in expansion territory. Order backlogs were flat at 53.0. The entire report was lackluster and provided no incentive to the market.

On the bright side the headline decline of the last three months from the high at 57.3 in February was halted.

ISM Nonmanufacturing Chart

The economic calendar for Wednesday has two big events. That is the Fed Beige Book on the economy in each Fed region and the ECB meeting. Given all the declines in the recent economic reports the Fed Beige Book could be negative. If the number of regions showing growth declined or that growth overall declined the market may not react well.

The ECB meets on Wednesday and there is a chance they will make some change to policy but very slim. Analysts believe they will want to hold off on changes to force the EU leaders to actually face up to the problem. If the ECB continues to launch QE after QE program to keep kicking the can down the road then politicians can avoid the hard decisions until the last minute. Either way the ECB meeting will be a critical data point for Wednesday.

The big event for the week is the Bernanke testimony on the economy on Thursday. This is the event that probably powered today's rally. Traders who were short did not want to remain short over the ECB meeting just in case they took action but even more they don't want to be short on Thursday morning when Bernanke speaks.

Bernanke has a tough road ahead. James Bullard, St Louis Fed, and Richard Fisher, Dallas Fed President, are very adamant about any further Fed stimulus. Bullard said on Tuesday "A change in U.S. monetary policy at this time will not alter the situation in Europe." Fisher said, "Fed policy makers must keep their heads about them," and "Short of an implosion, I cannot support further quantitative easing."

Cleveland Fed President, Sandra Pianalto, told the WSJ that the "dismal U.S. jobs report did not merit a policy response."

The Fed is likely to extend the Operation Twist program that expires at the end of June but it will have a minimal impact since the Fed no longer owns any large quantity of short term treasuries.

Bernanke has a tough job determining future policy and then convincing the FOMC members to go along with him. The testimony on Thursday could give us insight into what the Fed will do when it meets next week.

Economic Calendar

The pressure is on the Fed because the economy just posted one of the worst weeks ever in economic terms. Bespoke Investments has tracked economic reports since 1998 and last week there were 21 reports. 18 of those missed forecasts and only one report beat estimates. Bespoke said that was the worst performance since tracking began.

So far this week the trend has continued with the ISM NY declining, Factory Orders falling sharply and the ISM Services missing estimates. That stretches the trend to 21 of 24 missing estimates.

Europe continues to turn in numbers that are even worse. Euro-area services and manufacturing output contracted at the fastest pace in almost three years in May. The Markit composit index declined to 46.0 from 46.7. That was still slightly better than the estimate of 45.9 but still the lowest reading since June 2009. The 17 nation euro zone barely avoided falling into a recession in Q1 but it is a foregone conclusion that Q2 will be in recession. Unemployment reached the highest level on record and economic confidence is the lowest since 2009. The outlook is not good.

Spain called for outside support for its banks for the first time since the crisis began. Spain can't bailout its own banks because the international debt market has shut them out. The Spanish Budget Minister said European institutions should help bailout the country's lenders. He said the amount needed is not a lot of money. Analysts believe it is between 40 and 100 billion euros and some believe it could be as high as 200 billion. Spanish bond yields closed at 6.3% on Tuesday.

There are calls for the European Stability Mechanism (ESM) to invest in the banks when it goes into operation in July. Unfortunately the ESM is funded by the 17 euro zone nations. Spain is supposed to contribute 70 billion and Italy 110 billion euros. How is the ESM going to be funded when the countries with the biggest contribution requirements the same ones that are lining up for handouts?

Linda sent me this today as a solution to the Spanish Banking problem. Spanish Bank Bailout Solution

The G7 and a few G20 nations held an emergency conference today and it turned into a disappointment. However, there was no official G7 statement after the call so there was nothing to move the market. The news from the call was sparse but some leaders did leak a few tidbits. Basically the European ministers told the G7 leaders they would have to take action to resolve the crisis because the EU was mired in controversy and conflicting visions of how to solve the problem.

The White House said after the call that European leaders were moving with a "heightened sense of urgency" to resolve the crisis. That is a non answer to a specific question. It means there is no resolution.

Today may have been light on European news but the bottom line is that nothing changed and the Greek vote on the 17th is still the next turning point.

In stock news Morgan Stanley finally began lending Facebook (FB) share to investors who want to short the stock. Morgan has a lot of it so this had to happen eventually. Normally an underwriter will wait 3-4 days. Morgan waited more than two weeks because of the problems with the IPO. Facebook shares fell to their lowest point since the IPO to close at $25.87 despite receiving its first ratings upgrade. S&P Capital IQ raised them from sell to hold. It was not much but it all counts. Unfortunately several other analysts were lowering their price target to the $15-$18 range on worries that revenue will decline when they report their first earnings as a public company. One analyst said the only way FB can avoid a continued decline in its shares is to preannounce strong earnings. Otherwise the worries will continue to grow and the stock will continue to be sold.

Facebook Chart

Starbucks (SBUX) announced it was buying a bakery for $100 million in cash. Has Howard Schultz suddenly developed a sweet tooth? Shares declined -3% on the news but I think it is a great idea. Starbucks needs more food items to sell in its coffee shops. Who would not want a sweet treat with their afternoon coffee?

Food already accounts for $1.5 billion of Starbucks annual U.S. sales and has grown by double digits over the last two years. Bay Bread LLC owns the La Boulange chain of artisan bakeries. Starbucks will start rolling out La Boulange brand products in San Francisco in early 2013 ahead of a nationwide rollout later in the year. I view the knee jerk decline in the stock on Tuesday as a buying opportunity at support of $51.

Starbucks Chart

As I said earlier this was a "passing time" day. There was no catalyst and volume of only 5.97 billion shares. That is the lightest volume since April 30th if you don't count the Friday before Memorial Day. Pre holiday Fridays don't count in the bigger picture.

The dollar rose slightly when the G7 meeting didn't produce a working statement. Oil prices firmed with a 25-cent gain to $84.27 after a -7% decline last week. Whoopee! Gold continues to hold its gains from Friday to $1619. It closed today with a +$7 gain. Another boring gain. Nothing was moving.

The S&P did manage to tack on +7 points to 1285.50 and just below the 200-day at 1285.68. For all practical purposes it is there but that should now be resistance. A move higher should target 1295 then 1325. I am not holding my breath. Nothing counts until after Bernanke testifies and the FOMC meets next week.

Support is now 1265 but that level is weak. If we do revisit it I expect it to fail.

S&P Chart

The Dow managed to post a gain for a change but it was very lackluster. It was not that traders suddenly decided to buy Dow stocks but they just decided not to short them any more ahead of the ECB meeting and the Bernanke testimony. Some traders took profits on their shorts but the volume was so low it suggests plenty more are holding their positions.

Resistance is the 200-day at 12,263 but that is more than 130 points higher. Support is 12,040-12,000 and the odds are good it will be tested this week unless we get a surprise out of Europe.

Dow Chart

The Nasdaq was the biggest gainer but it was not because of Apple, Google or Amazon. The big gainers were not the normal high flyers. Apple lost $2 and Google -$8.

Nasdaq Top Gainers

Nasdaq stocks were the biggest shorts on Friday when the Nasdaq lost 80 points. Today was profit taking when the decline did not continue. Resistance is 2800 followed by 2860. Weak support is Monday's low at 2725. The Nasdaq did close back over its 200-day average at 2760 so that is one technical point in its favor.

Nasdaq Chart

I don't want to beat a dead horse here but this was a throw away day. Nothing can be assumed from the minor gains other than some shorts are covering and some traders are betting on a Bernanke bounce on Thursday. Let's hope they are not disappointed.

The futures are up late this evening after Germany's Die Welt newspaper reported in a preview of a story that will run on Wednesday that Spain may get a "precautionary credit line" from the European Financial Stability Facility (EFSF) (not the same as the ESM). The credit line would be to support their banks. It remains to be seen if this will happen, how big the line will be or what conditions will be attached. At this point it is just a rumor. It was enough to spike the euro, drop the dollar and push the S&P futures up about +5 points in early evening trading.

We remain hostage to the headlines and fortunately that works in our favor when the headlines are positive. Even if Spain did get a loan it is only a temporary respite from the larger problems facing the euro zone and Greece still votes on the 17th.

While there may be a monster short squeeze in our future the path of least resistance is still down. I would be cautious about entering new longs unless we see a sustained move higher on strong volume.

Enter passively, exit aggressively!

Jim Brown

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