The U.S. market's major indices all tagged new relative lows this past week. The big event that stocks reacted to were the elections in France and Greece a week ago. French president Sarkozy lost to his socialist rival Mr. Hollande. Meanwhile Greek voters threw out their old leaders for new ones opposed to the draconian austerity measures currently in place. As this news slowly sank in we saw European markets tumble on Tuesday and that sparked a sharper sell-off here at home in the U.S. Equities spent the rest of the week churning sideways. Concerns over Europe pushed the euro currency lower, which fueled a rally in the U.S. dollar. This strength in the dollar pushed commodities lower with big declines in oil, silver, and gold.

Economic data in the U.S. was relatively light. The University of Michigan consumer sentiment survey unexpectedly improved. April's reading on sentiment was revised to 76.4 and May's reading rose to a four-year high at 77.8. It also marks a nine-month string of gains. The look at inflation at the wholesale level came in benign with the Producer Price Index (PPI) falling -0.2% in April. The year over year rise fell to +1.9%. This is the first time it has been under the 2% level since late 2009. Meanwhile the weekly initial jobless claims slipped to 367,000.

The big story on Friday was Dow-component J.P. Morgan Chase, widely considered the "best in breed" among the major banking firms. On Thursday night the company revealed one of their credit portfolios had developed significant losses over the last several weeks. On Thursday night JPM disclosed those losses had reached $2 billion. This tanked the S&P futures as investors worried that other banks might have similar issues. Since JPM is a Dow-component, its weakness was going to weigh heavily on the index. The stock gapped open lower and post a -9.2% decline on Friday to settle on technical support at its simple 200-dma.

JPM is still expected to post a profit this quarter in spite of the $2 billion loss. The company expects to bring in revenues of $90 billion this year alone. The bigger issue here is this story is yet another blow to investor confidence. The Fitch rating company downgraded JPM's credit rating. Standard & Poor's said they placed JPM on outlook "negative". The event prompted Moody's to warn the top 17 global banks that they would be reviewed again for a possible credit downgrade. Meanwhile the S.E.C. announced they were opening their own review of JPM. It was not a good day for JPM CEO Jamie Dimon.

The bigger issues in the market remain Europe, specially Spain and Greece. Worries that Europe is losing its grip on the toxic debt issues helped push the yield on Spanish 10-year bonds back above 6%. If yields hit 7% or higher it's considered unsustainable and countries usually ask for aid at that point but Spain is considered too big to bail out. Speaking of bailouts the recently issued Greek bonds took a tumble in response to the election results. The dueling parties in Greece tried all week and failed to come together into some sort of coalition government. If they don't find common ground soon there will be more Greek elections in June.

There has been a growing chorus of analysts that are expecting Greece to either leave or get kicked out of the Eurozone (a.k.a. the 17-nation group that uses the euro currency). A recent Bloomberg poll said more than 50% of investors are expecting Greece to leave the euro before the end of the year. Not only would Greece's exit from the euro cause chaos in Greece it would create massive amounts of doubt and fear over the rest of the Eurozone. Greece already has high unemployment, which would only get worse. Businesses would close. The value of Greek savings and retirement accounts would be decimated. Granted a couple of years later Greece would most likely be significantly better off without the massive austerity they're facing now and the ability to print their own money (the drachma).

The bigger issue of a Greek exit from the Eurozone isn't what happens to Greece. It's who would be next? We've talked about this before. If Greece can throw off the shackles of austerity by exiting the euro that's going to make it very tempting for Portugal, Ireland, and Spain to all consider the same idea. Now that Sarkozy has lost the French election there are worries about whether or not Hollande and Germany's Merkel can coordinate on the tough decisions they might have to make going forward to support the euro. This past week concerns over Greece eased a bit when the EFSF announced they were still providing 5 billion euros in aid money to Greece but this remains a temporary band-aid.

Major Indices:

The S&P 500 index fell toward technical support at its rising 100-dma this past week. Tuesday saw a dip to 1343 before it bounced. We've outlined the 1340 level as key support. A breakdown at 1340 will probably signal a drop toward the 1300 level. You could argue that this past week is nothing more than a consolidation before the down trend resumes. A drop to 1300 would be a -8.4% correction off the 2012 highs near 1420. It would take a move to 1280 before the S&P 500 hit a -10% correction.

Daily chart of the S&P 500 index:

The NASDAQ-composite also saw a drop toward technical support at its rising 100-dma. This happened to coincide with a drop to its 38.2% Fibonacci retracement of the prior rally. The recent bounce off this past week's lows could be a bear-flag pattern, which is just a consolidation before the prior trend (down) resumes. Prior support at 2950 and 3000 are now new resistance levels. The next key level to watch for potential support is probably the 2800 area.

Daily chart of the NASDAQ Composite index:

The small cap Russell 2000 index fell toward support near 780 and its exponential 200-dma before bouncing. Unfortunately the index didn't bounce very high. You could argue that the $RUT has formed a bearish head-and-shoulders pattern over the last three plus months. The neckline would be at 780 and a breakdown under this level would forecast a drop toward the 710 area.

Daily chart of the Russell 2000 index

This week we're going to see an increase in economic data. The big events are probably the FOMC minutes released on May 16th. Plus the Philly Fed survey on the 17th could be a market mover. Another high-profile event will be the upcoming Facebook (FB) IPO. It is scheduled for Friday, May 17th but there was word out on Friday that Facebook's entrance to the market might be delayed.

Economic and Event Calendar

- Monday, May 14 -
(nothing significant)

- Tuesday, May 15 -
Retail sales data for April.
Consumer Price Index (CPI)
New York State Empire manufacturing survey
Business inventory data

- Wednesday, May 16 -
Housing starts & Building permits
Industrial Production & Capacity Utilization
FOMC minutes from the last meeting

- Thursday, May 17 -
Weekly Initial Jobless Claims
Philadelphia Fed survey

- Friday, May 18 -
(nothing significant)

Upcoming events:

end of May 2012: IMF's quarterly review of Greece

The Week Ahead:

Looking ahead the short-term outlook is stormy. Investor sentiment has turned bearish. The Economic Cycle Research Institute was reiterating their call that the U.S. will fall back into recession. This time they are predicting we'll fall into a recession within the next three months. The situation in Europe is once again starting to take center stage. If Greece eventually leaves the euro it could signal the beginning of the end for the eurozone. There were even rumors on Friday that Germany might decide to leave the euro to shake off its weaker partners although at this point that seems a bit drastic. Some are suggesting that the eurozone will persist but five years from now the membership list could see a lot fewer southern European countries.

Meanwhile the stream of economic data out of China continues to weaken and suggest the country is still slowing down. Thus it's not surprising that the U.S. might hit another recession if China is slowing down and significant parts of Europe are already in recession. Something else impacting investor sentiment is the U.S. "fiscal cliff" you're going to hear a lot about over the next several months. Currently January 2013 is set to see the expiration of the Bush tax cuts, the end of emergency unemployment benefits, and the end of the payroll tax cuts. Plus, the U.S. debt limit will need to be raised again. Last time the debt limit was raised the U.S. lost its AAA credit rating, which prompted a significant market sell-off. It's certainly possible that congress will merely postpone some or all of these deadlines (again) but it's not solving the problem that the U.S. has its own economic trouble of slow growth, high unemployment, and rising debts.

I remain very cautious on the market and would hesitate to launch new long-term bullish positions. I strongly suspect we will see the S&P 500 correct toward the 1300 level. If we can hold there and build a new base of support near 1300 then we can turn more positive on the market. There will still be individual stocks that outperform but it's going to make bullish trades tougher to find and sustain.

- James