Ding! Ding! Ding.. and that's the end of the first half. The bear team managed to make headway in the second quarter but the bulls have done a good job moving the market up the field in the last few weeks. It's been an exciting game so far with a few dramatic reversals that definitely changed the momentum of the game. Currently the bull team controls the market but we'll have to see if they can follow through on Friday's big play!

Friday marked the end of the second quarter and the first half of 2012. It was the best June for the markets in over ten years. Friday's +2.5% rally in the S&P 500 was the best one-day percentage gain year to date. The S&P 500 lost -3.2% in the second quarter but it was down -9.2% at its early June closing lows. The huge +6.5% bounce from its June lows helped significantly (and Friday was a big part of that move). Year to date the S&P 500 is up +9.2%. The Dow Industrials are up +5.4% YTD, the NASDAQ composite is up +12.6%, the small cap Russell 2000 index is up +7.7%, the Dow Transportation average is up +3.7%, gold is only up +2.0% and crude oil is down -14.3% for the year.

The week started off with a big decline thanks to news that Spain was asking for 100 billion euros to recapitalize its failing banks. Yet recent support near 1310 on the S&P 500 held and stocks started to rebound. The EU summit loomed at week's end and all week long German Chancellor Merkel was adamant that Germany would not take on extra liabilities for its struggling Eurozone peers. Rising bond yields for Spain's 10-year bond were once again near 7% as we approached the two-day EU summit.

Meanwhile here in the U.S. the big event for the week was the U.S. Supreme Court's decision on President Obama's Affordable Care Act. Chief Justice Roberts played the key role and sided with the more liberal half of the court to uphold the individual mandate clause. While the court's decision is finally out the conversation continues over is it a penalty or is it a tax? Healthcare will be a big issue for the upcoming presidential election. However, the implications of the court's decision on the healthcare act are beyond the scope of this column. I was a bit surprised to see the biotech stocks producing a bigger move (down) on Thursday than the healthcare stocks. Then on Friday both the BTK biotech index and DRG drug index surged higher while the HMO healthcare index closed in the red.

The biggest event of the week was the two-day EU summit. This was the 20th summit on the region's sovereign debt crisis. I believe we've been discussing the EU debt problem since early 2010 if not earlier. After multiple bailouts and hundreds of billions of euros in aid and "rescue" funds, not to mention all the QE programs, have they actually solved anything? This latest EU summit ended with regional leaders agreeing on a "long-term union." Really? Aren't they already in a long-term union? The Eurozone was created in 1999. Have they just been dating all this time? Now they are agreeing to get engaged, let's not even talk about marriage yet.

I'll boil the latest EU summit down to its main points. First, they have agreed on a plan to make a better plan down the road. How many times have we heard that one? Second, they are going to allow EU bailout funds from the EFSF and ESM to loan money directly to struggling banks instead of loaning it to the bank's government who would then loan it to the banks. Third, they have agreed to do away with many of the strict austerity measures required for any new bailout money. Fourth, they have agreed to a joint banking supervisor over the entire Eurozone. Fifth, they agreed to a "general" long-term plan for tighter budgetary controls and political union. Sixth, they also agreed to a 120 billion euro "growth" package for the region.

There are a plethora of problems with this new "plan". Some of the bigger challenges are removing the austerity requirements for aid. Does that sound like a good idea to anyone? The reason they are going to start loaning money directly to banks is because it will avoid raising the amount of debt to the struggling governments supposedly governing those banks! Rising debt levels would push interest rates up. Spain's 10-year bond yields are still flirting with the 7% area. Another detail is the ESM's ability to buy government bonds to keep interest rates low. Those are just a couple of the highlights. This big new "plan" is going to have to be ratified by the 17 Eurozone member nations. We may not actually see any implementation of these changes until early 2013.

I will point out that Barclays did some research on the prior 18 EU summits. According to their research, whenever a new "plan" was announced (about ten times) the markets saw a short-term pop for a day or two that was eventually erased. I wouldn't put too much faith in this EU-summit fueled short covering rally we saw on Friday - at least not with the S&P 500 closing right at resistance.

This EU-inspired rally pushed the euro currency sharply higher. This move pushed the dollar lower and commodities soared (because most commodities are traded in dollars, a weaker dollar means you need more dollars to buy the commodity). The CRB commodity index exploded +4.6% on Friday for its best one-day gain in years. Crude oil was a big part of that gain. Of course crude oil could have gotten a boost from the fast approaching July 1st EU oil embargo deadline set to begin on Sunday. Oil traders probably wanted to cover their shorts before the embargo begins in case Iran decides to do something stupid and try and close the Straits of Hormuz. Crude oil closed the week at $85 a barrel.

The general trend in economic data over the last few months has been negative. This past week actually produced a few pleasant surprises. Pending home sales for May rose +5.9%, which was way above expectations of just +0.5% and significantly better than the -5.5% plunge the month before. New home sales for May came in at an annualized pace of 369,000, which is up from April's 343K. The durable goods orders rose +1.1% in May, which was better than the +0.5% estimate. Personal income in May rose +0.2% versus the +0.1% estimate. Spending was flat (+0.0%) compared to the +0.1% estimate. The final Q1 GDP estimate was unchanged at +1.9%.

Meanwhile the weekly initial jobless claims number was in-line with estimates at 386,000. The Chicago ISM (PMI) report saw an rise from 52.7 to 52.9. Unfortunately economists were expecting a rise to 53.5. This report might hint at trouble for the May vehicle sales numbers, due out next week. The University of Michigan Consumer Sentiment survey plunged from 79.3 to 73.2. Big declines in the present conditions and expectations components fueled the drop. This consumer sentiment report snaps a multi-month string of gains in sentiment.

Major Indices:

Eight trading days ago the S&P 500 failed at resistance near 1360 and its 100-dma. Here we are again with the S&P 500's rally closing at resistance near 1360. Friday's move was mostly short covering and window dressing. The surprising improvements, if we want to call them that from the EU summit, pushed bears to cover positions. Add in some last minute end of quarter window dressing and we had a big day.

If the S&P 500 continues to rally then it could see a run toward the new trend line of lower highs or possibly the 1400 area. On the other hand if the market reverses then we're back to watching support near 1310 and the 1300 level along with the simple 200-dma.

Daily chart of the S&P 500 index:

The NASDAQ composite produced a pretty strong +3.0% move on Friday. This index is down -5.0% for the second quarter but still up +12.6% for the year. Friday's close above its simple 50-dma is short-term bullish but there is still overhead resistance near the 2950 level. If this rally continues and the NASDAQ manages to breakout past 2950 then the next level of resistance is the 3,000 mark. There is probably short-term support near 2880 and the 2825-2800 area.

Daily chart of the NASDAQ Composite index:

Believe it or not the small cap Russell 2000 looks the strongest of the three. Granted Friday's move was mostly short covering and the rally stalled at resistance near its 100-dma, but the $RUT did break through some resistance levels. Broken resistance near 780 could be new support. I would expect a pullback after Friday's big pop but short-term the trend has a higher low, higher high feel.

Daily chart of the Russell 2000 index

It's a brand new month and a new quarter this week. We'll see the newest ISM data. The markets will be focused on the employment data. The question is who will be paying attention. It's the fourth of July holiday on Wednesday. Many market participants will be taking a long weekend. Volume will likely be very low all week.

The report to watch is the jobs report on Friday morning. Estimates are for +90,000 new jobs in June compared to +69,000 in May but there are whisper numbers suggesting only +25,000 new jobs created.

Economic and Event Calendar

- Monday, July 02 -
ISM index for June
construction spending

- Tuesday, July 03 -
auto & truck sales for June
factory orders

- Wednesday, July 04 -
U.S. markets are closed for Fourth of July holiday

- Thursday, July 05 -
Weekly Initial Jobless Claims
ADP Employment report
ISM Services for June

- Friday, July 06 -
Non-farm payrolls (jobs) report for June

The Week Ahead:

Looking ahead the focus is going to turn toward the Q2 earnings season. The EU summit is over. Hopefully we can ignore Europe for a week or two and by then earnings season will be here. The problem is that we've had several weeks of slowing economic data suggesting a global slowdown. We've already seen several major multi-national corporations warn that the situation in Europe was impacting sales. Just this past week we got bad news from the likes of Nike (NKE) and Ford (F). Currently analysts are expecting Q2 earnings results to only show +1.5% earnings growth and +2% revenue growth.

Wall Street isn't blind. They've seen the same parade slowing economic data and warnings. Many firms have been lowering their earnings estimates. There is the chance that they've lowered the bar too low and businesses could actually beat estimates. Yet even if corporations beat the estimate the real challenge will be guidance. If corporate guidance is too cautious and too many firms lower their estimates it could spark a serious sell-off in stocks. The Q2 earnings season starts on July 9th.

Given the market's history of short-term rallies following any significant EU summit I am cautious here. The short-term trend for stocks is up but the larger trend is still questionable with a Q2 pattern of lower highs and lower lows. We might have to see stocks retest their June lows or even tag a new lower low like we saw in August-October of 2011 before stocks find a real bottom again.

- James