European sovereign debt concerns continue to impact equity markets and their related ETFs around the world. Another day of still selling is in the books. The selling is relentless. There’s no other way to say it. Every little intraday pop gets sold.  The S&P has now dropped 10 of the last 12 days and is more than 100 points off its high from just three weeks ago.   Head and Shoulders patter I mentioned a few weeks back is playing out.  Target area is around the 1290 area.
Face book is going public tomorrow with an approx. valuation of $104 billion. This is the largest IPO ever. They’ll raise over $18 billion – the second biggest raise behind Visa (2008). There will be handful of billionaires and more than 1000 millionaires minted at tomorrow’s open. Face Book is one of America’s greatest success stories. The company has gone from college dorm room to $100 billion valuation in 8 years.
My guess is the stock does well tomorrow. I’m hearing lots of negative opinions, and that tells me investors are trying to keep a lid on the stock, so they can buy it at a reasonable price. Personally I won’t be buying. At $100 billion, it’s ridiculously overpriced (relative to Google). Stocks trade today based on where investors believe the business is headed 6-9 months down the line. Anyone who buys FB tomorrow anticipates they’ll do a better job monetizing their exiting user base, they’ll successfully monetize mobile and they’ll come up with a second revenue stream – besides advertising. With the footprint they have, they can grow revenue rapidly. Their biggest risk, in my opinion, is the site becomes boring and people either stop using it (not likely) or spend much less time on it (already happening).
If FB doesn’t do well tomorrow, the market could be in trouble.  It’s a diversion and distraction that keeps eyes and ears off Europe. It could be a feel-good story. But if it gaps up and sells off all day, the entire market may follow along.
Options expire tomorrow. Given sentiment, it’s a meaningless day (from that perspective). Any squaring off of positions that needed to be done has already taken place.
Have a plan, expect the unexpected and remember when in  doubt CASH IS A POSITION!

Concerns about Europe spiked the U.S. Dollar Index again. The U.S. Dollar Index is up 9.5% from an average of 74.5 in the second quarter last year. Strength in the U.S. Dollar dampens consolidates earnings of international companies with extensive operations outside of the U.S. Approximately 50% of S&P 500 earnings and 70% of Dow Jones Industrial Average earning comes from outside of the U.S. Year-over-year earnings by international companies in the second quarter will be “difficult”.
The market gapped up, established it HOD (high of the day) at the end of the FH (first hour), stair-stepped down the rest of the day and then closed at its low. There were a couple quick surges up, but they were short lived. The S&P has now dropped 9 of 11 days, and I’m still wondering the same things as yesterday – when will the bulls step aside? They’ve been waiting for a bounce that has not materialized.
We entered this week with many breadth indicators pointing down but not yet at oversold levels. This is starting to change. Here’s the 10-day MA of the NYSE AD line. It has taken out its previous low and is at its second lowest level since last August. This tells me we may be close to a tradable bottom. Be careful with shorts. The market has fallen for two straight weeks, and we don’t have to look prior to November to be reminded a market that goes straight down can turn around and go straight up.

For the 8th time in 10 days the market dropped, and the closes of the two up days were in the middle or bottom half of their intraday ranges.  Instead of two or three steps down and one step up, it’s one step down and then another step down and then another. For the bulls looking for a bounce to exit positions, they’re feeling lots of pain right now because other than a couple intraday bounces that didn’t last long, there has been nothing.
As I mentioned in my previous emails the market did not technically look right by “checking under the hood” with various sectors and market divergences hinting a sell off was near. The problem is Europe makes its move overnight not leaving much risk /reward opportunity for the US traders.   I wondered how many times they’d bid prices up during the day only to see the market gap down the next morning.  With a steady stream of bad news from Europe and news here in the States being mixed and not well-received (bad news induces selling, good news gets ignored), when will the bulls give up? Are they banking on the Fed announcing QE3?  The Fed may do QE3 if the market drops far enough – but will they still be in the game? During January, February and March, the market kept going up and up and up regardless of whatever was thrown in its path. Now it’s going down and down and down no matter what.
As much as the market has dropped, I don’t think the bulls have hit the panic button yet, and that’s scary because we could easily have a string down SPX-down-20 days. SPX is at is next key support 1330 a break and close below 1330 would make the next downside target 1290. This would complete the head and shoulders pattern discussed weeks ago.
The trend is officially reversed. Such is the case with the S&P 500. The first trendline was broken in early April. The second in early May. The third was broken yesterday, and then today we got some follow through. From a technical standpoint the market is not in good shape. The path of least resistance is down. Sooner or later we’ll get a hysterical rally, but it’ll most likely be short-lived.

Markets came under pressure to end the week as significant losses in the financial sector resulting from shocking trading losses from JP Morgan, as well as weaker than expected China industrial growth numbers had investors shedding risk.   The Dow Jones Industrial Average, S&P 500  all traded lower by about one-third of one percent, while the NASDAQ managed to finish close to the flat-line.   The intermediate trend across the benchmarks remains negative, while head-and-shoulders topping patterns suggest downside targets reaching 5% to 10% lower than Friday’s closing values.   In many cases, the necklines of these patterns have yet to be definitively broken, but chances are more likely than not that they will and lower market levels will be attained before the end of June, when the quarter comes to an end.
Defensive sectors continue to outperform cyclical sectors, suggesting risk aversion.   Consumer Staples, Health Care, and Utilities are each outperforming the S&P 500 index, while Industrials, Materials, and Energy, key cyclical sectors tied to economic growth, continue to underperform.   Technology and Financials, the two sectors that fueled the market gains in the first quarter, have also turned to underperformers as investors take profits and de-risk.
Looking to commodities, copper is presently trading within a declining channel and the CRB Commodity Index just broke to the lowest level since 2010 on Friday.   Both benchmarks benefit from favorable economic conditions, so the fact that these fundamental gauges are breaking down suggest that investors are very skeptical on growth prospects that current equity valuations imply.
All of these elements detail a technically weak market as indicated I my previous emails.  Add to that the fundamental uncertainties pertaining to China, Europe, and even the United States, along with negative seasonality around this time of year, conviction to be long equity exposure is very low.   Assuming downside targets are fulfilled in equity markets over the next month and a half, the stage may be set for a summer rally into mid-summer based on oversold conditions and positive equity market tendencies in the months nearing the Presidential Election in the US.   During equivalent years, equity markets typically find a low between May and June, however, evidence of a bottoming process remains absent at the present time other than the fact the markets are showing oversold readings in the very short term.  This is not a buy signal, markets can stay oversold for quite some time.

Markets bounced on Thursday, trading higher at the open based upon oversold conditions and a series of significant reversals over the past few days as investors anxious to buy on the dips pushed equities off of their lows.   Yields in Spain pulled back from the key 6% level, alleviating some of the concerns that remain firmly positioned over the Eurozone.   At the end of the day, however, markets had lost much of the earlier gains, finishing closer to the flat-line at the closing bell.   Early indications are that Thursday’s market activity was nothing more than a oversold bounce, rather than a change of the short-term trend, meaning that further losses are still to come.   This realization may play out sooner than later as JPMorgan set off a bomb after the closing bell that is currently influencing equity futures significantly lower, setting the stage for a tough day of trading on Friday.   The Reuters headline reads “JPMorgan Chase & Co, the biggest U.S. bank by assets, said it suffered a trading loss of at least $2 billion from a failed hedging strategy, a shock disclosure that hit financial stocks and the reputation of the bank and its CEO, Jamie Dimon”.   Shares of JPMorgan lost almost 7% in value in after-hours trading, while the Financial Sector SPDR ETF (XLF) lost over 2%.   Financials have been underperforming the market since the current quarter began as investors give up on aggressive bullish bets that were placed in the first quarter, which helped lift broad market benchmarks.  
Just a quick update on the head-and-shoulders pattern that continues to be monitored; the S&P 500 traded precisely back up to the neckline of this pattern and bounced firmly off of this “breakdown” level on Thursday, maintaining the bearish bias that the topping pattern suggests.   The target of the pattern points down to 1292 on the large cap index, or essentially to the flat-line on the year.  A bullish catalyst looks to be required in order to negate the pattern, but unfortunately, negative economic events continue to be negative.  Markets will need to recover quickly from the JPM news otherwise the head and shoulder patter would likely play out.

Markets gapped lower yet again on Wednesday as investor/traders concerns pertaining to Spain and Greece continued to rise.   Yields on 10-year Spanish bonds crossed back above the heavily watched 6% level and the deadlock amongst political parties in Greece is showing no signs of improvement.   The end result was enough to push the Dow Jones Industrial Average lower for a sixth straight session, the longest consecutive decline since August 2nd of last year.   Equity indices did, however, finish well off of their lows as investors overexposed to cash tried to bottom fish in hopes that this decline is merely a temporary setback in a path to higher values.  
With Wednesday’s close in the S&P 500 of 1354, a lower-low, below April’s low of 1357, was realized.  This continues the recent trend of lower-highs and lower-lows, defining a negative path.   The neckline of the head-and-shoulders pattern is also beginning to crack.   As has been highlighted for the past month, the large cap index continues to find support at a horizontal range between 1350 and 1370, last year’s significant highs; a zone which is proving difficult to push below as was evident by Wednesday’s significant comeback.   The present level also represents the 20-week, or 100-day, moving average, a significant level to determine intermediate-term momentum.   As long as 1350 holds as support, expect these “buy the dips” days, of which three have been realized in as many days.   A close below 1350 would unleash further bearish implications, likely leading to the completion of the bearish head-and-shoulders topping pattern that points to 1292 target.

Yesterday all major indexes managed to hold major support considering the election-induced losses in Asia and Europe follow through as well as the UK returning from a bank holiday. The market was again weak and gapped lower early but then spent most of the day moving up. All the indexes closed down, but none of the indexes lost more than 1%, and all of them closed well off their lows and near their HOD (highs of the day). This gives the bulls something to cling to in the near term, although the path of least resistance is still down.
The dollar moved up again, and commodities got hit hard. Gold and silver were especially weak. Oil, which has dropped about 10% in the last week, was very weak early but then rallied and closed near its high of day. Consumer related groups were also weak. Clothing & accessories, footwear, gambling, recreational products, consumer electronics, restaurants & bar, apparel retail and furnishings were at the bottom of the leader board. Health care and biotech were at the top, but neither group could manage a 1% gain.
Let’s get into the  technical outlook on some key sectors:
The S&P 500 Index briefly broke support at 1,357.38 to complete a double top pattern.
The Russell 2000 Index briefly broke support at 783.56 to complete a head and shoulders pattern.
The NASDAQ Composite Index briefly broke support at 2,946.04 and 2,900.28.
The NYSE Composite Index briefly broke support to complete a head and shoulders pattern.
The Athens Index and its related ETF plunged below support at $12.70 to a low not seen since 1992.
The MSCI Emerging Markets Index and its related ETF broke support at $41.07 to confirm an intermediate downtrend.
Weakest sectors included Materials and Semiconductors. Their ETFs broke key support levels.
Gold broke support at $1,613 to reach a five month low.
This is what I call the health of the market checking “under the hood” Not what the pundits what everyone to believe.

 
Europe is back in the spotlight with economic prospects continue to deteriorate. The United Kingdom, Italy and Greece recently re-entered a recession. Austerity programs launched by governments in the United Kingdom, Spain, Portugal, Italy and Greece are curtailing prospects for growth. Elections in France and Greece over the weekend have added to uncertainties.

Markets have gapped down several days in a row leaving little opportunity for high quality low risk trades.  One must be selective for now until the markets can realign itself.

The US Dollar pushed aggressively higher overnight as risk aversion took over the financial markets, driving demand for the go-to safe haven currency. The Asia Pacific regional benchmark stock index dove 2.5 percent and growth-geared commodities like crude oil and copper chalked up sharp losses as markets responded to over-the-weekend news that Socialist candidate Francois Hollande beat incumbent Nicolas Sarkozy to become the next President of France. Stock index futures tracking key European and US benchmarks are trading sharply lower, hinting more of the same is likely ahead.
Traders are worried that the anti-austerity Hollande will unravel Eurozone debt crisis relief efforts, which like most EU policy have heavily relied on the Franco-German axis. A failure by the mainstream pro-austerity Pasok and New Democracy (ND) parties – which pledged to form a coalition with one another – to secure a joint parliamentary majority in Greek elections also held this weekend compounded sovereign risk fears.
We entered the week with the long term trend being up, the intermediate term trend being neutral and the short term trend being up. The long term and intermediate term trends remain the same. The short term trend is now down. Within a larger trend, the short term can switch back and forth between mirroring the longer term trends or moving against them. This is true, but the failure of the key groups to hold the previous week’s gains, and the deterioration of many key stocks has me thinking the market is ripe for a sell off . The tricky part with this being an election year, I’d be surprised to see a full-blown correction, but there is time to recover from a mini correction should one play out soon. A breakdown now that gets a little follow through has time to recover by the fall.
The breadth indicators did not fully recover during the most recent move up and are now heading back down. Some key groups moved above recent trading ranges but failed to hold their gains. Some key stocks which had recently broken down rallied hard, but most of those gains are gone.
In summary the market will gap down again at the opening. This will be important as it will be at primary support levels.  We will see if buyers will step in or simply sell into any rallies.

The deterioration that began Tuesday afternoon has continued. The market opened flat and failed to rally. Then after 10am news drove prices down, it made another rally attempt but failed again. Then prices pretty much stair-stepped down the rest of the day. The Dow held up the best but still dropped 0.5%. The small and mid caps dropped about 1.5%. Very few groups closed above water, and about half lost more than 1%. It was agonizing day for the bulls who just two days ago had hope for a summer rally.
The last couple months where there have been very few directional moves.  We got lots of grind in Feb/Mar…then a directional move up…then a 30-point range with several reversals. Now we’ve gotten a head fake up and a 1-week low. Rallies get sold; dips get bought.
It is very difficult to identify a good reason for risk correlated assets to continue to find bids. Markets have essentially consolidated since early 2012 with an intense contraction in volatility that has been warning of some major breakouts ahead. Given the most recent developments, we find it very hard to argue for anything but a breakout and acceleration in risk liquidation, which would benefit the US Dollar. 
The recent economic data is only a small sampling from one (or two) specific day(s); but overall, the condition of the Eurozone is still uncertain. The Fed has left open the door for additional quantitative easing, and China continues to show signs of cooling. Equity markets have been very well supported in the face of all of these developments in 2012; and yet, now it seems that fear and uncertainty cannot be ignored.
In my opinion, investors have been so disconnected from the underlying fundamentals that they may as well be trading from the moon, perhaps on a trip funded by all of the governments that have been artificially propping the global economy. However, the return trip to earth is around the corner, and gravity’s reality will once again set in. At this point the recent ranges in all of the major markets remain intact, and it would be way to premature to officially call for the onset of intense risk off.   All things considered, however, it is hard to see a case where the markets don’t break to the downside when they finally do decide to move. Then again, it is also possible that governments afford the markets an extended vacation.   Like they said never fight the fed and we won’t. The best way to handle this manipulated market is to follow the trend, reduce your trading activity and pick the best trades until this train stops, Once it does there be plenty of time to short the market.

The market continued yesterday’s afternoon slide, but the selling pressure stopped at the end of the first hour and prices stair-stepped up the rest of the day. The small caps and tech-heavy Nas closed with small gains; the large caps closed with small losses. If you only look at the closing numbers, not much happened today.
Among the groups, commodities did poorly…coal, oil & gas, gold, basic resources, industrial metals and steel lagged along with the financials. Home builders and associated groups such as furnishings and building materials did well along with other consumer-related groups such as footwear, clothing & accessories and recreational products.
A  30-min S&P chart below shows the current action. We’ve gotten several gaps in both directions…many sudden reversals…many news-induced moves…a couple directional moves, but mostly range-bound chop.  When things look pretty bad, the market rallies. When the bulls relax and across-the-board improvements are seen, the market drops. It’s been hard to enter a position and be confident you can sit back and mechanically manage it.
Things have been almost too quiet, and we suspect that there will soon be a new catalyst that sparks a major pickup in volatility and opens a clearer direction in the equity and FX markets.  Given where most markets are currently trading, we suspect that the breakout will be in the US Dollar’s favor, with most currencies currently trading by some key resistance against the buck. We also suspect that the flip-flopping on views over additional Fed QE implementation, will soon reverse back to a no additional QE consensus (has most recently been more QE positive), and this could open a more substantial rally in the Greenback which would put pressure in equities and commodities.
Economic data out of the US has also been quite solid, and the more this fact materializes, the greater the chance for a more aggressive push back into the US Dollar. Friday’s monthly jobs report will therefore be a significant data release this week, and we suspect that the buzz and anticipation around this event will escalate over the coming sessions.