The Morning Call-Dimon wows the girl's softball team while Europe prays for a timeout

The Market

Technical

The indices (DJIA 12496, S&P 1314) were off a bit yesterday. However, both traded within their intermediate term uptrends (11801-16801, 1239-1806) and short term trading ranges (12206-13302, 1266-1422)---(as an aside, their closing prices were also well above the upper boundaries of their former short term downtrends). In addition, they continue to develop the right shoulder of a reverse head and shoulders formation.

Volume rose; breadth declined. The VIX spiked, closing well above the lower boundaries of both its short term up trend and its intermediate term trading range.

GLD rose, remaining above the lower boundary of its intermediate (and short) term trading range. (it also continued to trade above the upper boundary of its former short term downtrend).

Bottom line: with the S&P in the middle zone of its short term trading range and well above the lower boundary of its intermediate term uptrend, there is not, in my opinion, a strong directional bias in the technical picture. That said, a move down to the 1292 level and a bounce would add considerable weight to the developing reverse head and shoulders formation. Such a price action would likely prompt our Portfolios to do some nibbling.

Fundamental

Headlines

There were a slew of economic datapoints released yesterday:

(1) mortgage and purchase applications soared but this was largely due to seasonal factors,

(2) May producer prices fell more than expected though core PPI was up in line with estimates,

(3) May retail sales were down; ex autos they were off considerably more than forecast---and for the second month in a row,

(4) April business inventories rose more than anticipated; plus business sales were weak.

All in all, a generally mixed set of numbers though weak retail sales are starting to raise my concerns. Granted much of this is a result of the trend of consumer deleveraging and, long term, that is a positive. However, too much of this good thing increases the odds of recession.

Most of those stats were released before the Market open; with retail sales getting the most attention. So stocks opened with a downward bias. However, Jamie Dimon’s congressional testimony dominated the airwaves for the rest of the morning. General consensus as that he did very well and that lifted prices. Of course, he was up against the equivalent of a girl’s junior high softball team for which he had bought the uniforms and a bike for each player. So none of this was exactly a surprise. Unfortunately, no one asked any ‘nuts and bolts’ questions on how the London traders could have flaunted the bank’s (supposed?) risk guidelines for as long as they did without somebody in a position of responsibility knowing.

More insight into the cause of JP Morgan’s trading losses (medium):
http://www.nakedcapitalism.com/2012/06/more-on-the-supposedly-out-of-control-jp-morgan-chief-investment-office-and-the-fortress-balance-sheet.html

After the talking heads recovered from the warm and fuzzy feeling provided by Mr. Dimon, Europe intruded on the party (Moody downgraded Spain’s credit rating while concerns about the necessity of a bail out in Italy rose) and stocks sold off. I know you get tired of this refrain, but Europe is calling the tune here. The Greek elections are this weekend followed closely by France and we still don’t know the terms of the Spanish bank bail out. This is like an anchor tied to Market’s ass. It may not go down much but I am not sure it can go much higher either.

One of the (many) problems with the Spanish bank bail out deal (medium):
http://www.minyanville.com/business-news/the-economy/articles/double-leverage-ratio-bonds-spain-spain/6/12/2012/id/41692

The pace of the Greek bank run quickens (short):
http://www.zerohedge.com/news/greek-bank-run-update-1-billion-day-now

EU banks now shooting the messenger (medium):
http://www.zerohedge.com/news/european-banks-preparing-boycott-big-three-rating-agencies

More debt for everybody---that’s the answer...not (short):
http://www.zerohedge.com/news/spanish-bank-borrowings-ecb-surpass-italian-italy-sovereign-debt-hits-record-%E2%82%AC195-trillion

And (2 minute video):
http://www.zerohedge.com/news/hannan-euro-problem-not-solution

And now Cyprus? (short):
http://www.zerohedge.com/news/europe-bailout-5-books

Bottom line: stocks (as defined by the S&P) are slightly below Fair Value. With Europe overhanging the outlook for the global economy, it doesn’t take much imagination to get prices lower. Our work suggests that a decline to the 1260-1270 would do virtually no technical damage; and a move to 1240 would leave the intermediate term uptrend unchallenged. The big question, of course, is how much of the most likely negative European scenario would be priced in at those levels---to which I have no answer because we simply have no blueprint for circumstance in which Europe and the rest of the world now find themselves.

As always the technicals will play a significant role in guiding us through any difficulties; but that explicitedly means that as stocks work their way through the resolution of this crisis that a portion of any buy/sell decisions will prove wrong in retrospect. My task is to be sure that an even larger portion will prove right.

Felix Zulauf gives us the worst case scenario (medium):
http://www.streettalklive.com/off-the-street/972-felix-zulaufs-market-prognosis-june-2012.html

Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973. His 40 years of investment experience includes institutional portfolio management at Scudder, Stevens and Clark and Bear Stearns. Steve's goal at Strategic Stock Investments is to help other investors build wealth and benefit from the investing lessons he learned the hard way.