The Market
    
    Technical

    The Averages (DJIA 10926, S&P 1173) suffered some serious whackage yesterday.  The DJIA busted through the very short support offered by 10965 as well as the March to present up trend 10970.  The S&P pushed below the 1183 short term support but closed slightly above its up trend off the March 2009 low (1172).

    Our time and distance discipline applies here; but barring a big bounce today,  the very short term support level (10965, 1183) is probably no longer in play.  The key technical issue for today is, can the DJIA regain its March 2009 to present up trend and/or can the S&P hold its comparable level (1172)?  Until I know the answer, I really don’t want to do anything.  If the S&P can’t hold 1172, then the next level to watch is  10725, 1150; if it can and nothing else changes, I will probably commit some cash.

    Volume rose; breadth plunged; the dollar was up big--indeed it blew right through the upper boundary of its current trading range, resetting the trend to an up trend off the December low (scoreboard: stocks down, gold down, oil down); the VIX smoked to the up side but remains in a trading range.

    Finally, our internal indicator weakened although 60% of all our stocks remain in their up trends off the March lows.  I frankly am not sure how useful this indicator is right now.  Whereas historically it has been very good at anticipating directional moves by stocks in general, of late it has been much more coincidental--which has very little informational value.  So for the moment, it will carry much less weight than it has previously.

    Bottom line: stock prices closed at an inflection point viz a viz their current up trend.  The next couple of days will determine whether the up trend holds or prices return to a trading range.  So do nothing and wait for direction.

   Fundamental
     
    Headlines

    Well, it didn’t take long for the world to figure out that the math of the current Greek bail out simply didn’t work.  But investors didn’t just decide suddenly that Europe has some problems, by the end of the day, the world seemed to be coming to an end.  Adding fuel to yesterday’s decline were worries over the latest Chinese monetary tightening, the new mining tax in Australia and the economic impact of the mounting environment disaster in the Gulf.  Better than anticipated March factory orders (see below) were lost in the shuffle.

I opined last week that the by product of the growing sovereign debt problem would not be a positive for the long term US secular economic growth rate.  When I wrote that I assumed that the Euros would continue to kick the Greek, Portuguese, Spanish cans down the road as they have been doing and that we wouldn’t see the consequences for a year or two.  That may still be what happens; but judging by the dire rhetoric on the financial shows, the odds of an acceleration of time table in my original assumption may well be occurring. 

If indeed the Greek/PIIG Judgment Day is at hand (and I am not saying the Euros won’t find a way to postpone the inevitable) then near term there is going to be some bumps and bruises because the European banking system will likely see its balance sheet severely impacted by the write down of its holding of sovereign debt issues; and there will be a resultant shrinkage in lending capacity.  That in turn would mean slower growth throughout the EU and would almost surely affect the US.

And if Judgment Day serves as a wake up call to the rest of the fiscally irresponsible governments out there, then while the near term impact of bringing their debt to manageable levels would be painful, longer term the global economy would be much healthier and able to sustain higher growth.  On that, we can only hope.

On the other hand, if the Euros manage to postpone Judgment Day and the rest of the world buys into it, then it will simply have been delayed for another day.

Meanwhile, we need to be worried about our on debt problem (medium):
http://american.com/archive/2010/may/why-our-current-budget-situation-is-a-crisis

Bottom line: at current levels, stocks are fairly valued assuming an historically below average long term secular growth rate; though clearly being at Fair Value when investors start losing confidence leaves open the possibility of the stocks can become undervalued.  However, before panicking that the consequences of years of fiscal profligacy are suddenly up on us, I think a step back is the best strategy.  We will have a bit more perspective in a day or so.
  
Economics

   This Week’s Data

    The International Council of Shopping Centers reported weekly sales of major retailers fell 0.4% versus the prior week but rose 4.4% versus the comparable period last year; Redbook Research reported month to date retail chain store sales down 2.2% versus the similar time frame last month but up 1.7% on a year over year basis.

    March factory orders climbed 1.3% versus expectations that they would remain unchanged.

    Weekly mortgage applications rose 4.0%.
    http://www.calculatedriskblog.com/2010/05/mba-mortgage-purchase-applications.html

   Other

    Here is a thoughtful piece on the risks of hyperinflation in the US (medium):
    http://www.nakedcapitalism.com/2010/05/mmt-fear-of-hyperinflation.html

    A chart of the HARPEX shipping index:
    http://scottgrannis.blogspot.com/2010/05/harpex-update.html