Markets Take a Breather, But Issues Remain Unresolved

US markets took a bit of a breather on Monday as news flow from Europe was more a trickle rather than a deluge and the only data that moved US indices was factory orders for April, which came in below forecast at -0.6% on expectations of a move lower of -0.3%. March was revised lower - from -1.9% to -2.1% - which made the current numbers look better by comparison.

After opening briefly to the upside, stocks quickly turned red, even before the first half hour of trading, a signal that the more experienced traders were still trimming their risk exposure, but stocks stabilized, traded in a narrow range, bottomed between noon and 2:00 pm before rallying fairly strongly into the close.

If today was something resembling a dead cat bounce, the kitty remained room temperature, and the bounce was more of a flopping over on one side, that being the upside on the NASDAQ. Essentially, following the worst decline of the year this past Friday, traders might actually be encouraged with a session in which the Dow fell by less than 20 points and the NASDAQ actually ended slightly higher with the S&P unchanged. In the current environment, that kind of performance is about the best one could hope to see.

The somnabulent tone of trading did not prevent another negative read on the advance-decline line nor a persistent gap between new highs and new lows, both of which continue to indicate worsening conditions.

It was a lackluster session on average volume in a wait-and-see scenario. Elections in Greece are the main focus of global markets, with the nation going to the polls on June 17 to try and elect a new government after the previous round could not produce a ruling coalition.

Hope is that the Greek people will do the right thing, which, to the technocratic base of european politics, would be to form a government that favors remaining in the Eurozone and swallowing the bitter pill of austerity, though even the most ardent supporters of the unified currency will concede that the continent faces further problems and keeping the union intact is only a first step.

While Greek voters may indeed vote for a continuation of the current ruinous policies, there is a heightened awareness that the tide of populism in Athens could produce a more radical government that eventually rejects the euro and favors a return to the drachma as the nation's official currency. Such an outcome would likely produce massive dislocations of capital not only in Europe, but worldwide.

Another topic of discussion on the street is one of whether or not the Federal Reserve will signal or engage in another round of QE, which would provide temporary relief to markets, though, as has been seen with the previous two rounds, it would probably amount to nothing more than a sugar coating over economic conditions that are unstable at best and deflationary and point to recession at worst.

The FOMC is set to meet again on June 19 and 20 with a press conference with FED chairman Ben Bernanke and a summary of Economic Projections following the policy decision, Prior to that, Bernanke is set to testify before the Congressional Joint Economic Committee on Thursday of this week and the calendar is full of other Fed speakers who might give a clue to the next move by the nation's central bankers.

Speculation is rising that the Fed will be forced into a position favoring more easing, since without it, stocks and the general economy don't appear to have enough momentum to continue growing on their own. The same logic applies to Europe, where the message is to bail out, loan and print as much as is needed to keep the titanic economy from listing and sinking.

The main problem is that the issues that contributed to the crisis - now nearly four years old - have still not been resolved, the main point being the necessary deflation of the global credit bubble, which has not occurred. Instead policy has pointed to even more credit creation, prompting the need for more and more of the same policies that will not provide a long term solution. The entire vicious cycle is spelled out in some detail by Charles Hughes Smith on his Of Two Minds blog, an essential read for those not quite equipped to handle the myriad details of credit, collateral and derivatives.

Basically, Smith opines that the problems of the crisis have remained unfixed and continuation of current policies only are buying time before an ultimate collapse. Along similar lines, investor George Soros recently quipped that Europe has only three months in which to get its act together, a time frame that coincides almost neatly with the upcoming US elections in November. Should Europe stumble, fall, crash and burn within the near term, the tide will almost certainly turn against president Obama and toward Republican candidate Mitt (Adolph) Romney.

That seems to be the preferred strategy of the clandestine rulers of US politics, as any further slippage into the abyss of global depression could then be blamed on Mr. Romney's predecessor, just has Obama, even three-and-a-half years into his term of office, continues to lay blame on former president Bush.

The truth is that each president has had his own set of blunders and misfortune, and not all of the economic distress can be placed upon their shoulders. Congressional dithering and inaction and the global banking cartel are responsible for at least two thirds of the malaise, if not all of it.

The coming two weeks will be ones of nail-biting and indecision, with a fairly light schedule of news and data flow, all of which seems to in the range from bad to horrifying of late. The Greeks, Bernanke, and to some extent, the parliamentary elections in France on June 10 and 17 should be the major catalysts for market in the near term.

Much of what's already occurred and what will happen is still murky, and, since markets hate uncertainty, the chances for a rally in the near term are quite slim. A continued correction and possible bear market conditions (down 20% or more from recent highs) have become distinct possibilities.

Dow 12,101.46, -17.11 (0.14%)
NASDAQ 2,760.01, +12.53 (0.46%)
S&P 500 1,278.18, +0.14 (0.01%)
NYSE Composite 7,286.74, -5.49 (0.08%)
NASDAQ Volume 1,661,424,125
NYSE Volume 3,922,442,750
Combined NYSE & NASDAQ Advance - Decline: 2564-3054
Combined NYSE & NASDAQ New highs - New lows: 36-293
WTI crude oil: 83.98, +0.75
Gold: 1,613.90, -8.20
Silver: 28.01, -0.51