Will Bulls Return to U.S. for Leadership After Weakest DJIA Week of Year?

Global financial markets grow more treacherous everyday as sharks circle.

It was a rough week for global financial markets with serious meltdowns in every corner of the world.

In Asia, the Shanghai Composite dipped 2.1% to remain firmly in bear market territory below its 50 and 200 day moving averages.

In Europe, the widely followed DAX German Composite Index (NYSEARCA:EWG) fell 4.7% as Europe’s largest economy was roiled by ongoing stress and uncertainty over the future of the Euro and Greece.

A Closer Look: ETF Investing Insights>>

Closer to home, the Dow Jones Industrial Average (NYSEARCA:DIA) dropped 3.5% for the week, putting in its poorest weekly performance year to date and logging 12 out of the last 13 trading days in the red, a phenomenon not seen since 1974.

The S&P 500 (NYSEARCA:SPY) was clipped for 4.3% while the Nasdaq Composite (NYSEARCA:QQQ) dropped 5.3% and the Russell 2000 Index of small cap stocks (NYSEARCA:IWM) led the way down with a weekly loss of 5.4%.

The Eurodollar (NYSEARCA:FXE) had an equally rocky week, dropping more than 1% for the week to $1.278.

Major markets are now vastly oversold and so a short term bounce could be expected within the context of a longer term downward trend.

On My  Wall Street Radar

In this chart of the S&P 500 (NYSEARCA:SPY) we see that the point and figure system issued a “sell” signal on May 8 with a “triple bottom breakdown” and now has a bearish price objective of 1180, approximately 9% below current levels.

More ominously in this chart, the 1180 price objective is below the blue bullish support line which is the line in the sand between bull and bear markets in point and figure charting.  You can see how these blue and red lines really do act as walls and are clear indicators of significant directional changes.

Therefore, a break below approximately 1230-1240 on the S&P 500 (NYSEARCA:SPY) would be an extremely bearish development.

For a complete review of current technical indicators and factors at work see These Technical Indicators Forecast Cautiously Cloudy Conditions Ahead.

The Economic View From 35,000 Feet

Greece and Europe continue to dominate the news as chaos and uncertainty seem to govern the country leading up to new elections now scheduled for June 17th.

While stock prices have put in a significant decline and it’s tempting to “buy the dip” and buy when there’s “blood in the streets,” this is only good practice as long as it’s not your own blood.  There is likely more bloodletting to come as global risks have reached extraordinary levels and a “Lehman event” on an international scale becomes a growing possibility.

The fundamentals are ugly, really ugly or unbelievably ugly, depending upon where you look.  JP Morgan’s (NYSE:JPM) loss was ugly; Spain is really ugly with rising bond rates, CDS at record premiums, the recent nationalization of Bankia and a recession that’s really more accurately a depression.

Unbelievably ugly brings us to Greece where political anarchy and anti-austerity will likely trump anything policy makers can do and so the likelihood of a Greek exit from the Euro (NYSEARCA:FXE) and a cascading series of financial calamities comes closer every day. Rationality has left that zone and we’re now in the era of “lanterns and pitchforks” in the street.  Reports indicate that a bank run is underway in Greece with deposits of more than $894 million USD withdrawn in a single day last week as the Euro declined to $1.27 with forecasts now dipping as low as parity with the U.S. dollar should the crisis worsen.  Once started, bank runs are almost impossible to stop and this flight to safety could quickly spread to Spain and Italy.  This global flight to safety was easily seen in this week’s action in the U.S. Dollar, Eurodollar and Treasuries.

The two forces that could possibly turn the tide are Germany and the European Central Bank and both seem to have waved the white flag.  Mario Draghi last week stopped lending to Greece and Germany is calling the upcoming election a referendum on Greek’s continued membership in the Euro rather than offering any signs of potential solution.  The ECB, IMF and the Fed seem to be quickly losing control of this situation, if they haven’t already, and so maybe their only input will be a flood of liquidity to make the fall less brutal than it otherwise might be.

Over the weekend, the G-8 met in Camp David with the European debt crisis and Greece front and center on the agenda and now the economic super powers of the United States, Germany and France must find ways to take real action that goes beyond their repeated pledge of full commitment to resolve this ongoing crisis.  Global markets continue waiting for Dr. Bernanke and Mario Draghi to once again ride to the rescue.

In economic news last week, Facebook (NASDAQ:FB) went public and flopped on its first day, closing just above its opening price which indicates less than stellar confidence in the macro outlook going forward in addition to Facebook’s (NASDAQ:FB) future.

Home builder confidence improved and the Empire State Index put in a surprisingly strong showing, rising to 17.1 for May from 6.6 the previous month.

On the negative side of the ledger, Greece’s stock market continued getting pummeled with the Dow Jones Greece Index dropping 12.4% and other major European indexes dropping sharply, as well.  Bond markets in Spain and Italy weren’t happy with the 10 year Spanish bond rising to 6.72%, closing in on the “unsustainable” 7% level, while credit default swap insurance prices set another record high and Italy’s rose to a four month high on increased nervousness across the Continent.

At home, April Retail Sales came in barely positive at 0.1% compared to last month’s 0.7%, initial unemployment claims were flat at 370,000 but missed expectations for a decline to 365,000, and the Philadelphia Federal Reserve Report delivered a nasty surprise, dropping sharply to -5.8 from an expected 10.0 and last month’s 8.5 which indicates unexpected weakness in the manufacturing sector in the region.

Next week brings more action in Europe and economic reports regarding new and existing home sales, durable goods and consumer sentiment.

Bottom line:  Global investors are truly swimming in shark infested waters as policy makers struggle to contain a rapidly deteriorating situation in Europe amid a slowing global economy.

John Nyaradi is the author of The ETF Investing Premium Newsletter.