No, I’m not talking about the movie, although, the market action was almost as bizarre. It’s not that Hungary’s new Prime Minister Victor Orban was misquoted, but officials did say that the meaning behind his comments that the economy was left in a “grave” situation and that talk of the country potentially defaulting on its sovereign debt as not being an “exaggeration” were misinterpreted. Initially, the comments were taken as suggesting that a default was likely, not just a possibility. Some think the new government was simply trying to shift the negatives associated with the debt on the old regime. Others felt that this was a way to let the IMF, EU, and World Bank know that the $25.1 billion in a rescue package given in 2008 would either not be enough or may not be repaid on schedule. Any way you slice it, it was bad news for the Euro-zone, which had made it only two days without major negative news. European banks hold Hungarian debt, and a downgrade would further deteriorate their financial structure. One bank specifically mentioned and refused to comment on trading losses was Societe Generale SCGLY (-11.0%), France’s second largest bank. That slammed the Financial Sector SPDRs, XLF, by 4.0%. The group was pressing back up to its 200-day moving average after successfully bouncing off of the recent test of the February low just under 14. A day later, it’s back challenging a 10-month low. As we’ve often said, Financials don’t have to lead, although preferable, they have to participate. The XLF sitting near a 10-month low is neither.

We’re not going to lay the blame solely at the foot of the Euro, but it was the major reason beyond Hungary. Each Friday, and each weekday to a smaller extent, the bulls have become nervous about what the news might bring overnight. The risks have outweighed the rewards for holding stock positions. It’s become a trader’s market, and that is a market from which “investors” tend to shy away. There will always be a core holding, but at the fringes, the recent trend has been to move to the sidelines at the end of the week. We were seeing signs that this might change, if we continued to see stability in Europe. But it was a Friday. Hungary dealt some bad news and the European markets reacted very negatively. The Euro broke its low at 1.2111 and fell to a fresh 4-year low of 1.954. I show a low of 1.1883 over this past weekend, so the US market reaction to the break was not overblown, if this remains the case. There was an “inverse head and shoulders” pattern built in late 2005 and early 2006. The shoulders were at 1.1827. The “head” was at 1.1640. This has been our range of support for the Euro since it broke below the recent spate of lows that flirted with the 1.2111 level. We may already be facing the near-term downside out of the recent wedge projection. The issues surrounding the weak Euro or a strong Dollar are no different than in prior weeks. They are weighing on the same groups, Energy and Basic Materials. As of Sunday evening, crude is trading lower by 2.6% at $69.65 in electronic trading. That won’t bode well for a Monday opening.

The other obvious, but no less cataclysmic catalyst, was the Employment report. Expectations had been building and analysts were playing a game of “can you top this” with the estimates. For once, ADP was high rather than too low. They were looking for 55,000 private sector jobs. The increase of 41,000 was well off the official expectation for 180,000 private sector jobs. What didn’t miss was the number of census workers. The range had risen to 350,000 – 450,000 from something at the 200,000 level. We saw 411,000 that were census related. The total jobs added were 431,000, falling shy of the total 536,000 anticipated. The unemployment rate dipped to 9.7% from 9.9%, reflecting a decline of 322,000 workers in the labor force. This was a partial correction after April reported an increase of 805,000. The unemployment rate was expected to dip to 9.8%. Hours worked increased by 1/10^th to 34.2. Average hourly earnings increased by 0.3%. Even the total household unemployment that includes part-time and discouraged workers slipped to 16.6% from 17.1%. This was bad news, no doubt. However, it was not 3.5% of the net worth of all publically held companies type bad news. It was a combination of high expectations, a poor report, further collapse in Europe, currency issues, and it being Friday. All in all, the bears had “game” and the bulls had nothing.

Technically, the averages fell through the recent support, although not by much and mainly in the final moments of the trading day. The S & P had support at 1068 and we closed at 1064. The May low is at 1040. The Dow also broke the recent closing low of 9974 and is facing the May low of 9774. The Dow closed at 9931. The Russell 2000 finished right on its 200-day moving average at 633 and the NASDAQ dipped slightly below its 200-day at 2234. Overall, the averages did not hold those recent very short-term lows, but the damage was done very late on a Friday afternoon. I don’t think the damage we suffered would have been nearly as bad had it not been for the Euro. Despite the fact that we have always thought that this would be a “jobless recovery” to some extent, because of the low capacity utilization and low average workweek hours, the earnings should still be reasonable. That won’t be the catalyst until mid-June, although the market typically moves up in advance of positive numbers. This week, the news will likely be rather benign until the Retail Sales data on Friday. Therefore, all eyes are still stuck on the Euro and its inability to gain stability week to week.