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The week started with bad economic news that confirmed the global slowdown and a short rally in this holiday shortened week. The S&P 500 (SPY), NASDAQ (QQQ), and the Dow (DIA) finished lower for the week as bad news continued to flow out culminating in a disappointing non-farm payrolls report.

The ISM index confirmed what was already known globally: European problems have driven manufacturing to a stop. The fall to 49.7 from 53.5 a month earlier surprised even the most bearish analyst forecast.

Tuesday brought surprisingly strong June auto sales as consumers sought out zero interest loans and aggressive financing offers to replace aging vehicles. Across the board every automaker showed strong increases, giving the markets hope that the consumer has not completely rolled over as has the manufacturing sector.

European unemployment numbers confirmed that the European recession is slowly grinding forward. EA17 unemployment rose to 11.1% in May of 2012 from 11% in April and 10% a year ago. EU27 unemployment rose to 10.3% from 10.2% in April and 9.5% in May of 2011.

Even more troubling were the unemployment numbers emanating from Spain and Greece. Spanish unemployment came in at 24.6% in May and 21.9% from Greece (March 2012). Youth unemployment hit 52.1% in both countries.

Jobless claims provided a ray of hope falling to 374,000 versus a consensus estimate of 386,000 while last week's figure was revised up by 2,000. However, that hope was quickly dashed by Friday's jobless report which showed that only 80,000 jobs created during month of June with the unemployment rate holding steady at 8.2%. Even more depressing, the economy needs to add almost 120,000 jobs a month to absorb the new entrants into the market and that is not happening.

China moved to cut deposit and lending rates as well with deposit rates cut by 25 basis points and lending rates cut by 31 basis points in hopes of jump starting economic growth as the property market cools off.

The Bank of England agreed to buy 78 billion pounds in bonds to help bolster the UK markets.

The surprise 25 basis point rate cut by the ECB failed to bolster the markets as traders continued to fret about the global economy. The lowering of the deposit rate to zero is a move to try and get some velocity going with respect to the deposits sitting on the ECB balance sheet and create an appetite for risk taking. Over the past seven years deposits have grown from 0 to 772.68 billion euros.

The coordinated moves by the Bank of China, Bank of England, and ECB should be looked at with skepticism as the moves all came within an hour of one another. Coordinated moves like these indicate a significant problem in the global economy because they do not happen by accident.

The markets may be looking for the ECB to do more but in the end the solution to this crisis sits squarely on the shoulders of the politicians rather than central bankers. Last week's announcement of a pan-European bank regulator was nothing more than an announcement that they will draft a Memorandum of Understanding regarding the creation of a new bank regulator by July 9, not a solution itself yet the market rallied.

While the rally has been exciting and we may have one more leg up to retest the earlier high investors should be selling into this rally and preparing for the next leg down. Expectations of a new all time highs should be tempered with the poor economic data coming out. Given the economic climate, deteriorating fundamentals, and economic data, valuations are stretched.

When this rally exhausts itself in the summer heat the market will once again focus on the economic data coming out across the globe. Until the prospects for an economic recovery begin to pick up investors should be on the defense looking to utilize short ETFs like the ProShares Short S&P Fund (SH), ProShares Short Dow 30 Fund (DOG), and the ProShares Short QQQ Fund (PSQ) as a hedge against further declines in the stock market.

Disclosure: I am short the market via leveraged ETFs.

Source: The Heat Is Exhausting This Rally