A familiar, negative catalyst weighed on the market today, leading to blood-letting on all the major indexes with the Nasdaq and the Russell 2000 bearing the brunt of the pain.
As I just mentioned, Europe was a big problem for the market today and one can pick his or her poison as to what the major European issue of the day was. It is never a good thing when someone as powerful as the head of the International Monetary Fund (IMF) is arrested on attempted rape charges, but that is the boat Dominique Strauss-Kahn finds himself in. On Monday, a New York judge denied bail for Stauss-Kahn after prosecutors were able to prove he presents a flight risk.
The alleged attack on a 32-year old employee of the Sofitel Hotel in Manhattan occurred on Saturday and it seems the decision to deny bail for the man once thought to be a leading contender for the French presidency is the right one as France does not extradite its nationals, according to Bloomberg News. Diplomatic immunity does not apply here and Strauss-Kahn could face up to 25 years in prison if convicted.
The IMF wants the world to know it is still a functioning body and it showed as much by approving a bailout of nearly $111 billion for the ''P'' in PIGS, Portugal. For those keeping score at home, a bailout of that magnitude is not a good thing when a country sports a 2010 GDP of less than $246 billion, which Portugal did last year, according to the IMF.
As for Greece, the ''G'' in PIGS, the country that some would credit with starting Europe's sovereign debt crisis, no decision is expected today, but the European Union is pushing the country to sell more than $107 billion in assets to in an effort to get its fiscal house in order. The chart below is a couple of days old, but it tells the story: Yields on Greek bonds are blowing out yet again.
Greek Bond Yields
Here in the States, investors had to contend with one economic report and it was not pretty. The New York Federal Reserve's Empire State manufacturing survey fell to 11.9 in May from 21.7 in April. Economists were expecting a reading of 19.7. While the May reading does signal expansion, it does so at a much slower rate than in previous months and making matters worse, the prices paid index soared to 69.9, the highest mark since August 2008.
Prices Paid Index
It was another wild day in the oil complex as oil futures, the West Texas varietal, remain below $100. The Commodities Futures Trading Commission reports that hedge funds and other speculators cut their long bets on crude by 10% for the week ending last Tuesday. Gasoline futures tumbled as well after the Army Corps of Engineers the Morganza Floodway north of Baton Rouge, La., over the weekend in a bid to lower the flood-swollen Mississippi River, easing concerns that flooding would hamper gasoline output on the East Coast, the Wall Street Journal reported.
Oil's slide weighed on Dow components XOM and CVX, both which were lower by just under 1%, but COP was flat on the day. Of course, oil's recent woes have resulted in a stellar performance for airline stocks. Whenever I think of airline stocks, I rarely think anything positive. I think of ''Wall Street'' (the first version) where Gordon Gekko says guys like him get burned on airline stocks. I think of real life where even Warren Buffett admits he was lucky on an old investment in US Air. And I think that oil needs to fall a lot more for airline stocks to pique my interest. Still, if you find yourself feeling bearish on oil, and do not have a futures account to short futures with or if you do not want to fool around with inverse ETFs, take a look at the Guggenheim Airline ETF (FAA). To be clear, I am not a buyer or seller of this ETF, my view is that it is worth a look as a conservative short oil play.
Airlines provide me with an interesting segue as that sector has been home to plenty of mergers and acquisitions activity over the years, much of it dubious, and it was M&A drama that was behind an ugly slide for NYSE Euronext (NYX) today. Nasdaq OMX (NDAQ) and IntercontinentalExchange (ICE) scuttled their $11.3 billion bid for the operator of the New York Stock Exchange after the Justice Department threatened an antitrust lawsuit.
Now, NYSE Euronext shareholders are forced to embrace an inferior takeover from Germany's Deutsche Boerse. If you like M&A drama, you are in luck because the Deutsche Boerse/NYSE Euronext deal is by no means a foregone conclusion. While U.S. regulators will have less to crow about under this scenario, the folks at the European Commission in Brussels, typically a bit more ornery with their M&A concerns than their U.S. counterparts, are probably going to raise some issues.
If the deal with the Germans goes through, the two companies dominate the fixed income derivatives market in Europe because Liffe and Eurex would be residing under one roof, Bloomberg reported. Today's plunge of nearly 13% was the worst one-day performance for NYX since 2009 and if the deal with Deutsche Boerse is scrapped by European regulators, another day like today probably awaits NYX shareholders. I say that because two things are clear: The global exchange business is consolidating and if you have a chance to participate, you take it. Second, the list of rivals that could make a legitimate run at NYX, excluding Deutsche Boerse, is quite small.
In better M&A news, shares of medical device maker Orthovita (VITA), surged 40.3% after larger rival Stryker (SYK) said it will acquire the company for $304 million in cash. Stryker is offering $3.85 a share for Orthovita, a 41% premium to where the stock closed on Friday. Stryker is using the deal to bolster its orthobiologic and biosurgery offerings. The deal is expected to close in the current quarter.
The marquee earnings report of the day came courtesy of Lowe's (LOW), the second-largest U.S. home improvement retailer behind Dow component Home Depot (HD). North Carolina-based Lowe's said its fiscal first-quarter profit slid 6% to $461 million, or 34 cents per share, from $489 million, or 34 cents per share, a year earlier. Revenue tumbled 2% to $12.19 billion as same-store sales fell 3.3%. Analysts were expecting a profit of 36 cents on sales of $12.54 billion.
The company's guidance failed to give investors reason to cheer. Lowe's cut its full-year profit guidance to $1.56-$1.64 a share on revenue growth of 4% from $1.60-$1.72 a share on sales growth of 5%. Analysts were expecting a profit of $1.72. For the second quarter, the company expects a profit of 65-69 cents on revenue of $14.93 billion. Analysts are forecasting a profit of 68 cents on $14.82 billion.
Looking at the charts, the close below 1330 on the S&P 500 is not a good sign. In the weekend wrap, Jim talked about the dangers here if the 1328 printed and it did today as the intraday low was 1327.32. If we see upside in the coming days, there is still stubborn resistance just over 1340 while further downside could see the index trade below 1300 over the coming weeks.
S&P 500 Chart
The Dow is facing a similar situation. Today's close below 12,550 could encourage further selling and drag the blue-chip index lower to 12,400 and perhaps all the way back to 12,200. Often times when I comment on the Nasdaq, I say that stocks like AAPL, AMZN, GOOG, etc. cannot do all the work. In the case of the Dow these days, it is not reasonable to expect seven stocks to do the work of 30. By seven, I mean the staples and pharma members of the Dow. The longer the high-beta trade stays off, weighing on CVX, CAT and XOM and the more financials fall, the more vulnerable the Dow becomes.
The Nasdaq is looking really ugly, to put things simply. Support at 2825 was nowhere to be found today nor was psychological support at 2800. A close at 2782 has the index flirting with the 50-day moving average at 2773. If that does not act as support, a return to 2700 could be in the cards.
The best thing that can be said about the Russell 2000 is that it closed above critical support at 820 today. On the other hand, it also closed at its low for the day and below the 50-day moving average. A break below 820 violates the uptrend and could mean a move all the way back to 775.
Russell 2000 Chart
I am really not a fan of the current state of affairs in the market. International headline risk is too much of an issue. One week it is China. The next it is Europe and I would not ignore the Middle East. There is obvious technical concern facing every one of the major indexes as I just highlighted and stocks are getting no help from lower oil prices, making me think the ''sell in May'' crowd is having its way, at least for the time being.