The U.S. stock market accelerated lower for its worst two-day drop in weeks. Suddenly everyone's worried about a correction with small caps leading the way. Market Statistics:

Stocks do not need a reason to go down. That was a common thought discussed in the financial media today. A few pundits suggested that stocks were weak thanks to disappointing economic data out of Germany. All of the European markets were down across the board with Britain, Germany, and France all down -1.25% or worse. European banks were leading the decline with a -6% plunge in the last three days.

Mike Santoli of Yahoo Finance suggested that the market rally was just tired and we were due for a pullback. His thoughts echoed several Wall Street analysts this morning. Jeffrey Saut, chief investment strategist at Ramond James, said "I think we are vulnerable to a 10 percent to 12 percent decline in the weeks ahead." Citigroup also voiced concerns of a "severe" pullback in U.S. stocks. Elliot Spar, with Stifel, Nicolaus & Co, probably said it best with his comment, "This market could go down for any reason or no reason at all. It looks like we got the latter."

Small cap and momentum stocks led the decline today. The Russell 2000 index fell -1.22% and the NASDAQ composite lost -1.34%. The volatility index (VIX) was up +10% intraday and settled with a +7% gain. This puts the VIX two-day gain at about 20%. To keep that in perspective the VIX is only up a couple of points from last week's seven-year low.

Money was looking for safe havens and U.S. bonds were the winner. The yield on the 10-year bond dropped to 2.56% today. Precious metals and oil all closed in the green but the gains were so small we might as well say they were unchanged on the session. Gold ended the day at $1,316.60 an ounce. Silver closed at $21.02. Oil settled at $103.36 a barrel. Art Cashin warned investors to keep an eye on the 10-year bond yield. A drop under 2.55% could be a warning signal.

Momentum stocks and high-beta names were the market's worst performers today. Market watchers were quick to speculate if we might see another correction in the momentum names like the one we saw in March. Just four months ago the momentum names were crushed with a six-week sell-off that left large chunks of the market relatively unscathed. After a huge bounce from their April lows many of these momentum names were trading at lofty valuations.

Facebook (FB), the world's biggest social network, is trading at 43 times forward earnings. FB closed down -3.8% today and it's down -7.7% from its July 1st close near $68. Yelp Inc. (YELP), an online business and restaurant guide, is trading for 70 times forward earnings and shares plunged -6.6% today. YELP is down -10.9% from its July 2nd close near $79.40. Shares of Pandora (P), one of the largest online streaming music companies, trades for 150 times forward earnings and the stock crashed -7.3% today and is off -13.5% from its July 2nd close near $30.

A few of the market's biggest decliners today are:

It was a quiet day for economic data in the U.S. so investors took the cues from overseas. Unfortunately Europe continues to struggle with a slowing economy. Yesterday Germany reported a disappointing number for its industrial production. Economists were expecting a small gain but German industrial production fell -1.8%. Today Britain followed suit and reported a negative industrial production number, down 0.7%. Germany is also seeing a slowdown in exports. May exports were down -1.1% and imports dropped -3.4%. Meanwhile the Organization for Economic Cooperation and Development (OECD) said their leading indicators for Germany dropped for the third month in a row.

This slowing momentum in Germany is a major warning signal for Europe. Germany has been the growth engine for the region. They have the biggest economy and account for almost 30% of the Eurozone's GDP. If Germany is struggling to keep growth alive what does that say for the rest of the region? Most of the southern European nations are already in recession.

Back home in the U.S. we did see Richmond Federal Reserve President Jeffrey Lacker making headlines. Lacker is currently not a voting member on the Federal Open Market Committee but analysts were still listening as they try to glean clues to the Fed's next move. Lacker spoke at an event in North Carolina today. In his speech he said inflation had likely bottomed and would start to move higher. He did express concern over the lack of growth. Lacker confessed that his previous estimate for growth above 3 percent in the near future "is unlikely" and expects U.S. growth in the 2 to 2 1/2 percent range. Lacker concluded with,

"I expect growth to continue at about the modest pace we've seen over the first five years of this expansion. While the acceleration that many have been forecasting for right around the corner would be welcome, that scenario seems less likely than a scenario in which growth continues to be held back by household cautiousness, low productivity growth and restrained housing markets."

One of the biggest stories today was the demise of Crumbs. A few years ago the gourmet cupcake fad exploded in major metropolitan areas. Crumbs Bake Shop (Crumbs Holdings, symbol: CRMB) came to market right at the peak of the fad in 2011. The stock's IPO price was $13 a share. Today it settled at 4 cents as the company announced it was shutting its doors.

When CRMB went public they had 37 stores in six states. They quickly ballooned to over 50 stores in 10 states. The future looked bright as customers rushed to pay upwards of $4.50 for a 4-inch, 600 calorie cupcake. Unfortunately fads normally fade and this one was no different. The company lost $10.3 million in 2012. That surged to a -$18.2 million loss in 2013. Rising competition and the post-craze drop in traffic was a one-two punch that CRMB could not recover from.

(CRMB's stock price history and the last remaining CRMB cupcake)

At least someone in New York must be a Rahm Emanuel fan and acting on the idea, "never let a serious crisis go to waste." An ingenious eBay seller has listed what they claim could be the last Crumbs Bake Shop cupcake up for auction. The eBay listing reads,

"Crumbs is shutting its doors forever, leaving behind nothing but... well, crumbs. Except for this last, precious cupcake -- the Holy Grail of confections from chain bakeries that have closed.

Bid on this still-delicious soon-to-be relic, and you'll be able to tell your grandchildren that you devoured the last Crumbs cupcake."

You can view the eBay listing here. The current bid is a surprising $250.00.

Tesla Motors (TSLA) was also in the news after the Beijing Municipal Science and Technology Commission issued a new report on their plans to build 10,000 electric car charging stations by 2017. Unfortunately for Tesla the current designs do not fit Tesla's cars. China wants to desperately solve their air pollution crisis. Promoting electric vehicles is a great step. Yet there is no worldwide agreed upon standard for rapid-charging systems. Europe, the U.S., Japan, and Tesla all have different configurations. China's will be the fifth proposed standard. In other news Tesla is also being sued by a Chinese businessman who had registered the trademark Tesla in China. The businessman is currently suing Tesla to stop selling and marketing cars in China. The case goes to court on August 5th.

chart of Tesla (TSLA)

Alcoa (AA) is the largest producer of aluminum in America. They officially kicked off the Q2 earnings season tonight. Wall Street has been bullish on the stock. The company has beat earnings estimates eight out of the last ten quarters. They did it again tonight. Analysts were expecting a profit of 12 cents a share for the second quarter. AA delivered 18 cents. Revenues came in at $5.84 billion, which was better than the $5.65 billion estimate.

AA has been trying to transform themselves and building up their value-added business. This division for AA just delivered their best quarter ever. This "downstream" business accounts for 59% of Alcoa's revenues but 70% of its profits. Alcoa is forecasting strong growth in the aerospace industry of 8 to 9% this year. They also reaffirmed their forecast for 7% growth in global aluminum demand in 2014. The stock ended today at $14.85 and is currently trading near $15.00 after hours. AA shares have surged +39 percent this year versus a +6.2 percent gain in the S&P 500 and a +2.7 percent climb in the Dow Jones Industrials, which AA used to be a component.

chart of Alcoa (AA)





Major Indices:

The S&P 500 lost -0.7%. It's down about 21 points from last week's closing high of 1985. That's only a one percent pullback and yet people are already waving the correction flag. That seems a little premature. The S&P 500 did bounce near short-term support at 1960, which happens to be near the bottom of its short-term bullish channel.

If this index breaks down below 1960 and its 20-dma (currently near 1957) then we could be in for a drop toward its 50-dma closer to 1920. If 1920 fails then 1900 should be round-number, psychological support. A drop to 1900 would only be a -4.2% decline. In a normal stock market we tend to see a -10% correction once or twice a year. Currently the S&P 500 has not seen a 10% pullback in over 1,000 days.

chart of the S&P 500 index:

Intraday chart of the S&P 500 index

The pullback in the NASDAQ composite index looks a lot uglier with a -1.3% drop. You can see where the index bounced off its prior March 2014 peak, which is an area that also coincided with its 20-dma on the daily chart. The NASDAQ is down almost 100 points from last week's high. That is a -2% drop in two days. Thanks to the underperformance in the momentum names everyone is suddenly worried we might see another sell-off like the one in March where the NASDAQ lost almost 9% (to its April lows).

If the NASDAQ breaks down below the March peak then 4300 is the next likely level of support. A really ugly drop could pull the NASDAQ down to its long-term trend line of higher lows on the weekly chart.

chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index

The small cap Russell 2000 index ($RUT) had everyone's attention today. Small caps underperformed with a -1.2% decline. This index is already down almost 3% from last week's closing high. Not only has the $RUT reversed hard at resistance near its March peak but today's drop has broken a multi-week trend line of higher lows.

Jim warned readers in his weekend commentary that if the $RUT failed near its March peak it could form a bearish double top pattern. Odds of a double top just skyrocketed with this sharp, two-day reversal in the $RUT. This index did bounce near its 30-dma today but the nearest support could be down in the 1040-1050 area. This area should be underpinned by its 50-dma and 200-dma.

chart of the Russell 2000 index

Weekly chart of the Russell 2000 index

Looking at tomorrow there will be a lot of focus on the Federal Reserve's minutes from the last FOMC meeting. Last month the Fed reduced its QE program by another $10 billion, which was expected. At the current pace the Fed's QE program will end this year. The market has been trying to speculate on when the Fed will start raising interest rates. In the last two weeks we've seen some major banks move up their estimates on when the Fed will start to hike rates. Instead of the second half of 2015 there are more analysts expecting a rate hike in the first half of next year.

In the past when the market suddenly worried about the Fed hiking rates sooner than expected the market sold off. That doesn't appear to be the case today. The U.S. hasn't seen a rate hike since 2006. As long as inflation remains tame the Fed should be in no rush to raise rates. The minutes will hit the news wires around 2:00 p.m. eastern tomorrow.

The market does face geopolitical risk. The fighting continues in Ukraine between the Kiev government and pro-Russian rebels. The U.S. stock market also continues to ignore the civil war brewing in Iraq. What about Israel? Will stocks remain this sanguine if the situation between Israel and Gaza escalates?

Over the weekend Hamas, a Palestinian terrorist group, fired dozens of rockets and mortars into Israel. The Israelis responded with airstrikes on Hamas weapon sites and tunnels used to attack Israel. Today Hamas managed to launch rockets into Tel Aviv. There is new intelligence that would suggest Hamas now has up to 400 long-range rockets. That is four times more than Israeli intelligence estimated. The rockets that landed in Israel's second biggest city did not kill anyone but Israel is considering an invasion into Gaza before they do. The Israeli military is calling up 40,000 reservists for a potential ground assault.

Odds are investors will ignore the geopolitical headlines tomorrow and focus on the stock market technicals and earnings season. Currently analysts expect S&P 500 companies to deliver 5 percent earnings growth in the second quarter and 3 percent revenue growth. Thus far there have been four negative earnings pre-announcements for every one positive pre-announcement. One has to consider the idea that all the bad earnings news is already priced in. All of the negative earnings pre-announcements has already lowered the bar and we might actually see stocks rally on earnings news. Of course the real key will be guidance. The second quarter is already in the rearview mirror. Investors want to know what corporations are expecting for the second half of 2014. The pace of earnings will pick up speed next week.

In other news the Wall Street Journal turned 125 years old today. Their first issue was July 8th, 1889. It cost two cents for all four pages. You can view the front page of their first issue right here.

James