The parade of bearish economic data continues. I'm surprised the U.S. market did not see steeper declines. The S&P 500 index posted its fourth week of losses but the selling has been almost orderly with a trend of lower highs and lower lows. The volatility index (VIX) is not suggesting a lot of investor fear given its pull back from its midweek highs. Overall markets were weak on growing concerns that the global economy is losing momentum.

Worries continue about the debt situation in Europe. Now there are new concerns about China's economy. The U.S. seems to have hit a soft patch and Japan is still reeling from its disaster. In spite of concerns over Europe the euro currency staged a comeback. The dollar retreated, which boosted precious metals. Gold, silver, and copper all rallied. Gains in oil were very mild last week but oil does look poised to rise.

Here at home in the U.S. both the Chicago fed economic index and Richmond fed survey declined. The April durable goods data was negative and worse than expected. Pending home sales plunged -11.6%, which was significantly below estimates. Initial jobless claims rose +10,000 to 424K last week. This was worse than expected and above 400,000 for the seventh week in a row. While not necessarily negative the latest GDP estimate was unchanged at +1.8%.

Overseas the news was not any better. Europe is reporting bearish PMI data. Italy's credit rating has been downgraded to a negative credit watch. Business confidence in Europe fell for the third month in a row. On the other side of the world Chinese manufacturing expanded at its slowest pace in almost a year.

Further depressing investor confidence were a number analyst revisions. Both Goldman Sachs and UBS downgraded their global growth forecasts. Meanwhile ING Groep and Credit Suisse downgraded their Chinese growth forecasts. Goldman also raised their forecast on Brent crude oil prices, which will be another headwind for global growth.

The only positives last week seemed to be another decline in gasoline prices, which fell about 7 cents a gallon. Mortgage rates remain near their lows but no one is buying so this doesn't really matter does it? One bullish surprise was the consumer sentiment figures for May, which rose unexpectedly from 72.4 to 74.3. Considering the overwhelmingly negative news flow I am surprised the market didn't see a deeper sell-off.

Last week I warned readers to look for a drop toward the S&P 500's simple 100-dma. Fortunately this level of technical support managed to hold almost all week before stocks finally bounced on Thursday. Sadly the bounce on Friday stalled at its short-term trendline of lower highs. Looking at the weekly chart the long-term trend is still up but it is definitely in jeopardy of being broken soon. A close under the 100-dma would be a bearish development. While I would hope the 1300 level on the S&P 500 index would hold as support if we saw a breakdown I would expect a correction toward the 1280 area and possibly toward the 1260-1250 area. On the other hand a rally past 1340 could certainly reignite the market's up trend.

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

It was a rough week for plenty of technology stocks. The NASDAQ gapped open lower on Monday. The index hit new five-week lows. The Wednesday-Friday bounce was just enough to fill the gap down from Monday so it's not a very convincing rebound (the top of a gap tends to be resistance). The NASDAQ composite actually spent most of the week trading under its multi-month trendline of higher lows. Friday's rally back above the 50-dma put the index back above this level. Unfortunately the NASDAQ-100 index (NDX) is still trading under this trendline and under its 50-dma.

Daily chart of the NASDAQ Composite index:

Daily chart of the NASDAQ-100 index:

We have been worried about the small cap stocks leading the market lower. Yet this past week the Russell 2000 small cap index actually saw a strong rebound and managed a gain for the week. The longer-term up trend still appears to be in serious jeopardy so I wouldn't get too confident here but a close over the 840 level would be encouraging for the bulls. My biggest concern is that the $RUT will merely kiss the old trendline of support and then roll over.

Daily chart of the (Russell 2000):

Weekly chart of the (Russell 2000):

We have another busy week of economic data. Some of the highlights will be the Chicago PMI, the May Consumer Confidence (not Sentiment, that was last week), the ISM manufacturing index, the ISM services index, factory orders, vehicle sales, the ADP employment report, and the non-farm payrolls (jobs) report.

The biggest event on the calendar will be the jobs report for May that comes out on Friday, June 3rd. Economists are expecting +185,000 new jobs compared to +244K in April. Private payrolls are expected to come in at +220K. The ISM index on June 1st will be another big headline for the markets. Analysts are expecting the ISM to fall from 60.4 to 57.6 in May.

Memorial Day is the unofficial start of summer. This means we can expect lower average volume for the stock market. It also means we could be facing the summer doldrums as investors pull back and wait for fall. There is a greater risk of that now given the end of QE2 at the end of June. No one knows for sure how the market will react to the end of this stimulus. It's a huge reason for traders to be cautious and step away until we see what happens in the U.S. bond market. How will interest rates move? How will stocks react?

There are plenty of pundits expecting the market correction to continue. Unfortunately for the bulls the month of June has a recent history of declines. Yet I haven't given up hope yet. In spite of all the negative headlines the S&P 500 is down less than -3% from its highs set four weeks ago. Thus far the correction has been pretty mild. While the short-term trend is down there is a chance that stocks will merely churn sideways although that may be wishful thinking on my part.

I know you've heard it a hundred times already but the situation in Europe with Portugal, Italy, Ireland, Greece and Spain will remain a potential landmine for stocks. Europe is trying to decide what the next step is to prevent a default by Greece. Meanwhile bond yields are rising on the rest of this group as investors demand more reward for the risk of holding government debt.

My comments from last week still apply. I am suggesting a defensive, step back and wait mindset. I would not rush to buy the dip this week. A normal market correction is anywhere from -5% to -20%. Right now a -9% correction would push the S&P 500 toward its simple 200-dma and near its March lows. I'm not predicting that sort of move just pointing out the possibilities. If you are concerned about the market correction accelerating lower then consider scaling back your position size now. Free up some cash so when we do see the market bottom again you'll be able to take advantage of it.

If you are a U.S. citizen or enjoy living in this country then take a moment this weekend to think about what Memorial Day stands for. A lot of soldiers have died to protect the U.S. and the freedoms it stands for. To all the men and women who have served or are still serving in our armed forces I can't say "thank you" enough.

Enjoy your weekend!

- James