I'm sure you have heard it a dozen times already. The U.S. stock market is now down six weeks in a row, a feat that hasn't happened since 2002. The combination of another week of bearish economic data and investors without a reason to buy left stocks to crash under their own weight. The correction has been accelerating lower with steep losses in just the last two weeks. Yet in spite of these declines we're not seeing much movement in the volatility index (VIX), which is supposed to be the "fear index". At current levels the VIX is not suggesting much fear on the part of option buyers. The VIX is up two weeks in a row but it's merely at the top of its ten-week trading range. This is another clue that the market's correction could have further to fall. Traditionally there needs to be a spike in the VIX before stocks actually hit any sort of bottom.

Daily chart of the Volatility Index:

Glancing over the highlights from last week the U.S. reported that exports hit a record high in April and that the deficit came in lower than expected. This is good news but it didn't have much impact on the market. China seems to be doing a good job engineering a soft landing for their red-hot economy but there are new worries that the recent slowdown in China's exports are a clear signal that the global economy is slowing down. So good news for China, not so good news for the world.

Gasoline prices in the U.S. fell another nickel (on average) across the country. This is beneficial for the struggling U.S. consumer but fuel prices remain elevated. Last week's initial jobless claims were once again worse than expected at 427,000. This is the ninth week in a row that initial claims have been over 400K so we're not seeing any improvement in job creation or retention. Looking at the market, investors continue to grow nervous over stocks with equity funds seeing $7.7 billion withdrawn and a lot of that money being placed into the safety of bonds.

A week ago we thought the problem with Greece had temporarily cooled with the latest round of bailout money. Yet this past week European leaders were arguing over the future challenges for the struggling country. Germany, one of Europe's strongest economies, is getting tired of handing money to a Greece that isn't seeing much improvement. The German finance minister Mr. Schaeuble is arguing with ECB head Mr. Trichet over requirements for future aid to Greece. Germany is suggesting that some sort of restructuring of Greek debt might be necessary (a.k.a. a default) while Trichet argues the ECB will not allow a default. The euro currency plunged on this disagreement, which sent the dollar bouncing higher in response.

In other news several of the largest U.S. banks saw an intraday bounce on Friday. Banks have been hoarding money because they're not sure how much capital they will need to keep on the books as new regulations head their way. Many were expecting that the biggest banks, also called the Systemically Important Financial Institutions (SIFIs), which is another name for those banks the U.S. has decided are "too big to fail" will need to hold an extra 3% of capital. Yet Friday afternoon there was word that it might be closer to 2.0% or 2.5%. This would free up billions of dollars to be put to work. Unfortunately banks were still some of the worst performing stocks last week in spite of the bounce.

I cautioned readers a week ago that the S&P 500 was probably headed for the 1280 level and the 1250 level. Last Monday saw a very quick breakdown under support at the 1300 mark. The index closed at 1279 on Wednesday. Unfortunately Thursday's bounce from support near 1280 was immediately erased with Friday's plunge to new twelve-week lows. The close under 1280 leaves the S&P 500 on a collision course with technical support at the rising exponential 200-dma near 1262 and the simple 200-dma near 1253. We might as well aim for the 1250 level, which was the March low (actually it was 1249).

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The sell-off in the NASDAQ is accelerating. There was a brief pause at the 2700 level that lasted all of one day. Friday left this technology-heavy index sitting on potential support at its exponential 200-dma. Yet with the NASDAQ closing on its lows for the session it doesn't bode well for Monday. We can probably expect a drop to the simple 200-dma near 2628 or more likely the 2600 level near its March lows. Aggressive traders might want to bet on a bounce from the 2600 level but if you do I'd try and use a tight stop loss if you can and then only within the context of a short-term trade.

Daily chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

The sell-off in the small cap Russell 2000 index has been rough. In the last two weeks this index has lost -8%. There was barely any pause at what should have been support near the 800 level. Now this index is already testing its March lows and the exponential 200-dma. It's possible the $RUT could bounce near 780 or the simple 200-dma and since this is a volatile group the bounce could be a sharp one but don't be fooled. It could take a while for the $RUT to establish a new bottom. At this point I would be wary of any "V" bottom type of move like the one we saw in March.

Daily chart of the Russell 2000 index:

Weekly chart of the Russell 2000 index:

I also want to mention that the SOX semiconductor index has already broken below its simple 200-dma and below its March lows. This is very bearish but there is a chance the SOX could see an oversold bounce from the 400 level, which was significant resistance in the past. Unfortunately the current trend is down with a bearish pattern of lower lows and lower highs.

Daily chart of the SOX semiconductor index:

The Dow Jones Transportation index ($TRAN) has also produced a very sharp sell-off in the last two weeks. This index has settled on its long-term trendline of higher lows but I don't believe it will hold. Odds are good the $TRAN will drop toward its 200-dma near the 5,000 level or even the February and March lows closer to 4900. Dow Theory suggests that we can't have any sort of sustained rally without participation on the transports and a breakdown under 5,000 would be very bearish.

Weekly chart of the Transportation index:

Looking ahead we have a very, very busy week for economic data. Here are some of the highlights:

-Tuesday, June 14th-
May Retail sales
Producer Price Index (PPI)
Business inventories

-Wednesday, June 15th-
Consumer Price Index (CPI)
New York State Empire Manufacturing survey

-Thursday, June 16th-
Weekly Initial Jobless claims
Housing Starts
Building Permits
Philly Fed survey

-Friday, June 17th-
Michigan Consumer Sentiment

This is an abbreviated list. There is another handful of reports coming out that aren't listed but they are unlikely to have an immediate impact on stocks. From the list above the ones to watch are the PPI, CPI, the two business activity surveys (New York and Philadelphia) and the consumer sentiment number. I would definitely keep an eye on the Philly Fed survey. This indicator has imploded from a high of 43.4 in March to 3.9 in May.

Not much has changed since my comments last week. Investor sentiment has clearly soured with stocks accelerating lower in the last two weeks. Eventually stocks will see an oversold bounce but I would be skeptical. I would not expect the market to make much progress until after we see a week or two of the Q2 earnings numbers in the middle of July and then only if corporate guidance is positive. If corporate guidance is negative then it could launch a new leg lower for the stock market, which may not end until October.

This week we're facing a quadruple-witching options and futures expiration on Friday. There is a decent chance that stocks will start to mellow out and drift sideways as investors wait for option expiration to occur. Although this may be wishful thinking on my part. Once we get past this week the market might actually see some window dressing as we approach the end of the second quarter on June 30th.

Currently the NASDAQ and Russell 2000 indices have turned negative for the year, down -0.3% and -0.5% respectively. The S&P 500 is still up about +1%. I suspect these numbers are going to get worse before they get better. I would seriously hesitate to launch any long-term bullish positions at this time when we might get a much better entry point a few weeks from now.

- James