Concerns over Spain plagued the stock market for the second week in a row. As expected the market plunged on Monday in reaction to the April 6th U.S. jobs report. The week started with back to back triple-digit declines in the Dow Jones Industrial Average. U.S. economic data was way too bland to have much impact on the market last week. A worse than expected Chinese GDP number helped fuel fears of a slowdown. Corporate earnings are off to a good start but traders were selling the news in spite of better than expected results. By Friday's closing bell the NASDAQ-100 index broke its 14-week winning streak and the S&P 500 delivered its worst week of 2012 with a -1.99% loss.

Looking at U.S. data the consumer sentiment numbers for April dipped from 76.2 to 75.7. This was slightly worse than expected. The Consumer Price Index (CPI) look at inflation came in at +0.3% in March, down from +0.4% in February. This was generally in-line with estimates. The core-CPI, which doesn't count food or fuel, inched up +0.2%. The weekly jobless claims was a disappointment with a rise to 380,000 last week, up from 367K the week before. This is a ten-week high for jobless claims. The Federal Reserve's Beige Book report suggested economic activity continues to grow at a moderate pace but the news had little impact on the market. Speaking of the Fed, Vice Chairman Janet Yellen helped fuel the market's big bounce on Thursday with her comments that the Fed might need to keep rates extremely low into late 2015 instead of the current plan for late 2014.

The market wasn't moving on U.S. data. The focus was overseas. Spain remained in the spotlight with Italy just off stage ready to jump in. Bond yields for both Spanish and Italian bonds have been surging. The yield on Spain's 10-year bond hit 5.99% this past week while Italy's hit 5.67%. These are the highest levels since last December, just before the ECB launched their LTRO 1% money program. The real all-hands-on-deck warning signal is a 7% yield but the market is showing rising lack of confidence in Spain and its ability to get its budget under control.

Seriously complicating matters for Spain was a headline that Spanish banks saw their borrowing from the ECB surge +50% in March, up from February's levels. Spanish officials are calling for the ECB to start buying Spanish bonds again to push bond yields lower. That's what the LTRO money was supposed to do. The idea was the ECB would provide cheap 1% money to European banks and they would in turn buy higher-yielding Spanish bond (as well as Ireland, Portugal, etc.) and keep rates low(er). Spain will be holding another bond auction this coming Thursday and the financial world will be focused on it to see how high rates rise at the auction and if there is enough demand to complete the auction.

The EU desperately wants to avoid Spain turning into the next Greek meltdown. Greece is a small country of 11 million people with a very small economy. Spain is several times the size of Greece and what many would consider too big to bail out. There were reports that the EU economic team was planning to visit Spain this weekend. Obviously Eurozone officials are concerned. Suddenly there is speculation rising with "what if" scenarios of how or why Spain might want or need to leave the Eurozone.

Spain is getting all the attention now but Italy is next in line and there is an Italian bond auction of short-term three and five month bills on Wednesday. The Spanish and Italian stock markets plunged -5% this week. Overall European stocks have seen their longest streak of weekly losses since August 2011. Investors are desperately seeking safety and money is flowing into German bonds with yields on the 2 year, 5 year, and 10 year German bonds hitting all-time record lows.

It wasn't all about Europe. China was making headlines as well. Economists continue to worry that inflation in China might be rising too fast, which could hamper the country's ability to stimulate its economy again. The most recent CPI data rose +3.6% year over year, which was higher than expected. Meanwhile China released their Q1 GDP numbers. Analysts were expecting +8.5% growth but whispers numbers had reached +9.0% just before the report. The communist government said Q1 GDP game in at +8.1%. This disappointment helped fuel the stock market sell-off on Friday and rekindled fears that the country was seeing a hard landing. China is the biggest consumer of commodities and commodity prices spiked lower on this news.

Major Indices:

Monday and Tuesday last week were pretty ugly for the U.S. market. A drop to 1375 was a -3% correction but the S&P 500 index plunged to 1360 instead. There was a sharp two-day bounce midweek but it failed near prior support and now new resistance near 1390. The market appears to be in correction mode and the S&P 500 looks poised to drop toward the next level of major support in the 1350-1340 zone. The key level there is 1340. If the 1340 level fails then we're probably headed for 1300, which would be a -8.5% correction from the highs near 1420.

Daily chart of the S&P 500 index:

60-minute chart of the S&P 500 index:

The NASDAQ composite fell -2.2% for the week. Traders bought the dip near its 50-dma and the 3000 level (actual low was 2987) but the bounce has reversed. I cautioned readers a week ago that the prior two weeks was looking like a top. Odds are growing that we will see the NASDAQ break support near the 3000 level and its 50-dma. If that happens I would expect a drop toward 2900 and the 38.2% Fibonacci retracement of the rally.

Daily chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

The small caps tend to be more volatile than the large caps and the Russell 2000 index gave up -2.6% last week. There was a sharp plunge toward the simple 100-dma and the $RUT ended Tuesday below its March low. That counts as a new lower low. There is potential support in the 780 area but I suspect we will see the $RUT dip toward its 200-dma in the 760 area. If the small caps happen to bounce then the 820 area and its 50-dma should be new overhead resistance.

Daily chart of the Russell 2000 index

The Dow Jones Transportation Average has broken its trend of higher lows. While the group did see a sharp midweek bounce it failed to break the short-term trend of lower highs. You could argue the $TRAN is in a sideways 5000-5400 trading range. A breakdown under the 5000 area would look pretty bearish. With Friday's reversal lower I am expecting a drop toward the 5050-5000 area.

chart of the Transportation Average

We are still watching Apple Inc. (AAPL). The stock may have finally topped. Shares hit a new all-time high on Tuesday morning only to reverse lower. The stock is down four days in a row. Plaguing shares of AAPL was news that the Dept. of Justice was going forward with its anti-trust suit against AAPL for ebook price fixing. Another legal battle is shaping up in Germany. A German court claims that AAPL violated one of Motorola's push technology patents that alerts users to new emails and messages on Apple's mobile devices. This could spark a series of legal losses for Apple in other countries where similar cases are being heard. It just so happens that one of AAPL's biggest rivals, Google (GOOG), is in the process of buying Motorola Mobility Holdings (MMI).

Apple Inc. is due to report earnings on April 24th after the closing bell. What are the odds that investors decide to sell the news and lock in a gain after a +50% rally in 2012? I suspect that the profit taking may have already started. As an aside, there was a chart circulating the Internet this past week showing that AAPL's market cap has risen so high (almost $600 billion) that by itself AAPL is worth more than all the public companies in Greece, Portugal, and Spain combined.

Daily chart of the Apple Inc. (AAPL)

Weekly chart of the Apple Inc. (AAPL)

The major economic reports this week are the Empire State survey on Monday and the Philly Fed survey on Thursday. These will be overshadowed by the Spanish bond auction on Thursday. The real event for the week is Q1 earnings season, which hits full speed. There are several big cap tech stocks and big cap financial stocks reporting corporate earnings. Thus far the high profile names that have already reported have beaten expectations but traders sold the news. That trend doesn't bode well for this week.

- Monday, April 16 -
Retail Sales data for March
New York Empire manufacturing survey
Business Inventories

- Tuesday, April 17 -
Housing Starts and Building Permits
Industrial Production and Capacity Utilization

- Wednesday, April 18 -
(nothing significant)

- Thursday, April 19 -
Weekly Initial Jobless Claims
existing home sales
Philly Fed survey
Spanish bond auction

- Friday, April 20 -
(nothing significant)

Upcoming events:

April 22nd - 1st round of Presidential elections in France
April 24th FOMC meeting
May 6th - Greece national elections
May 6th, - 2nd round of French elections

The Week Ahead:

Looking ahead we could see some movement in oil prices. Gasoline prices in the U.S. have been retreating lower but that could change if we don't get good news out of Iran. The country is meeting with five members of the U.N. Security Council and Germany in Turkey this weekend. The West wants Iran to stop enriching uranium and halt its nuclear weapons program. Iran denies it's working on nuclear weapons and is focusing on nuclear power for the future. The U.S. has warned Iran that this is their last chance for a diplomatic solution before the situation escalates. If we don't see positive headlines from this weekend's meeting then we're going to hear a lot more about a possible military strike against Iran's nuclear facilities. If the U.S. or Israel does pull the trigger on a strike then Iran has promised to shut down the Straits of Hormuz, which sees nearly one third of all global oil traffic. The price of oil would skyrocket and the Dow Industrial Average could see a -1,000 point decline as some have speculated. The U.S. already has a major deployment of naval ships in the area to prevent Iran from succeeding on its threats to halt oil traffic.

In the meantime Europe will remain in focus. The region does not have a solution for Spain's problems. The impact of the ECB's LTRO program has already faded. The country of Spain is seeing rising tensions between its national government and regional governments and the market is worried that the Spanish banking system could start to fracture. Rising bond yields puts increasing pressure on Spain's budget problems. The country's upcoming bond auction will be closely watched on Thursday.

We're also going to start hearing about elections in France and Greece. France has two rounds of presidential elections. Round one is April 22nd and round two is May 6th. If France gets a new leader there could be a reaction in the stock market since we don't know what stance any new leadership might take toward the toxic debt problems of Greece, Spain, Portugal, etc. Speaking of Greece the country will hold national elections on May 6th. If Greece gets new leadership will the new leaders up hold the country's responsibilities, burdens, and budgets promised by the current government? Meanwhile we will likely hear more downgrades on European banks as Moody's reviews a host of European banks over the next several weeks.

Last week was a rough one for the U.S. markets. Bullish sentiment plunged and U.S. equity funds saw their biggest outflows of the year. Has the sell-in-May phenomenon already started? Historically April is one of the strongest months of the year. The third week of April (this coming week) tends to be the strongest week of the month. Is this year going to break with seasonal trends? Analysts expectations for Q1 earnings growth is pretty low. There is a decent chance for corporations to beat expectations but the key will be management's guidance. If we hear more and more corporations guiding lower it could be the death knell for this rally.

It's going to be a very, very busy week for earnings announcement and it will set the tone for the rest of earnings season. I also suspect that this week will either accelerate the market's current correction lower or it will fuel a bounce back toward the recent highs. Yet even if stocks bounce I would hesitate to buy the rebound. A bounce back to the highs probably sets the market up for a bearish double top pattern.

Big picture the market looks tired. Earnings growth is slowing. Expectations for more QE from the Fed are fading. The Fed might announce something at the late April meeting but analysts like those at Goldman Sachs believe the Fed will wait until its next meeting, which is closer to the end of Operation Twist which stops at the end of June. At the very least we have several more weeks of guessing by market participants on if the Fed will launch any more QE this year. The situation in Europe is heating up again. A large chunk of the Eurozone is facing a potential recession. That's going to impact economic growth in China, which is already seeing a slowdown in growth. Meanwhile we have rising tensions with Iran.

Do I think the market has peaked for the year? No, but I do suspect the next couple of months could be rough if you're bullish. It's a good time to make a list of high quality companies we want to buy LEAPS on and then wait for a -10% to -20% pullback in their stock price as a potential entry point. I would not be in a rush to launch new long-term bullish LEAPS positions. We will get a better chance to buy stocks cheaper down the road.

- James