Stocks turned lower across the board for the second week of October. It was their worst weekly performance in months. The combination of lowered growth estimates and disappointing earnings results overshadowed somewhat benign and even positive economic data. The major U.S. stock market indices all turned lower with most down -2% for the week or more.

Early in the week the market suffered from lowered growth forecasts from the World Bank and the IMF. The World Bank lowered their 2012 and 2013 growth forecasts for Asia. The IMF adjusted their Chinese 2012 GDP forecasts and global growth forecasts lower. Meanwhile in Europe we saw protests for German Chancellor Merkel's visit to Greece but that was expected.

The economic data was mixed. The Producer Price Index (PPI) is a look at inflation at the wholesale level. September's reading came in at +1.1% versus estimates of +0.8%. This follows a +1.7% rise in August. Normally the PPI only moves a few tenths of a percent. This sudden rise in inflation is a bit alarming. Most of the headline inflation was in food and fuel prices. The core rate, which doesn't count food and gas, came in at +0.0% in September, which was lower than the +0.2% estimate.

There were plenty of headlines regarding the weekly initial jobless claims on Thursday. Last week's report showed a drop to 339,000 new claims. That's the lowest level since early 2008. Unfortunately what the average citizen may not know is that one large, unidentified state was not included in the totals so it's not a clear reading on claims.

Another economic surprise was the University of Michigan's preliminary reading on consumer sentiment for October. Economists were expecting a small decline to 78.5 yet it jumped to 83.1. That's the highest reading for consumer sentiment in five years. Traditionally analysts try to draw a correlation between positive consumer sentiment numbers and higher consumer spending, which is bullish for the U.S. economy.

Countering this positive outlook for consumers was a drop in business confidence. Moody's does a global survey of business confidence every week. The most recent report showed that business owner confidence fell to a 52-week low. That's not too surprising when you consider that China, India, and Europe are all slowing down and U.S. is showing very little growth.

Major Indices:

The S&P 500 is correcting lower again. This index is down six days in a row and lost -2.2% for the week. It broke support at 1440 and possible support at 1430. Friday saw the S&P 500 briefly trade under technical support at the simple 50-dma.

If this decline continues we can look for possible support at 1420 and at the 1400 level. What's is unfortunate is that the current sell-off has broken the bullish channel that started back in June. Plus, the peak in October is looking like a bearish double top.

chart of the S&P 500 index:

The NASDAQ Composite underperformed its big cap peers with a -2.9% decline for the week. The index broke down under 3100, 3080, and its 50-dma. I suggested readers look for potential support at 3040 and that's exactly where the NASDAQ found support on Friday. There is no guarantee the NASDAQ will bounce here and if the sell-off continues we can look for the next likely support level at the 3,000 mark.

We will want to keep an eye on the semiconductor sector index (SOX). The chip stocks are a big component of the NASDAQ and the SOX turned in a terrible -4.3% decline last week. There doesn't seem to be any support nearby for the SOX.

chart of the NASDAQ Composite index:

chart of the Semiconductor Index (SOX):

The small cap Russell 2000 index gave up -2.3% for the week. I cautioned readers to look for a drop to 820 if the correction continued. The $RUT broke through its 50-dma on Friday and the 820 level will probably be tested on Monday. I would honestly expect some sort of bounce at 820 but no one can say how long the bounce might last. If the 820 level fails then the 200-dma and the 800 level are the next spot to look for potential support.

The dotted trend line on the chart below dates back to the October 2011 low.

Daily chart of the Russell 2000 index

This week the economic data will be focused on housing and a couple of Fed surveys (New York and Philadelphia). The real economic headliner will probably be the data out of China, which is released on Thursday. If the Chinese figures come in slower than expected it could spark further selling pressure across the globe.

We will probably see fireworks on Tuesday night's second presidential debate between Obama and Romney. Plus, there is a chance we'll see more fireworks in Europe prior to Greece's next vote on new austerity measures.

The main event this week will be Q3 earnings season, which hits full steam. We'll hear from several large technology and financial firms that could set the tone for the rest of earnings season.

Economic and Event Calendar

- Monday, October 15 -
Retail sales for September
New York Empire State manufacturing survey

- Tuesday, October 16 -
2nd presidential debate (Obama vs. Romney)
Consumer Price Index (CPI) for September
Germany's ZEW economist sentiment reading
Eurozone inflation data

- Wednesday, October 17 -
Housing Starts & Building Permits
Chinese Retail Sales data
Chinese production data
Chinese GDP estimate

- Thursday, October 18 -
Weekly Initial Jobless Claims
Philly Fed survey
Greek Parliament vote on new austerity measures

- Friday, October 19 -
Existing Home Sales for September

Additional Events to be aware of:

Oct. 21st - Spain's regional elections
Oct. 22nd - 3rd presidential debate
Oct. 23rd - FOMC meeting begins two-day meeting

The Week Ahead:

I don't mean to repeat myself but the focus this week should be Q3 earnings results. We're going to hear from a lot of corporations. Right now analysts estimates are dropping. A week ago Wall Street was expecting a -1.9% drop in quarterly earnings. Now that estimate has fallen to -2.1%. Analysts are racing to lower their Q4 earnings estimates as well with consensus Q4 estimates down to +9.6% from +14%. We can probably blame that on the upcoming fiscal cliff, which has yet to be solved and or kicked down the road.

A week ago I warned you that low expectations for earnings results could actually lower the bar so low that corporations might be able to beat estimates and spark a rally. That might be wishful thinking on my part but it has happened before. The key will be corporate guidance and whether it's positive or negative. Executives might turn more cautious on guidance considering the unknowns regarding who might be in the White House and the previously mentioned fiscal cliff.

Background issues that could flare up at any time is the economic meltdown in Greece and Spain, the open warfare in Syria and its escalating tensions with Turkey, and the ongoing drama with Iran and Israel.

Short-term I am expecting more weakness. I looked at a hundreds and hundreds of stocks this weekend and it looks pretty ugly right now with a lot of bearish breakdowns and failed rallies. I suspect that after another week or two of selling the market will find support again. That could be our next entry point for bullish LEAPS positions.

Be patient.

James