The stock market's midweek bounce was more like a speed bump on the way down. Commentators pointed to the latest Fed minutes on Wednesday for giving stocks a boost. It seems that the FOMC is not set on how soon they will raise interest rates once they have finished tapering their QE program. Unfortunately, the rebound reversed hard and U.S. equities ended at new lows for the month. The normal seasonal bullishness of April is nowhere to be seen.

A number of market pundits also noted that there is no one story that is driving the market declines. It seems like selling for selling's sake. However, the selling pressure may be attributed to a number of different factors. It could be more tax selling to raise cash to pay taxes on the 15th of April. It could be selling as the Fed reduces their QE program, since the market has a history of decline once QE ends. It could be a reaction to another round of disappointing economic data out of China. Or it could be fear of rising geopolitical tensions.

Whatever the reason behind the market's decline we were due for a correction anyway. Three industries helped lead the market lower. Semiconductors lost -3.25% last week. The housing industry fell -4.1%. Banks and biotechs lost -5.0%. The Dow gave up -2.3% for the week. The S&P 500 dropped -2.65%. The small cap Russell 2000 index declined -3.6%. The NASDAQ composite is down -3.1% for the week.

Economic Data

Economic data for the United States was mostly bullish last week. The latest University of Michigan Consumer Sentiment Survey for April came in better than expected. Economists were hoping for a rise from 80 to 81. April's number hit 82.6, the highest reading since July 2013. The weekly jobless claims numbers also came in better than expected. Last week's report showed a drop of 32,000 claims to 300,000 for the week. That's the lowest initial jobless number since 2007.

The wholesale look at inflation in the Producer Price Index (PPI) rose +0.5% in March. That is the biggest increase since June 2013. The core-PPI only rose +0.1%. Overall the U.S. is seeing the sixth longest economic expansion since we began keeping records. Momentum has definitely slowed down but the growth is there. Avondale Asset Management noted that it's been 58 months since the recession ended in June of 2009.

Overseas Data

Data out of Europe was relatively quiet. The IMF reduced their 2014 worldwide growth forecast from +3.7% to +3.6%. Meanwhile the Bank of England kept their interest rate unchanged at +0.5%. and their asset purchasing program at 375 billion pounds. Greece was making headlines with its first debt sale in four years. The struggling EU member sold 3 billion euros worth of five-year bonds. It was deemed a success with rates at 4.95%. Analysts rate the bonds a Caa3, which is nine levels below investment grade. Why anyone would buy Greek debt is a mystery. The country will never be able to pay back its current debt load. A few analysts were actually suggesting that this was a sign the European financial crisis is over. Don't bet on it.

The European Central Bank is considering a stimulus program. ECB President Mario Draghi suggested that further strength in the euro might be the catalyst to start some sort of QE program for Europe.

In Asia investors were watching the Japanese yen and worried about a slowing Chinese economy. It looks like the Japanese yen may have found a bottom with a big bounce last week. A rising yen makes Japanese exports more expensive. Thus it wasn't not a surprise to see the Japanese NIKKEI index fall to its lowest levels since October. Meanwhile Japan said its core machinery orders dropped -8.8% in February, which was significantly worse than expected. The Bank of Japan left its interest rates unchanged in the 0.0%-0.10% range.

Data out of China continues to disappoint. The world's second biggest economy said exports plunged -6.6% in March. This follows the -18% drop in February. Economists were expecting a +4.0% rise in exports in March. If Chinese exports are slowing down it could be seen as a sign that the global economy is also losing momentum. In other news the China Index Academy reported that China's four largest cities saw real estate sales collapse -40% in the first quarter from a year ago.

One indicator that seems to echo the weakness in China is the Baltic Dry Goods index. This chart shows the day rates paid to transport dry goods via ship. The $BDI is currently down 14 days in a row and closed at an 8-month low on Friday. This is a sign of falling demand to ship goods, which is another way of saying falling business activity around the globe.

chart of the Baltic Dry Index:

Ukraine-Russian Conflict

The markets are also carefully watching the tensions rising between Russia and Ukraine. This past Thursday Russian President Putin sent a letter to leaders of the 18 EU members and said that if Ukraine doesn't pay its $2.2 billion debt for past natural gas deliveries his country may have to cut off supplies. Gazprom, the state-run Russian oil giant, has a history of cutting off supplies over price disputes and bills with Ukraine. This is significant because Europe gets about 30% of its natural gas from Russia and 50% of that gas flows through pipelines that cross Ukraine.

In a surprise move Ukraine announced on Friday that they were halting further payments to Russia. They probably announced this because they're broke and waiting on financial aid from the EU and the IMF. Meanwhile Russia is still massing more troops and tanks on Ukraine's eastern border. At the same time Ukraine is dealing with pro-Russian protestors, many of them armed with rifles, who have taken control of several government buildings in four Ukrainian cities. Ukraine just warned the protestors that they're running out of time before the government responds with force. That could spark a move from Russia. The Russian parliament has already given Putin permission to invade Ukraine to "protect" Russian-speaking people.




Major Indices:

The S&P 500 index gave up -2.65% for the week and is currently down -1.7% year to date. Thus far the large-cap index is down -3.9% from its early March closing (all-time) highs. The breakdown under support at 1840 and its 100-dma is technically bearish. Odds are pretty good we could see the S&P 500 testing round-number support at 1800 soon. If the 1800 level fails then we could see the S&P 500 drop toward its 200-dma, currently near 1760.

chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The NASDAQ has been leading the declines and is now down four out of the last five weeks. The tech-heavy index is nearing correction territory with a -8% drop from its early March highs. It has sliced through multiple layers of support and one of its long-term up trends has clearly broken on the weekly chart.

Friday's close at 3999 looks bearish but we should consider it a test of round-number support at the 4,000 level. Unfortunately even if the NASDAQ bounces from here it has a new bearish trend of lower highs and lower lows.

A normal -10% correction would mean a drop to 3,921. The 200-dma is currently at 3,936. I would not be surprised to see a dip into the 3,900-3,935 zone.

chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

The small cap Russell 2000 had a rough week with a -3.6% decline. It's down -4.5% for the year and also down about -8% from its March highs. The index could find technical support at its simple 200-dma near 1105. We might as well group in the 1100 level as well. If the 1100 area fails to hold as support then the next area of likely support is the 1080 level, which is where the $RUT bounced in mid November and early February.

chart of the Russell 2000 index

Weekly chart of the Russell 2000 index



Economic Data & Event Calendar

The U.S. markets will have a four-day week with the markets closed on Good Friday. The economic reports to watch will be retail sales, and the two fed surveys (New York and Philadelphia). Fed chairman Yellen is scheduled to speak so anything she says could be market moving.

Economic and Event Calendar

- Monday, April 14 -
U.S. Retail Sales for March
Business inventory data from February
Eurozone Industrial Production

- Tuesday, April 15 -
Consumer Price Index (CPI)
New York Empire State manufacturing survey
NAHB housing market index
Federal Reserve Chairman Janet Yellen to speak
China's GDP estimate
China Industrial Production

- Wednesday, April 16 -
Housing starts & Building permits
U.S. Industrial Production
Federal Reserve's Beige Book report

- Thursday, April 17 -
Weekly Initial Jobless Claims
Philadelphia Fed business survey

- Friday, April 18 -

U.S. markets are closed on Good Friday

Additional Events to be aware of:

April 30th - FOMC interest rate decision and outlook


Looking Ahead:

I warned readers last week that Q1 earnings season could set the tone for the market. In the last few months Wall Street's earnings growth estimates for the first quarter had fallen from +5% to +0.3%. Now after just a handful of reports already out that estimate has turned negative -1.2%.

The question came down to if businesses would surprise to the upside because estimates were so low or would corporate America turn the first quarter into a "kitchen sink" quarter and report terrible earnings growth so they could blame it on the weather. Thus far, and it's still super early in the reporting season, it feels like business are going to turn it into a kitchen sink quarter.

U.S. financial giant JPMorgan Chase (JPM) delivered a very disappointing earnings report on Friday. Profits plunged -20%. Earnings came in at $1.28 a share when Wall Street was expecting $1.39. Revenues dropped from $25.8 billion to $23.8 billion. The results were significant worse than expected and JPM shares plunged -3.65%, a big move for the stock. JPM used to be considered "best of breed" for the big banks and its results do not bode well for the rest of the industry.

Wells Fargo (WFC) may be the exception. The company reported on Friday as well and they delivered much better numbers. WFC's revenues missed estimates but they managed to beat the earnings estimate ($0.97) by 8 cents. WFC stock managed to recover from its Friday lows to close in positive territory. Several of the high-profile companies we will hear earnings from this week are: C, INTC, JNJ, YHOO, AXP, BAC, COF, GOOG, IBM, USB, GE, and GS.

On a short-term basis as we look at the week ahead of us it will be all about Q1 earnings. That's assuming we do not see an escalation between Russia and Ukraine. Stocks normally don't move in a straight line for too long. The short-term trend for stocks is down but the NASDAQ and the Russell 2000 are both near support so I would not be surprised to see an oversold bounce. However, no matter how sharp the rebound will likely be, it's probably just a bounce.

The market's recent sell-off has done a lot of technical damage to all the charts for the major indices. It has also inflicted some damage to investor sentiment. It could take a few weeks for the U.S. market to find real support again. We can look at any market decline as a potential entry point for our long-term LEAPS trades but I would not be in a rush to launch new positions.

James