This probably was not the start to the week the bulls had in mind after last week's slump. News out of the World Bank that the global economic situation is more dour than originally thought spooked investors, sending the S&P 500 down 3.1% to 893.04. Monday's drubbing of the index surpasses the 2.6% it shed last week. The Dow Jones Industrial Average tanked 200.72 points, or 2.4%, to 8339.01, reminding investors the venerable index still knows how to execute a triple-digit tumble. Technology provided little respite as the Nasdaq fell 61.28, or 3.35%, to 1766.19.
Investors left disappointed by a lack of volatility during last Friday's quadruple witching day got it in spades today. It seems the market is no longer impervious to bad news, though it seems like only yesterday a host of dire forecasts could be released, banks could clamor for capital and earnings could disappoint, and the market would rally. Things have obviously changed. According to the World Bank, things might be getting worse.
The World Bank said today it expects the global recession to be deeper than originally estimated and when growth resumes, (hopefully) sometime in 2010, it will be at a 2% clip, not the 2.3% forecast just three months ago. For 2009, the World Bank expects the global economy to contract by 2.9%, but poverty and unemployment will continue to rise. Those are anything but the green shoots this market so desperately craves.
And don't think that because equities spent the day being taken to the woodshed that commodities provided any shelter for beleaguered investors. Crude oil continued to fall, closing below $67 and Treasury prices climbed. Monday was just a glum day for commodities period as the Reuters/Jefferies CRB experienced its biggest drop in three weeks, closing at 246.07. The index tracks 19 commodities, so pick one and it was probably down today. News that miner Anglo American (AAUK) spurned a takeover offer from rival Xstrata did not do much to bolster sentiment in the commodities space and may have dampened hopes for consolidation in the sector.
Not surprisingly, this was not good news for commodities stocks. Dow component Alcoa (AA) shed 98 cents, or 8.9%, to close at $10.02. That's well below the 200-day moving average at $10.73 and next support may appear at the 50-day moving average of $9.74. Honestly, that level could be breached as early as tomorrow.
Chart of Alcoa
Copper mining giant Freeport McMoran (FCX) joined in the commodities calamity for the day, plunging $5.75, or 11.3%, to $45.18. Last Tuesday, this was a $55 stock, meaning you had a triple-bagger on your hands had you bought the stock roughly a week before last Christmas. It appears Freeport topped out at $61.55 earlier this month. Giving up $16 in a span of two weeks is never a good sign and the stock sliced below its 50-day moving average of $48.99 today. Volume was about 33% higher than usual today, indicating the selling pressure was intense to say the least.
Freeport is a well-managed company and investors would be hard-pressed to find a better large-cap play on international copper demand. That said, Freeport's most recent bullish run appears to have not only stalled, but perhaps ended and the chart is below so you may draw your own conclusions.
Chart of FCX
Speaking of the end of bullish of runs, after more than doubling in just four months, crude oil appears to be pulling back as well. Just a few weeks ago black gold seemed like it would make its way to $75 a barrel and from there other lofty heights seemed obtainable. Crude for July delivery closed at $66.93 on the NYMEX, but the bright side is several press reports today noted a decline in gasoline prices as well. In fact, gasoline futures contracts are down more than 10% since last week, so that's a bit of good news for consumers. Whether or not that news is a green shoot, well, only time will tell.
Crude's pullback probably should not startle anyone. Over the past several weeks, in the Market Monitor and in our Market Wraps, rising oil inventories and less miles driven have been noted as two factors that made oil's ascent somewhat dubious. In other words, the fundamentals really weren't there to support crude's climb higher and enthusiasm on the part of speculators was probably the driving forces behind oil's surge.
Crude futures were also hostage to the expiration of those futures at the close today. The USO and DXO as well as other oil ETFs had to be out of that contract before the close. Just the USO/DXO volume equates to more than 30% of the open interest in the July contract so the panic expiration decline was not really a surprise.
The USO ETF, which tracks the daily price action in crude oil futures, finished the day down $1.72 to $36.25 and has shed more than $3 in the past five sessions. It is now well below its 200-day moving average at $41.08 and any more pain could bring the 50-day moving average of $33.22 into play.
Chart of USO
Another oil ETF getting tarred and feathered today was the Oil Services HOLDRs ETF (OIH), which tracks a basket of oil services, a group I had been quite bullish on starting back in early May. Holdings include companies such as National Oilwell Varco (NOV), Diamond Offshore (DO) and Transocean (RIG). All fine companies to be sure, but all were down over $2 today and the OIH was down $6.62, or 6.5%, to $95.04. That is its first close below $100 in three weeks.
A comparison to Freeport McMoran is relevant here not only because the OIH and its holdings are deeply correlated to a physical commodity, but also because like Freeport, companies in the OIH fold have been on fire since December. Any investor astute enough to have bought National Oilwell along with Freeport on, say December 15, was celebrating well past the holiday season. Now Mr. Market seems to be saying that he hopes you took some profits as the rally in oil services stocks looks to be taking a breather (and that may be the optimistic way of describing the recent declines).
The OIH looks to have topped at $115.93 earlier this month and the ETF slammed through its 50-day moving average of $98.44 today. The 200-day at $91.84 could be seen sooner rather than later unless the bulls can wrest control of the oil market this week.
Chart of OIH
On a day when culprits were not hard to come by, it was no surprise to find negative news in the banking sector. Two board members left Bank of America (BAC) and oddly enough, both have military backgrounds. Retired U.S. Navy Admiral Joseph Prueher and retired U.S. Army General Tommy Franks are leaving Bank of America's board, bringing the total board departures in recent weeks to six. Just a few weeks ago, CALPERS, the pension plan for California's public employees and a major Bank of America shareholder, was clamoring for changes on the bank's board. Unsuccessful at the annual shareholders meeting, it appears CALPERS ultimately got its wish.
Bank of America slid $1.28, or 9.68%, to $11.94, but misery loves company and JP Morgan Chase (JPM) tumbled 6% and Wells Fargo (WFC) fell nearly 7%. Financials were the biggest loser among 10 main industry groups. The KBW Bank Index (BKX), which tracks 24 of the largest US banks, fell $2.48 to $34.84 to close well below both its 50 and 200-day moving averages. After falling from its high of $43.80 in May, the BKX consolidated in the $38 area and today's move below the 50-day line could be a bearish signal.
Chart of BKH
So given all the glum news from Monday's session, Tuesday's trade becomes all the more important for the bulls. The primary catalyst for the day will be the release of existing home sales before the market opens. Economists are forecasting sales of 4.82 million units in May, up from 4.68 million in April. Any surprise, up or down, will likely set the tone for the markets tomorrow.
The housing market has been at the epicenter of the slacking economy and it is hard to envision a true recovery without substantial improvement in the housing sector. Unfortunately, that improvement may be a way's off as the Mortgage Bankers Association (MBA) said today it expects new home sales for 2009 to be 27% lower than they were in 2008 and that median home prices will fall by 10% with no signs of an uptick until next year. Proving that bad news often comes in droves, MBA also lowered its mortgage origination forecast for 2009 to $2.03 trillion from over $2.7 trillion. Yes, $700 billion is quite a chunk of change.
Assuming there is no dramatic upside surprise in the existing home sales data, the market may also be happy with some signs of stability, which may have started to appear last month. Actually, the charts indicate some stabilization in both new and existing home sales, so a continuation of that trend tomorrow would be encouraging.
Chart of Existing Home Sales
Chart of New Home Sales
In addition to the home sales data, all eyes will be on the Federal Open Market Committee meeting that commences tomorrow. A decision on interest rates won't be announced until Wednesday and economists expect rates to remain unchanged. Fed funds futures indicated a 55% chance of a rate increase two weeks ago and that number fell to 47% by last Friday's close.
And while earnings season has been over for a few weeks now, there are still some sporadic reports worth watching. Before the bell tomorrow grocery store giant Kroger (KR) is expected to report first-quarter results and analysts are calling for 62 cents a share in profits. Oracle (ORCL), the largest enterprise software maker, reports after the close and the average analyst estimate is 44 cents a share.
Taking a look at market techincals, today was the broadest sell-off for US stocks since May 13 and now that Dow 9000 doesn't seem to be a reasonable possibility in the near-term, attention may turn to the Dow's ability to find support at 8300. The index is now negative for the year and whether or not that gives the bears the impetus they need to growl once again remains to be seen.
While the 50-day moving average at 8377.89 didn't act as support today, this could be an important level for the Dow to surge past in the coming days to reestablish some positive momentum. Three recent tests of 8500 as support held until Monday's lambasting, so 8500 and the 200-day moving average at 8552.81 could be the Dow's next resistance levels.
Chart of the Dow
The S&P 500 is now negative for the year as well and is down 5.6% since June 12. Today's close below 900 probably was not a good thing and the close below the 50-day moving average at 898.63 may be worse. As I have lamented before it is hard enough to make up the losses after severe down days such as today. It is even more difficult in the summer with a lack of positive catalysts on the horizon. Not to be overly simplistic, but the S&P needs to get back above 900 in a hurry. Too many closes below that critical level and the bulls may wave a white flag.
Chart of the S&P-500
The Nasdaq situation may be a little trickier to decipher at this point. Was today's decline a result of what happened on the Dow and S&P 500? Were sellers buoyed by news of Apple (AAPL) CEO Steve Jobs covering up his liver surgery? Keep in mind Apple did say it sold more than 1 million iPhone 3G S units over the weekend. Perhaps it would behoove Apple's investor relations department to be a little more forthright about Mr. Jobs' health.
Either way, support for the Nasdaq probably rests at the 50-day moving average of 1741.75. Good news out of Oracle after the close tomorrow could sustain tech investors through the rest of the week and keep the Nasdaq out of bearish hands. At this point, it might be fair to say the near-term prospects for the Nasdaq are less bleak than they are for its major-index counterparts, but I would not stake all my chips here either.
Chart of the Nasdaq
Given the recent tenor of the market over the past couple of days, it is not hard to imagine the bulls keeping their fingers crossed for some positive news on existing home sales on Tuesday. My next guess is those that are still long will be on bended knee Tuesday night hoping and praying Chairman Bernanke can rustle up something positive to say at the end of the FOMC meeting on Wednesday.