The Dow lost another 213 points and the Nasdaq 55 in the worst losing streak since December.

Market Statistics

The selloff that started with the FOMC minutes last week accelerated on worries over another meltdown in Europe and a Bernanke speech with no reference to the Nonfarm Payroll report. Bond yields in Spain rose to 6% and are in danger of pushing the country into a meltdown similar to Greece where Europe would have to come to their rescue. Unfortunately Spain is too big to save. The EU rescue fund is far too small to save Spain. The Madrid stock market fell to its lowest level since 2009 crash. Spanish officials said the country had fallen back into recession with a -1.7% GDP but Citigroup said it could be much worse. Unemployment is 23.6%. Spain's budget deficit is -8.5% and the target is -3% in 2013. Spanish officials roiled the market overnight saying Spanish banks needed to raise more capital because of a deteriorating economy. This caused analysts already leery of Spain's troubles to wonder if Spain's banks can survive any further economic declines.

Italy is also falling off a cliff. The Italian FTSE MIB index fell -757 points or -5% on Tuesday. Major Italian banks lost 7-8% in today's crash. Apparently the $1 trillion ECB LTRO sugar rush has ended and EU banks are no longer supporting bond offerings from Italy and Spain in fear of a 75% haircut like investors in Greek bonds suffered.

I have repeatedly warned the EU crisis will return and Greece will eventually default. The events this week reminded investors the ECB only kicked the can further down the road. It was not the end of the road as many thought. We are rapidly approaching another can kicking crisis but the cans (Italy and Spain) are much, much larger and will be significantly harder to kick.

The ECB could issue another 500 billion euro LTRO and that might postpone the problem for a couple months but quantitative easing can only go so far when the banks/countries borrowing the money run out of collateral or the will to increase their indebtedness. The only way this problem can be fixed permanently is with the breakup of the EU. Weaker nations heavily in debt need to be able to print their own currency rather than be tied to the euro.

In the U.S. the economic reports were decent but they could not slow the market drop. The Job Openings, Labor Turnover Survey (JOLTS) for February showed a small increase in job openings to 3.498 million from 3.477 million. That was a very small increase month to month but the headline number represents a 16.1% increase over February 2011. Hiring increased from 4.2 million to 4.4 million. This is a lagging report for February so it was mostly ignored.

The Wholesale Trade report for February showed inventories rose +0.9% and nearly twice the expectations of +0.5%. That was also stronger than the +0.6% gain in January. Sales increased in seven of nine categories. Sales of furniture and electrical equipment fell. The inventory to sales ratio remained flat at 1.17. While this report was positive it was also a lagging report and was mostly ignored.

The economic calendar for the rest of the week will be highlighted by the Fed beige Book on Wednesday, Google earnings on Thursday, Bernanke speech and WFC/JPM earnings on Friday.

Bernanke gave a speech on Monday night and there was not one word about the unexpected decline in the payroll report. One commentator compared Bernanke to Abraham Lincoln and the Emancipation Proclamation. Lincoln wrote the executive order to free the slaves but stuck it in his desk drawer for two months until he felt the time was right to release it. The commentator believes Bernanke knows exactly what he is going to do but is waiting until the right time to make the announcement. If Bernanke constantly alluded to some new program at some point in the future then the market would factor in its suspicions and when the announcement finally came there would be no surprise. By waiting he can pick the ideal time to drop the bomb.

President Harry Truman gave the order to drop the atomic bomb on Hiroshma several weeks before the actual event. However, in his order he said absolutely not before August 3rd 1945. He was planning on attending the Potsdam Conference in Potsdam Germany with the leaders of the Soviet Union, the U.K. and the USA. That conference to discuss the war was scheduled to be over on August 2nd. The bomb was dropped on August 6th.

Political and financial leaders like to be able to choose the time and place for a major event. With Europe imploding again and the stock market in free fall, Bernanke may be pushed to make an announcement before he is ready. That may dilute the impact but only time will tell.

Economic Calendar

The news intensity is increasing over the coming earnings cycle. Alcoa (AA) was the first Dow component to report and there was a major surprise. Alcoa reported earnings of 10-cents compared to expectations for a loss of 4-cents. Revenue was $6.01 billion compared to estimates of $5.77 billion. The CEO said he expected overall global demand to rise by +7% in 2012 despite a worsening European economy. He pointed out there were record physical premiums paid for delivery of aluminum on top of the benchmark exchange price in the USA, Asia and Europe. He felt that reflected "Very, very strong demand." Buyers are paying about $150 per ton over the benchmark price. Premiums in the Midwest are averaging 9.0-9.5 cents per pound over the benchmark.

Alcoa shares rose 60-cents to $9.83 after the earnings.

Alcoa Chart

Supervalu (SUV) posted adjusted earnings of 38-cents compared to estimates of 35-cents. Revenue fell -5% to $8.23 billion but that still beat estimates of $8.14 billion. Rising commodity prices slowed profits but the company said it was relying on store brands to maintain profitability. Supervalu issued full year guidance for the full year of $1.27 to $1.42 and that was well above analyst estimates of $1.18 per share.

SVU Chart

The earnings for Wednesday are TITN and ADTN and not names most people would know. The tech sector will be focused on Google after the bell on Thursday and volatility always follows Google's results. The financial sector will be focused on the dual earnings of Wells Fargo and JP Morgan on Friday.

Commodity prices have been crushed this week. Copper hit a high of $3.96 on March 3rd and it traded below $3.65 today. In copper futures that is a monster move that pushed it to a two month low. China's slowing economy is a main driver of those demand worries.

Copper Futures Chart

Crude oil had a bad day thanks to the falling market and expectations for lower global demand. China said oil imports rose only 5.2% in March. That was down from the +8% in February. I am always amazed by the market reaction to numbers. China's imports still ROSE by 5.3% for the month. Yes, it was slower than 8% but it is still a big number. WTI declined by -1.35 to $101 and Brent by -2.82 to $120. This is temporary.

WTI Crude Chart

Iran cut off oil exports to Greece and Spain and said it may halt exports to Germany and Italy according to the report on Iranian TV. However, these "counter sanctions" are only a political ploy to try and make it appear Iran is in control rather than the EU and the West. Spain said it quit buying Iranian oil several months ago. Greece shifted its purchases to Saudi Arabia last month. Iran has been claiming they cutoff deliveries to countries but only after those countries actually quit buying from Iran.

Iran is scheduled to meet on Saturday with the five nations in the UN Security council plus Germany in Turkey to talk about nuclear issues. However, Iran has protested Turkey as a site since Turkey has quit buying oil from Iran. It is unknown if the meeting is still going to happen. Iran has a habit of protesting everything and agreeing to nothing. The last attempt to hold talks in 2011 ended after two days when nobody could agree on what topics to discuss. Iran refused to talk about any nuclear subject.

Iran's president said today that Iran did not need the money from oil sales. He said Iran could go for 2-3 years without selling a single barrel of oil. Since oil exports account for $80 billion a year, 80% of Iran's foreign revenue and 60% of its annual budget, those claims are clearly bogus.

The six parties to the talks in Turkey are going to demand a shutdown of the newly built and highly secret enrichment facility in Qum and the shipment of all uranium enriched to more than 3.5%, the grade required to power reactors, to a third country for safe keeping. The hardliners in Iran are not going to agree to this. President Ahmadinejad said today "whoever seeks to violate the nuclear rights of the Iranian nation will get a blow to the mouth." I hope he has figured out how to eat oil because that may be the only thing Iranians have to eat before the year is out.

Apple (AAPL) did it again. The stock rose to a new high of $644 intraday and was briefly worth more than $600 billion. GE came close to that level once but Microsoft is the only other company that has actually done it. MSFT his that level in December 1999 but is less than half of that now.

Apple Chart

Priceline (PCLN) also rallied to a new high of $774.96 at the open before losing -$23.50 for the day.

Priceline Chart

Did the afternoon selloff in the Nasdaq big caps signal the end of the rally story? These stocks have not had a really bad day since December and the flight of the momentum junkies could be a sign investor sentiment is shifting.

The Dow had its first back to back triple digit loss since November 17th. This is the longest losing streak for the Dow since last August. The S&P is on its longest losing streak since November. The Dow has lost -548 points since its closing high of 13,264 on April 2nd. That is roughly a 4% decline and the -61 point drop in the S&P is also -4%. Same on the Nasdaq with a -128 point drop.

In normal times a 4-5% decline is just a regular bout of profit taking. A 5% decline on the S&P would take it to 1348. With strong support at 1340 I would suspect that level to hold on the first test. The indexes closed on their lows on Tuesday on much stronger volume than we have seen in a long time. The 8.2 billion shares was the strongest volume we have seen since December 16th at 9.0 billion. That was option expiration Friday in December.

S&P Chart - 120 Min

Decliners beat advancers by 5:1 but that should not be a surprise given the magnitude of the decline. However, down volume was only seven times up volume. It could have been a lot worse. We need a 10 times day for a reversal in normal markets.

The break below the 50-day average is a sell signal for some hedge funds and institutional traders. The big question now is whether the strong support at 1340 will be enough to slow the drop and allow traders to reevaluate their outlook.

S&P Chart - Daily

Unfortunately the Dow has already closed below the equivalent support level to the S&P 1340. The Dow closed under 12,750 and at the lows of the day. In theory the Alcoa earnings will produce a positive impact to the Dow but in practice the $9 price on AA has no weight in the Dow. The +7.5% bounce in AA in afterhours will not even be a speed bump in the Dow's direction.

However, S&P futures are up +4 points tonight in what I would describe as a reaction bounce rather than a change in sentiment. Alcoa was very positive in their earnings comments but we don't know if this positive sentiment will last until morning or be crushed by further declines in Europe overnight.

The next material support level in the Dow is 12,600 but that is also a minor bump in the road if the pace of selling continues.

Dow Chart - 120 Min

Dow Chart - Daily

The Nasdaq declined to close on the 50-day average but the Nasdaq rarely honors the 50. The Nasdaq is more reactive to the 100 and 200 day averages. The 3000 level was initial support and the close at 2991 could be considered a break of that support but breaks of less than 10 points are close enough to be ignored until confirmed. Stronger support at 2900 is likely to be tested if there is no immediate rebound on Wednesday.

Nasdaq Chart - Daily

The Russell 2000 suggests fund managers are in flight mode. The index closed below what should have been strong support at 785 but only by a point. A failure to rebound on Wednesday suggests we could be looking at a much stronger market decline in the days ahead.

Russell 2000 Chart - 120 Min

Russell 2000 Chart - Daily

I don't have a lot of confidence in the futures holding in positive territory overnight. European markets are too fragile and the bond vigilantes are on the prowl in Italy and Spain. Investors know the ECB is powerless to prevent an actual meltdown in those countries so a lot of blustery talk from the EU finance ministers may not have any impact. They had three months to put some real changes in place and blew it. Now they are behind the curve once again and the slope ahead is growing more slippery by the week.

In the U.S. the Alcoa and Supervalu earnings were positive but those companies don't have enough clout to really halt a charging market. Google could slow the tech decline or accelerate it. WFC and JPM could reverse the trend back to positive with some blowout earnings. It remains to be seen if they can pull it off.

I believe we are due for a larger decline than the -4% over the last week. All the markets are up strongly for the year and there has not been a material bout of profit taking since December. We are due for a real dip and the expectations for lousy earnings are not likely to push us higher. There may be a bounce in our immediate future but I think it will fail.

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