The market just delivered its worst weekly decline in three months but still managed its third monthly gain in a row. Headlines were once again dominated by Greece, economic data, financial reform, and Goldman Sachs. The market's reaction to the various news stories appears to be moving toward a more bearish tone. Earnings news, while generally positive, has lost its momentum. In summary the market appears to be losing steam and the post-earnings season correction may have begun.

The Greece problem refuses to go away. Of course we knew it wasn't over a week ago when Greece officially asked for aid. What should be alarming is how the price of the aid package keeps rising. First there were promises of low-interest loans but that didn't work. Then about three weeks ago EU officials and the IMF hammered down a 45 billion euro aid package. Yet now they're talking about a 130 billion euro aid package.

The major changes in this story have been the sudden reversal in Germany. Most Germans are still against any aid to Greece but in just the last few days German leadership appears to have finally caved into peer pressure to offer a bail out. Further complicating the scene have been a number of downgrades. This past week S&P ratings service downgraded Greek's debt rating to junk, downgraded Portugal two notices and downgraded Spain one notch with negative outlooks for all there.

Debt spreads were rising for most of the PIIGS countries. While many suspect Portugal is next on the list of potential defaults the real worry is Spain, which is a much larger economy. Nouriel Roubini, the somewhat infamous economists who predicted the recent economic downturn, made headlines with his comments that Greece's debt woes are just the "tip of the iceberg".

Evidently Greece has been haggling with EU officials and the IMF on Friday over any aid package. Investors were worried about the headline risk over the weekend since any announcement has been postponed to Sunday.

On a more positive note most of the economic data this past week has been bullish. Same-store sales continue to improve. Consumer confidence numbers improved. The consumer sentiment reading declined but still came in better than expected. The Chicago PMI data improved. The big report was the Q1 GDP number, which came in at +3.2%, which was essentially in line with the +3.3% estimate. More importantly the growth in Q1 saw personal consumption rise to +3.6% compared to estimates for +3.3%. This was the fastest pace in three years. Overall it was a very bullish week for data suggesting the all-important consumer is still hanging in there. This coming week the major event will be the jobs report due out on Friday. Unfortunately the numbers will be distorted by temporary census jobs.

The energy sector suffered some selling this past week. Coal stocks were plagued by disappointing earnings, downgrades, and an FBI probe into the recent coal mine disaster. Meanwhile oil stocks were suffering as the oil rig explosion in the Gulf of Mexico has turned into an oil spill story with daily headlines bombarding the market. Shares of BP sank sharply after the company said the ocean floor well was leaking at 5,000 barrels a day versus original estimates of 1,000 barrels. Shares of Transocean (RIG) have been hammered over the company's exposure to this event. Insurance stock PRE is down for the week after announcing that insured losses could exceed $1 billion. In spite of the sector weakness oil prices look poised to move higher.

One of the biggest stories of the week surfaced on Friday and once again it involves Goldman Sachs (GS). News that the U.S. attorney's office in Manhattan was pursuing a potential criminal probe into the company's CDO and mortgage debt trading sent shivers through the financial sector. The Wall Street Journal pointed out that in the last 200 years not one company has ever survived criminal charges. It was two weeks ago that the SEC shocked the market with a civil lawsuit against GS claiming fraud in the company's CDO dealings. Currently it is widely accepted that any criminal case would be extremely difficult to pursue due to the complexity of the matter and the challenge to prove beyond a reasonable doubt for prosecutors. Unfortunately that did not stop shares of GS from losing more than 9% on Friday and sinking to a new low for 2010.

Technically the market looks tired. I have been suggesting that stocks would see a post-earnings sell-off in the second half of April. The action last week helped support that the correction theory. You could argue that the S&P 500 index and the NASDAQ composite have both formed bearish head-and-shoulders patterns. If the S&P 500 breaks down under the 1180 level the H&S pattern would forecast a drop toward 1140 although personally I would expect to see support closer to 1150, which was prior resistance. If the NASDAQ breaks down under the 2450 level the pattern would portend a correction toward the 2365 area although the 2400 level and the 50-dma could offer some support.

Technicals offer clues on what to expect but this remains a news-driven market. Investors are concerned that this Goldman Sachs story is going to add fuel to the financial reform fire. Meanwhile traders are nervous about the rising risk of sovereign debt default in Europe. It could just be the case of traders looking for an excuse to take profits. You've heard it before but there are investors who do practice the sell-in-May theory to market timing. I've also read recent claims that hedge funds have been lowering their exposure to stocks. Don't get me wrong. I'm not suggesting the rally is over but we've been waiting for a normal correction in this trend higher. One of the biggest clues that the market could be forming a top has been volume. Trading volumes have been elevated and the combination of big volume and increased volatility is usually a good sign of a turning point at market tops and market bottoms.

It is worth noting that bears could argue that the rally is running out of steam at a major Fibonacci number (near 1220 on the S&P 500) and that suggests the entire move off the 2009 lows is nothing more than a bear-market bounce. I'm not suggesting the rally is over just yet. Instead traders can look for a 5%-10% correction. If the S&P pulled back 5% from the 1220 level we would see a dip toward the 1160 area. A 10% correction would produce a pull back toward the 1100 level (and the 200-dma) for the S&P 500. The last correction that began in January lasted about four weeks. Don't be surprised if this pull back lasts several weeks.

The good news here is that the market pull back we've been patiently waiting for appears to have started. Over the next few weeks we will be looking for an entry point to launch new bullish positions. Take your time and let the market come to you.

Chart of the S&P 500 Index:

Chart of the NASDAQ Composite Index:


Previous Comments on my Long-Term Outlook:

My long-term outlook has not changed. I still expect the economy to see a double-dip, "W"-shaped rebound with the second dip in 2010 (some analysts are predicting it will not show up until 2011). Lousy consumer spending, rising foreclosures, and lagging job growth will be the main culprits. Several weeks ago there were some comments out of the U.S. Treasury concerning foreclosures. The Obama administration's HAMP loan modification program can only help a certain number of homeowners and one official said that even if the HAMP program was a total success we should still expect millions of new foreclosures. This only reinforces my own belief that we will see another tidal wave of foreclosed homes in 2010 and 2011. Some analysts are forecasting upwards of six million foreclosures in the next three years. What is that going to do to consumer confidence and consumer spending? It's not going to help! You can review my long-term outlook here. It's the second half our my "Two Months Left" commentary.

~ James Brown