After the market's best quarterly performance since 2008 stocks stumbled in their first week of the second quarter. It was a holiday-shortened week with several factors sapping investor appetite for risk. Gold prices fell to new relative lows while the U.S. dollar produced a sharp three-day rally. Trading in bonds was mixed but yields were lower by Thursday's closing bell. The S&P 500 ended the week down -0.7% marking its third weekly decline in the last 14 weeks. The small cap Russell 2000 index fell -1.4% for the week while the NASDAQ composite only slipped -0.3%.

Volatility ticked higher last week with the S&P 500 index posting a -1% loss for the second time in 2012. Two biggest events impacting trading was the FOMC minutes and bond yields in Spain. Tuesday saw the release of the FOMC minutes from the most recent meeting and the market was shocked that the fed governors took a much more hawkish tone toward policy. The minutes weakened the belief that the Federal Reserve might offer some sort of QE 3 program later this year. The very next day (Wednesday) Europe took the spotlight with Spain struggling to complete a debt auction due to very weak demand. The yields on Spanish bonds were marching higher, which suggests that investors do not have any faith in the country's ability to meet its austerity targets and control its deficits.

There were a number of economic headlines from overseas. China saw its manufacturing PMI rise from 51.0 a month ago to 53.1. The communist country also reported that its PMI Services data hit a six-month high. Meanwhile in Europe we saw France, Germany, and the U.K. all report that their PMI services data was improving. Britain also announced that its PMI construction data hit its best levels since 2010. Yet the U.K.'s manufacturing and industrial production data missed expectations. Another dark cloud for Europe was the unemployment rate for the Eurozone rising to 10.8% (unemployment for individual countries like Greece and Spain are a lot higher). Another disappointment was German industrial production missed estimates by a wide margin. While we're on the subject of Europe, investors didn't like the hawkish tone ECB President Draghi seemed to have when he spoke on Wednesday.

In the U.S. we saw factory orders rise +1.3%, which was generally in line with expectations. The ISM services data for March came in at 56.0 but that was less than the 56.7 estimate and down from February's 57.3. The ADP employment report said private companies added 209,000 jobs but that was less than the 217,000 expected. Last week we also saw consumer credit decline after twelve months of improvement. Meanwhile U.S. auto and truck sales for March were showing strong improvement. March same-store sales for the retailers still reporting this data was generally better than expected thanks to one of the warmest Marchs on record.

The biggest economic report for the U.S. was released on Friday morning while the stock market was closed. I am referring to the nonfarm payroll (jobs) report. Economists had been expecting +205,000 jobs with some whisper numbers near +250K. Yet the government's report said March jobs came in at +120,000. February's number was revised up +13,000 but January's was revised down by -9,000. The unemployment rate actually ticked down from 8.3% to 8.2% but that was solely due to a drop in the number of people in the work force.

The S&P futures immediately plunged -20 points on the jobs number miss. The last couple of weeks the tone of analysts and economists suggested that the American economic recovery was finally self sustaining. This big miss in the March jobs number throws that view in doubt. Now the first thing most analysts said on Friday was that "it's just one month of data" and we shouldn't read too much into it. Second, there was a chorus of analysts suggesting that March's jobs number was so bad because the warmer than expected weather in January and February had pulled hiring forward. Both opinions could be right but that's not going to stop the stock market from surging lower on this dismal economist data.

You've heard it before, the U.S. needs at least +150,000 new jobs a month just to keep pace with our population growth (new graduates and immigration). The last two years the job growth has averaged +143,000. The U.S. economy lost 8.8 million jobs during the recession. We've only gained 3.6 million back. That leaves 5.2 million out of work plus two years worth of new entrants to work force. The real unemployment rate should be a lot, lot higher but the number of people not counted in the work force has been skyrocketing and hit a new record of 87.8 million people. There are a few pundits out there suggestion the BLS data is extremely out of sync due to gross miscalculations in their seasonal adjustments while some analysts are actually suggesting that these numbers are being politically motivated to make the economy look better than it really is.

Major Indices:

The S&P 500 index ended the short week closing under what should have been round-number support at 1400 as well as short-term technical support at its 20-dma. If you look at the daily chart you have to wonder if the market is forming a top. The last three weeks in a row have seen gains on Monday followed by a three-day decline. Of course that pattern would have been broken this Friday if the market was open. The S&P futures spiked down toward the 1375 area on Friday following the release of the jobs data. A dip to 1375 would be a -3% correction. There is a chance that the 2011 highs in the 1370-1360 area could offer some support. Yet if these levels fail (and its 50-dma) then we're probably looking at a multi-day decline down toward the next level of support near 1340.

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The NASDAQ composite only gave up -0.3% last week. It's still up +18% year to date. It's worth pointing out that shares did produce a new lower high last week and the weekly chart is definitely showing a slowdown in momentum with two long-tailed doji candlesticks. The NASDAQ composite will probably test support near the 3,000 level. If the 3K level breaks then it's probably looking at a drop toward 2900. Remember a -3% to -5% decline would be a dip into the 3040-2975 range but since the NASDAQ is so overbought we should probably expect a deeper pullback. A -8% correction would be 2870 and a -10% correction would be 2808. Although I do expect the 2900 level to offer pretty good support. That's where we will find the 38.2% Fibonacci retracement of the December-March rally.

Daily chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

The trading in the small caps was a bit uglier last week. The small cap Russell 2000 index has closed under both its simple 50-dma and its trend line of higher lows. This also looks like a breakdown from its bear wedge pattern. We could see the $RUT test its March lows near 785 soon. I would expect the 780-760 area to offer some decent support but the trend could be changing.

Daily chart of the Russell 2000 index

Weekly chart of the Russell 2000 index

We are still watching the transports although they didn't move much last week. As the market reacts to the jobs data on Monday we will most likely see the $TRAN break its trend line of support. I would expect a correction toward the March lows. Weakness in the transport is usually bearish for investor sentiment.

chart of the Transportation Average

We are still watching shares of Apple Inc. (AAPL). It's the largest stock by market cap and tends to be a barometer for investor sentiment toward big cap tech stocks (and the NASDAQ-100). There was no slowdown in the rally for AAPL with shares hitting new record highs. I don't see any changes from my prior comments.

When this stock corrects, and eventually it will, it's going to put a lot of downward pressure on the major indices.

Key areas to watch are $550, $520, and $500. All of which could be potential support for AAPL.

Daily chart of the Apple Inc. (AAPL)

Another chart I want to post is gold, specially the GLD gold ETF. The last couple of weeks there has been talk that the GLD is forming an inverse head-and-shoulders pattern, which is bullish. The GLD should be testing the very bottom of its right shoulder now. Aggressive traders could start initiating bullish positions now and then add to it as the GLD rises. I am not suggesting new positions in the GLD tonight but it is something to keep on your radar screen. You can also see that the GLD is near some of its long-term trend lines of higher lows (a.k.a. support). If the GLD can breakout past the neckline (resistance) of this H&S pattern it would forecast a bullish target of $200 for the ETF.

Weekly chart of the GLD gold ETF

We have a relatively quiet economic calendar this week. The big reports will be the Fed's Beige book on Wednesday and then the PPI and CPI data on inflation later in the week. The real event will be the unofficial start to the Q1 earnings season. Dow-component Alcoa reports on Tuesday. Google reports on Thursday and banking giants JPM and WFC report on Friday.

- Monday, April 9 -
(nothing significant announced)

- Tuesday, April 10 -
wholesale inventory data
Alcoa (AA) reports earnings

- Wednesday, April 11 -
Import/Export prices
Federal Reserve's Beige Book Report

- Thursday, April 12 -
Weekly Initial Jobless Claims
PPI index for March
Google (GOOG) reports earnings

- Friday, April 13 -
CPI index for March
Michigan sentiment survey for April
JPM and WFC both report earnings

Upcoming events:

April 24th FOMC meeting
April - Greek election

The Week Ahead:

What can we expect as we look at the week ahead of us? The U.S. markets will likely gap down and spike lower as investors react to the disappointing jobs data released on Friday. Complicating matters could be widespread sell-offs in Asian and European markets reacting to the same data. The jobs report could be the perfect excuse investors need to hit the sell button and lock in gains after such a stunning first quarter performance.

If you could put a positive spin on the jobs report it would be that the March report probably helps keep the Federal Reserve in their easy money stance. It seems that the market can't decide which way they think the Fed is going to go. Two weeks ago stocks were in rally mode on comments from Ben Bernanke because it sounded like he was leaning toward more stimulus. Now this past week the minutes from the last meeting come out and the FOMC sounds more hawkish (less chance of QE3). If the U.S. economy is self sustaining then there is less need for QE. If the recovery is not self sustaining then the Fed will probably announce another round of stimulus.

Bill Gross, the head at PIMCO, the largest bond fund on the planet, believes that Bernanke doesn't have a choice and will come out with some sort of QE3 program. Many believed that the Fed might announce something at the late April meeting. Yet now Goldman Sachs just released their opinion that the Fed probably won't move in April but will announce some sort of new stimulus at the June meeting instead. That would make sense because the current "Operation Twist" is due to end on June 30th. Yet there are plenty of pundits that believe the Fed is done with their QE programs. Wall Street can't decide and the markets hate the unknown, which could be just another reason for investors to sell and lock in gains.

While we're on the topic of selling we are approaching the "sell in May" time frame. April ends the best six months of the year for stocks on a historical basis. Once investors recognized this trend there formed a pattern of many investors to sell in May and not come back until October. It doesn't always pay off but over a long period of time October-April does outperform the rest of the year. I've mentioned it before but I believe April earnings will disappoint and they will be an early catalyst for traders to sell stocks, which could start the "sell in May" trend early. However, I will mention another historical trend and that is April tends to be an up month for stocks. We definitely have some crosswinds impacting investor sentiment.

There is always the chance that Q1 earnings results beat the currently lowered expectations but corporations are facing tougher year over year comparisons. Plus there is still the issue of guidance. The fear is that both Europe and China are slowing down. There is the potential for leadership change in Washington. Corporate management could be cautious on their guidance given all the unknowns and that could be a reason for investors to sell stocks following their earnings reports.

Speaking of China, the country is going to release their latest inflation data on Sunday night. If the inflation rate is too high it will impact China's ability to loosen their monetary policy which will impact their ability to fight a hard landing (a.k.a. slowdown). This report could have an influence on stocks Monday morning. China will also release their Q1 GDP numbers later in the week.

Bull markets do tend to climb the "wall of worry" but we're facing a lot of obstacles for the bulls to overcome. On top of everything already mentioned we have rising gasoline prices in the U.S. and rising bond yields in Spain. You already know the story with gas prices. Eventually high gas prices will impact consumer spending, which accounts for nearly 70% of the U.S. economy. Meanwhile rising bond yields in Spain are a sign the toxic debt issue in Europe hasn't been solved. The yield on the Spanish 10-year bond hit 5.75% on Friday. That is the highest levels since December, just before the ECB launched their LTRO program. They key level to watch is 7% yields, which is generally considered unsustainable for a country to service its debt levels. Plus there is still the dark cloud of Iran on the horizon. Tensions between Iran and the West are heating up and many believe it could come to a head sometime this summer.

Is the market's larger trend still up? Yes, it is. Yet the U.S. market is overdue for a correction so short-term the trend is probably done, at least for a few days and maybe for a few weeks. That makes me cautious when it comes to launching new long-term bullish LEAPS trades. We welcome a correction because it will provide a new entry point but we need to be patient when it comes to actually initiating new positions.

- James