The U.S. stock market could be flashing a warning sign. Stocks ended April on a down note and April's monthly decline ended a four-month winning streak for the S&P 500. The major indices saw a rally on May 1st but gains started fading before the close and stocks sold off the next three days in a row. By Friday's closing bell the Dow Industrials were down -1.4% for the week. The S&P 500 was down -2.4%, the NASDAQ composite was down -3.7% and the small cap Russell 2000 index fell -4.1% for the week. Looks like the "sell in May" phenomenon might happen again this year.

Two weeks ago the market was ignoring bad news. Unfortunately another week of largely disappointing news was apparently too much for the bulls to endure. We did see some positive surprises. The ISM manufacturing data came in at a better than expected 54.8, up from 53.4 the month before. The weekly initial jobless claims fell from 392,000 a week ago to a much better than expected 365,000. Vehicle sales in the U.S. remain healthy above an annual pace of 14 million. That about ends it for the good news.

The ISM services data fell from 56.0 to a worse than expected 53.5 in April. The Chicago PMI reading plunged to a 29-month low at 56.2, down from April's 62.2. Economists had been expecting a dip toward 60. The ADP employment report was disappointing but it was overshadowed by the government's non-farm payroll data on Friday. Economists had been expecting the U.S. economy to add +170,000 in April, up from 120K in March.

Unfortunately, the Friday morning jobs report showed a gain of just 115,000 new jobs. That's 55,000 less than expected although March's +120K was revised higher to +154K. The unemployment rate is based off the household survey, which showed employment actually fell -169,000. Yet the unemployment rate dropped -0.1% to 8.1% due to another big drop in the labor participation rate. Conspiracy theorists suggest the labor participation numbers are being manipulated to make the unemployment rate look better than it really is. While Friday's report was disappointing it wasn't bad enough to really spur the Federal Reserve into action. Market pundits suggest that we would need to see a string of really bad employment reports before the Fed steps in with more QE to try and stimulate the economy.

Major Indices:

The S&P 500 just delivered its worst weekly performance of the year. Last week I warned readers that if the S&P 500 fails to breakout past its 2012 highs it will look like a bearish double top. The index didn't even make it to its highs near 1420 before rolling over last week. Now the S&P 500 is showing a new lower high. There is still a chance that support near 1360 will hold again. However, if the S&P 500 does break down below 1360 then we're probably looking at a correction toward the 1300 level with possible support or a bounce near 1340 along the way.

Daily chart of the S&P 500 index:

90-minute chart of the S&P 500 index:

The NASDAQ composite continues to see a lot of volatility and fell -3.7% last week. There was no confirmation of the bullish reversal candlestick pattern on the weekly chart. It's back below its simple 50-dma and back below the 3,000 mark. It's possible the NASDAQ could bounce near the prior week's lows around the 2950 level but I suspect we will see the NASDAQ correct lower toward support near 2900. A drop to 2900 will coincide with a decline to the 38.2% Fibonacci retracement level.

Daily chart of the NASDAQ Composite index:

The small cap Russell 2000 index has reversed lower as well. It's back below its 50-dma and just closed under its simple 100-dma on Friday. Last week has created a new lower high. There is a chance that the $RUT will find support again in the 785-780 zone. The exponential 200-dma and its simple 300-dma could add technical support to the area. However, a breakdown at 780 would also be a break below the neckline to a bearish head-and-shoulders pattern that would signal a drop toward the 710 area.

Daily chart of the Russell 2000 index

The economic calendar slows down significantly this week. The major reports for the week will be the PPI and the sentiment numbers, both out on Friday. We will still see a large number of Q1 earnings reports but for the most part earnings season is starting to wind down. Most of this data will likely be ignored for headlines out of Europe given the elections this weekend.

Economic and Event Calendar

- Monday, May 7 -
(nothing significant)

- Tuesday, May 8 -
(nothing significant)

- Wednesday, May 9 -
Wholesale inventories from March

- Thursday, May 10 -
Weekly Initial Jobless Claims
import/export prices
trade balance figures from March

- Friday, May 11 -
PPI for April
Michigan Sentiment for May

The Week Ahead:

Europe remains in focus for investors. This past week the market reacted poorly to news that Spain's economy has officially fallen back into recession although I don't see why that is a surprise. Spain's unemployment is soaring and with so many people out of work how could their economy be anything but in a recession. What is a surprise was improvement in Spanish and Italian bond yields, which both drifted lower last week. Another surprise was an unexpected rise in German unemployment.

The question everyone will be asking is if we will see any surprises in the Greece and French elections this weekend. Both are scheduled to take place on Sunday, May 6th. We have mentioned both elections as potentially market-moving events over the last few weeks. Greece is holding their national elections and people are wondering if the new Greek leadership will honor the prior government's austerity and budget promises or will they choose another path and potentially exit the euro?

The larger event is the French presidential elections. Right now it looks like incumbent Sarkozy will lose to the Socialist candidate Francois Hollande. If Hollande wins the election it will throw doubt on the relationship between France and Germany. The willingness between these two governments to work together politically and economically has been critical in keeping the euro together. With both Spain and Italy still struggling with their debt issues any weakness in the EU leadership could complicate matters.

Seasonally we are in a weak time of year for stocks. May and June are not normally very bullish periods for the stock market. The month of May is only four trading days old and the S&P 500 is already down -2%. I am very cautious on stocks over the next few weeks. We have seen a string of disappointing economic reports. The labor issues in the U.S. are not improving. China is struggling to keep its economy from slowing down too much. Europe remains a trouble spot with concerns over Spain and the possibility of new leadership in both Greece and France. I would hesitate to launch new bullish positions at this time.

- James