Are we witnessing a stock market top? The volatility index (VIX) surged from 12.0 a week ago to over 18.0 on Thursday before reversing sharply on Friday's market rebound. The S&P 500 index went from hitting new all-time highs near the 1600 level a week ago to delivering its worst weekly performance of 2013.

Monday's sell-off was the worst one-day market slide in nine months as investors reacted to disappointing economic data out of China and the tragedy in Boston. Even though Wall Street has lowered their earnings expectations for the first quarter there is still an above average number of earnings misses. Meanwhile commodities are plunging, led by a steep drop in gold. In dollar terms gold has just witnessed its biggest one-day loss ever. Gold also experienced its worst two-day drop in the past 30 years. Oddly enough the rally in the U.S. bond market has stalled with the yield on the 10-year note still close to 1.7%.

Economist data continues to disappoint. Economists were expecting the Philly Fed manufacturing survey to rise. Instead the survey showed a drop from 2.0 to 1.2. Numbers above zero still show positive economic growth but this report is obviously getting close to negative territory. If you look behind the headline number the Philly Fed report's employment component plunged from 2.7 to -6.8. New orders came in at -1.0 and the back order component dropped to -6.8. This report doesn't bode well for the ISM due out in two weeks. The New York Empire State manufacturing survey was not much better. Economists were expecting a drop to 7.0 from March's 9.2. Unfortunately the New York survey declined to 3.1.

Homebuilders remain cautious. The NAHB homebuilder sentiment index fell for the third month in a row with a drop from 44 to 42 in April. U.S. building permits fell 3.9% when analysts were expecting a small rise. We're going to see some sales data soon with both the new home and existing home sales report coming out this week. Elsewhere the weekly initial jobless claims rose from an upwardly revised 348,000 to 352,000.

The situation in Europe continues to fester. After months of negative economic data we're finally seeing the rating agencies act. Much of the week there was speculation that we might see Germany or France receive a credit rating downgrade. Egan Jones did lower their rating on Germany from an "A+" to an "A" but this was not one of the big three agencies (Standard & Poor's, Fitch, or Moody's). The United Kingdom did get downgraded by Fitch from "AAA" to "AA+". Meanwhile the country of Italy is still without a president. There was a third vote by the Italian parliament but no clear winner on a presidency.

Looking east much of the headlines were from China. A disappointing Q1 GDP growth estimate of +7.7% last Sunday helped spark the stock market sell-off on Monday. Economists had been expecting +8.0%. China also said their industrial production came in at +8.9% when analysts were looking for +10.0%. A Goldman Sachs analysts followed this news by lowering their 2013 GDP estimates to 7.8%.

Major Indices:

The S&P 500 index gave market participants a scare with its worst weekly performance of the year (-2.1%) and a bearish breakdown under technical support at its 50-dma. The large cap index managed to bounce on Friday lifting its back above the 50-dma and paring its losses for the week. Yet the up trend remains in jeopardy.

The S&P 500 index's five-month bullish channel has been broken. The pullback looks like a normal reversal at round-number, psychological resistance at the 1600 level. I pointed out last week that the 1540-1550 area would likely be short-term support and right now the index is trying to bounce from this area. If this rebound continues then we can look for resistance near 1575 and the 1600 level. If instead this bounce attempt fails and the S&P 500 turns lower then the next major support level is probably the 1500 area, bolstered by its simple 100-dma.

chart of the S&P 500 index:

Monthly chart of the S&P 500 index:

The tech-heavy NASDAQ managed a +1.25% bounce on Friday but even with the rebound it posted a -2.7% decline for the week. The NASDAQ went from making new relative highs to new relative lows pretty quickly. Its largest component Apple Inc. (AAPL) didn't help matters with a breakdown under the $400 mark for the first time since 2011.

I am concerned that the NASDAQ's peak near 3300 might be a short-term top and the current pullback is the start of a larger correction. On a short-term basis I would not be surprised to see a bounce back toward 3250 but we'll likely see a drop toward the 3100-3000 area in the relatively near future.

Daily chart of the NASDAQ Composite index:

The small cap Russell 2000 index underperformed its large-cap rivals with a -3.2% drop for the week. Last weekend I suggested investors watch for likely support near 900. That's where market participants stepped in to buy the dip. Unfortunately, this is a new short-term relative low. If the $RUT can bounce the 50-dma near 930 and the 940 and 950 levels are all potential overhead resistance.

If the correction lower continues a normal retracement would suggest a pullback toward 880 or 860. Of course the prior all-time highs near 870 could offer some support.

chart of the Russell 2000 index

Economic Data & Event Calendar

We have a relatively quiet week ahead of us for economic reports. The big event will be the first look at U.S. Q1 GDP growth, which should be released on Friday morning. Economists are expecting (hoping) for growth of +3% in the first quarter. Nearly everything else will likely be overshadowed by earnings season.

Economic and Event Calendar

- Monday, April 22 -
CFNAI (Chicago Fed) report
existing home sales data
Eurozone consumer confidence
Chinese HSBC PMI data

- Tuesday, April 23 -
new home sales data
Eurozone PMI data

- Wednesday, April 24 -
durable goods orders

- Thursday, April 25 -
Weekly Initial Jobless Claims
Spain's unemployment report
Japan's CPI index

- Friday, April 26 -
U.S. Q1 GDP estimate University of Michigan consumer sentiment (final reading for April)
Bank of Japan interest rate decision

Additional Events to be aware of:

May 1st - FOMC meeting
May 18th - U.S. debt ceiling deadline
May 27th - U.S. market closed for Memorial day

The Week Ahead:

Looking at the week ahead of us the market's focus will likely remain on earnings results. Thus far almost 100 of the S&P 500's components have reported earnings and the results are disappointing. Wall Street had very low expectations going into this earnings season and yet only 37% of those reporting have beaten estimates. The historical average is closer to 47% of companies beat estimates. This will be the second full week of earnings reports. April 26th will mark the halfway point for earnings season and results tend to decay the deeper we get into earnings season. The biggest earnings report of the week will probably be Apple Inc. (AAPL), which reports on April 23rd, after the closing bell. Odds are good AAPL shares will see a big move, one way or the other, on the news.

If we look beyond the next five trading days there are a number of big picture issues facing the market. It's widely believed that consumer spending accounts for nearly 70% of the U.S. economy. The chief economists at Goldman Sachs recently expressed concerns that the U.S. consumer is struggling, which will likely impact growth in the second quarter. Speaking of the second quarter, we are quickly approaching the "sell in May" phenomenon. May 1st begins the worst six months of the year.

Seasonally we are approaching a weak part of the year for stocks. Compounding the problem for the bulls is a parade of slowing economic data. The recent sell-off in commodities has been painted as another warning signal for global growth concerns. The fact that the economy is slowing down in spite of the Federal Reserve's infinite QE program doesn't bode well either. What more can the Fed do at this point?

Looking ahead the April nonfarm payrolls (jobs) report will be the first jobs report that should be impacted by the U.S. government sequestration cuts. A sharply lower jobs report could be another blow to investor sentiment. That's two weeks away. The U.S. debt ceiling fight in Washington will resume in about four weeks. Now add slowing economic growth in Europe, China and the U.S., a number of potential geopolitical risks, and we're facing what could be a tough summer for stocks.