Good day! Even though it just began, this week so far has been the weakest one for the major U.S. indices since mid-March. The market gave us clues for this weakness heading into last week and started to follow-through mid-week. The strongest selling, however, has been over the past two days for many sectors, including those tied to gold and oil.
The index futures fell further after Monday's close into midnight on the heels of disappointing earnings from Alcoa (AA) to kick off the first-quarter earnings season. Alcoa (AA) (-6.02%) matched earnings estimates, but fell short on revenue. Alcoa (AA) shares ended lower by more than 6% on Tuesday and was the Dow's ($DJI) biggest loser.
Dow Jones Industrial Average (Figure 1)
Heading into Tuesday, my bias was that the "overall weakness in the market [would] still be the predominant theme," because "The larger daily time frame still has more room that it can move." The indices were extended on the downside into Monday's close, but "a slower recovery off the afterhours/premarket lows [would] favor the bears, while an increase in the volume on downside action [would] help confirm it."
The index futures did, in fact, consolidate afterhours and into the early morning with a more gradual reaction off Monday afternoon's support. This slower recovery showed a lack of interest on the part of the bulls, including those overseas.
The news abroad was not very encouraging either. Japanese regulators raised the damage level for the Fukushima Daiichi nuclear power plant to a level akin to the 1986 Chernobyl disaster. Previously at 5, the level was increased to a 7, which is the highest level possible on the International Atomic Energy Agency's International Nuclear and Radiological Event Scale.
The nuclear plant had been damaged as a result of the massive earthquake and tsunami that hit Japan last month. While the headline is dramatic and eye-catching, officials quickly point out that the events are still quite different and that the upgrade is not a projection of things to come, but rather the events that had already unfolded at the plant. The radiation leak to date has been estimated at 10-15% of the amount seen at Chernobyl. Nevertheless, the evacuation area was widened on Monday.
S&P 500 (Figure 2)
After consolidating throughout the morning, the index futures first began to give way to further selling coming out of the 8:30 a.m. ET economic reports, which confirmed fears that the economic recovery has slowed. According to the Commerce Department, imports fell 1.7%, while exports fell 1.4% in February. This included signs that demand for oil had eased, which put downward pressure on oil prices on Tuesday.
Import prices in March were up 2.7% in March, larger due to higher oil prices. Excluding oil, prices were up 0.6%. Meanwhile, the trade deficit, which is the difference between imports and exports, narrowed to $45.8 billion in February. This was a decline of 1.6% and was less than anticipated.
Nasdaq Composite (Figure 3)
The U.S. indices gapped lower into Tuesday morning and continued to head south for the first 90 minutes of trade with two waves of selling on the 5 minute time frame. This was similar to the selloff afterhours on Monday and aided in establishing support at the 11:00 a.m. ET correction period.
The pace of the selloff prevented the market from establishing a rapid recovery off morning lows, but the indices did hold the lows established between 10:50-11:15 a.m. ET and steadily recovered throughout mid-day before turning slightly lower into the second half of the afternoon. The selloff around 14:15 ET also had two waves of downside, but did not break the morning lows before bouncing back in the final 30 minutes of trade.
The Dow Jones Industrial Average ($DJI) had a loss of 117.53 points, or 0.95%, and closed at 12,263.58 on Tuesday. Seven of the Dow's thirty index components posted a gain. The top performers were WalMart (WMT) (+1.33%), Procter & Gamble (PG) (+1.13%), and McDonalds (MCD) (+0.54%). Alcoa (AA) was the weakest component in the Dow Monday afternoon's earnings announcement. Other top decliners were Chevron (CVX) (-3.34%), Exxon Mobil (XOM) (-2.33%), and Caterpillar Inc. (CAT) (-2.29%). After Alcoa (AA), energy shares were hard-hit as crude-oil futures fell $3.67 to $106.25 a barrel on the New York Mercantile Exchange for May delivery. This was the largest one-day drop in weeks.
The S&P 500 ($SPX) fell 10.30 points, or 0.78%, and closed at 1,314.16. The strongest individual performer in the index was Tyco International (TYC) (+7.41%). Other top gainers were PPL Corp. (PPL) (+4.63%), Monsanto Co. (MON) (+3.10%), Edison Intl. (EIX) (+3.07%), and Monster Worldwide (MWW) (+2.85%). The weakest performers were Alcoa (AA) (-6.02%), Teradyne Inc. (TER) (5.04%), Pioneer Natural Resources (PXD) (-5.02%), and Nabors Industries (NBR) (-4.60%).
The Nasdaq Composite ($COMPX) ended the session lower by 26.72 points, or 0.96%, on Tuesday and it closed at 2,744.79. Only one-fifth of the index components in the Nasdaq-100 posted a gain. The top performers were Netflix (NFLX) (+2.52%), Seagate Technologies (STX) (+2.29%), Verisign (VRSN) (+2.11%), Netapp Inc. (NTAP) (+1.49%), and Akamai Technologies (AKAM) (+1.43%). Fastenal (FAST) (-4.39%), which reported earnings prior to Tuesday's open, was the biggest loser in the Nasdaq-100. Other top decliners included Baidu Inc. (BIDU) (-3.41%), Broadcom Corp. (BRCM) (-3.08%), and Joy Global (JOYG) (-2.68%).
Earnings season continues on Wednesday with JP Morgan Chase (JPM) reporting in the morning. Google (GOOG) reports after Thursday's close.
Major economic reports to watch for this week include the Mortgage Bankers Association's report on mortgage applications and the Federal Reserve's Beige Book on Wednesday. On Friday eyes will be on the Empire Manufacturing Index and the University of Michigan's Consumer Sentiment Index.
The ongoing budget debate will continue to grab headlines this week. In addition to the debate on cuts this year, the 2012 fiscal budget also still needs to be laid out and the situation with the country's legal debt limits must still be addressed.
Unless otherwise stated, the index action described in this article relates to the E-mini futures contracts for the respective indices. Actual index action may differ slightly in terms of pattern formation, although the market bias will remain the same.
Toni Hansen is president and co-founder of the Bastiat Group Inc., DBA Trading From Main Street. Toni is one of the most respected technical analysts and traders in the industry. She has been trading and educating new traders, money managers, professional market analysts and traders throughout the boom and bust of the last decade. She has worked in conjunction with some of the world's top financial exchanges. Learn more about Toni Hansen and the educational services she provides through her website at http://www.tonihansen.com.