Good day! The market has been dealing with a great deal of pessimism as economic data continues to disappoint, resulting in weakness finally overtaking the overall market. During earnings season we continually saw the market brush off this negative data, but without the hope that fresh quarterly results offer, the market finally gave way to selling at the beginning of May.
As I mentioned heading into earnings season, this is a fairly common phenomenon and strong market moves into earnings season will often experience a correction as earnings wraps up. The overall market just wrapped up its sixth straight week of losses once first quarter earnings season wrapped up. This steady decline is something that has not happened since 2002. Moreover, the Nasdaq has now given back all of its gains for 2011 and is negative on the year by 0.3%.
Dow Jones Industrial Average (Figure 1)
The index futures were struggling heading into Thursday's closing bell despite a strong morning. The way the selling formed, following a shift in momentum at intraday highs, suggested that further weakness was on the horizon and that it would be difficult to for the market to continue to rally strongly off the daily support zone which had struck earlier in the week. When the futures hit support heading into midnight on Thursday evening, instead of rallying off that level, they fell into another period of congestion along the support zone. This indicated even further weakness ahead of Friday's opening bell.
Once again, the day's economic data left little room for excitement. Import prices in May rose 0.4% (excluding oil), while export prices rose 0.5% (excluding agriculture). The previous month experienced a 0.6% increase in import prices (excluding oil) and a 1.0% increase in exports prices (excluding agriculture). The index futures began to sell off following this latest data and the breakdown increased in momentum once the opening bell rang.
Initial support on the 15 minute charts hit with the 11:15 ET correction period on Friday morning. The pace of the selloff was strong enough that the market once again had difficulty mounting any type of price recovery. A very gradual uptrend channel into the 13:00 ET correction period broke lower into the early afternoon, but the brevity of the congestion on the 15 minute charts did not allow for larger continuation action and the market bounced back into the 15 minute trading range for the remainder of the afternoon. The swings were wide enough and support and resistance levels held well enough, however, to make the session a decent one for daytraders.
The Dow Jones Industrial Average ($DJI) ended the day with a loss of 172.45 points, or 1.42%, and closed at 11,951.91 on Friday. Only three of the Dow's thirty index components posted a gain. They were Bank of America (BAC) (+1.41%), JP Morgan Chase (JPM) (+0.17%), and AT&T (T) (+0.03%). The top decliners were Pfizer (PFE) (-3.08%), Travelers (TRV) (-3.06%), Home Depot (HD) (-2.51%), and Caterpillar (CAT) (-2.49%). The Dow ended the week lower by 1.64%, but is still up 3.2% year-to-date.
The financials rebounded from earlier losses following an afternoon report that the Federal Reserve proposed to increase capital requirements on large banks by less than previously anticipated.
S&P 500 (Figure 2)
The S&P 500 ($SPX) loss of 18.02 points, or 1.4%, and closed at 1,270.98. Only twenty-five of the index components in the S&P 500 posted a gain on Friday. The top performers were AK Steel Holding Corp. (AKS) (+3.61%), American International Group (AIG) (+3.06%), First Solar (FSLR) (+2.66%), and Goldman Sachs (GS) (+1.79%). The weakest performers were Goodyear Tire & Rubber (GT) (-6.66%), Janus Cap. Group (JNS) (-4.61%), ETrade Financial Corp. (ETFC) (-4.01%), and Cummins Inc. (CMI) (-3.84%). The S&P 500 ended the week lower by 2.24%, but is still up 1.1% on the year.
Nasdaq Composite (Figure 3)
The Nasdaq Composite ($COMPX) ended the session lower by 41.14 points, or 1.53%, on Friday and it closed at 2,643.73. Five of the index components in the Nasdaq-100 ($NDX) posted a gain. They included First Solar (FSLR) (+2.66%), Sears Holdings (SHLD) (+1.33%), Flextronics (FLEX) (+1.15%), Activision Blizzard (ATVI) (+1.15%), and Vertex Pharmaceuticals (VRTX) (+0.27%). The weakest were F5 Networks (FFIV) (-3.25%), CTrip.com (CTRP) (-3.23%), Alexion Pharmaceuticals (ALXN) (-3.21%), and NII Holdings (NIHD) (-3.20%). The Nasdaq Composite ($COMPX) ended the week lower by 3.26% and is now down 0.3% for the year.
The outlook remains weak as we head into Sunday evening, but bears will want to begin to be cautious since the extent of the selloff to date opens the door for a larger recovery at some point this week. Nevertheless, the pace of the selloff will make any rapid recovery difficult unless we see rounding off at lows with an increase in the momentum of the intraday upswings followed by more evenly paced downswings as the week progresses. Overall, this is unlikely, however, and the indices have plenty of room for further downside with the 200 day moving average serving as a magnet in the Dow and Nasdaq-100. This is a stronger support zone for the indices than the area currently being tested.