Are Financial Markets Cooling Off for the Next Wave Up?

Major U.S. markets declined for the second week in a row, leading a global sell off in equity assets.

It was the worst week of 2012 for U.S. stocks, triggered by declining sentiment and slowing growth in China.   Adding to the unease was the situation in Spain, where its main index continued to plunge and credit default swap pricing reached record highs.  We have been expecting this downward price action for sometime and expect it to continue into spring and summer.

On My Wall Street Radar

In the chart of the S&P 500 (NYSEARCA:SPY) above we can see that the index failed to penetrate resistance at the 1420-1430 level after several attempts and now has fallen 3.4% from recent highs.  Momentum, as represented by MACD, continues to decline, but the overbought condition in RSI has been unwound.  Support resides at the 1340-1360 level just below current prices.

Most importantly, the S&P 500 (NYSEARCA:SPY) has broken its 50 day moving average and needs to reclaim that level soon for the uptrend to resume.

The Russell 2000 (NYSEARCA:IWM) is in a similar configuration while the Nasdaq 100 (NYSEARCA:QQQ) is the only major index still above its 50 day moving average.

The Economic View From 35,000 Feet

The financial sector was hit particularly hard last week with Financial Select Sector SPDR ETF (NYSEARCA:XLF) dropping 2.3% on Friday as investors worried about Spain even as JP Morgan and Wells Fargo reported decent earnings.  Spanish banks have been borrowing heavily from the European Central Bank and the country’s bond yields jumped sharply last week as new stresses emerged in Europe.  Major U.S. banks declined with Bank of America being a notable loser, down 5.3% and Wells Fargo dropping 3.5% after its earnings report.

Gold (NYSEARCA:GLD) also continued its decline, now down some $150/oz. or approximately 8%, from recent highs and in a bear market below both its 50 and 200 day moving averages.

U.S. Treasuries (NYSEARCA:TLT) have been strong gainers with the long bond ETF rising 5.7% since the beginning of April.

Aside from Spain, the big news last week was slowing growth in China that exceeded analysts’ expectations and which raised the specter of a “hard landing” for the country and the world’s second largest economy.

General economic news was mixed with the Fed Beige Book saying that the economy continued to expand at a modest pace while April’s University of Michigan Consumer Sentiment declined from 76.2 last month to 75.7.   Initial jobless claims jumped again, this time to 380,000 which was the highest in the last three months while the NFIB Small Business Optimism Index fell.

This week brings a deluge of economic and earnings reports:

Economic Reports:

Monday: March Retail Sales, April Empire State, February Business Inventories, April Homebuilders

Tuesday: March Housing Starts, March Industrial Production, March Capacity Utilization

Thursday: Weekly Unemployment, March Existing Home Sales, March Leading Indicators, April Philadelphia Federal Reserve

Earnings Reports:

Monday: Citigroup, Mattel

Tuesday: Yahoo, Intel, Johnson & Johnson, Goldman Sachs, Coca Cola, IBM

Wednesday: American Express, eBay, Yum Brands

Thursday: Dupont, Microsoft, Bank of America, Advanced Micro Devices

Friday: Honeywell, McDonalds, General Electric

Bottom line:  China is slowing, Europe is bubbling up again, and the U.S. recovery remains fragile, supported mostly by the Federal Reserve.  Technical indicators suggest further weakening against an already weak fundamental backdrop.  Equity market risk continues to grow.

John Nyaradi is the author of The ETF Investing Premium Newsletter.