Are October Markets Haunted?

As major stock indexes weaken, global growth slows and earnings stall, storm clouds gather over world financial markets.

The correction for stocks and ETFs continued last week on the threat of weak earnings reports and a slowing global economy.  For the week, major stock indexes took significant declines but managed to hold on to most of the important levels as the Dow Jones Industrial Average (NYSARCA:DIA) dropped 2.1%, the S&P 500 (NYSEARCA:SPY) fell 2.2% and the Nasdaq 100 (NYSEARCA:QQQ) declined 3.2%.

On My ETF Radar

Several warning signs popped up this week as the current correction continues.

spx, spy, chart of s&p 500

In the chart of the S&P 500 (NYSEARCA:SPY) above, we can see how relative strength and momentum are declining as represented by RSI and MACD.  However, the index stopped exactly at its 50 day moving average which is significant support and more support is found between 1400-1420.

spx 500, S&P 500, spy, chart of S&P 500

More ominously, the point and figure chart painted a “sell” signal on Friday, October 12th, with a new bearish price objective of 1380 which would leave the S&P 500 (NYSEARCA:SPY) just above the blue bullish support line which separates bull from bear markets in point and figure charting.  Furthermore, the Nasdaq 100 (NYSEARCA:QQQ) has already slipped below its 50 day moving average.

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So things look decidedly weaker for major U.S. indexes as a result of last week’s action.  Major U.S. indexes now stand at a turning point regarding future direction.  If major support holds, this will turn out to be a normal correction after a heated run up.  If not, then the likelihood of something bigger becomes stronger.  However, a similar pattern played out after the announcement of QE2, in which stocks corrected before starting a strong move higher, and certainly a similar move could happen here.  

ETF News You Can Really Use

In last week’s news, we saw initial jobless claims fall and University of Michigan consumer rise which were two bits of good news that seemed to be largely ignored by major U.S. markets.  On the weak side of things, Standard and Poors slapped Spain with a downgrade to BBB- which puts the country’s debt just above junk level but Spain’s 10 year bond yields remained relatively flat at 5.62%.  The big question surrounding Spain is, “will it or won’t it” ask for a bailout from Europe, and if it does, the second question is whether or not Europe will be able to afford it?

Analysts are suggesting that the new European Stability Mechanism isn’t big enough to save Spain and so the country needs to apply for a formal bailout which would allow Mario Draghi and the European Central Bank to step in with a bond buying program to prop up the beleaguered country.  Regarding both Spain and Greece, the IMF and Christine Lagarde are pushing for more time for the countries to meet their deficit reduction targets as it becomes increasingly apparent that current target levels and dates will likely be missed.  All of this plays out within the context of a deepening recession in Europe which serves to make the hole deeper and more difficult to fill.

At home, earnings from JP Morgan and Wells Fargo failed to excite markets as the Financial Sector (NYSEARCA:IYF) fell 1.6% for the week with 1.2% of that move coming on Friday alone.

 The Week Ahead

The week ahead will be huge as earnings season accelerates and a raft of economic reports are due to be released.

On the earnings front, we’ll hear from major names like IBM, Intel, Coca Cola, Goldman Sachs, Mattel, Johnson and Johnson, Bank of America (NYSE:BAC), McDonalds, Google, Microsoft and Intel, among many others.

FactSet reports that there have been 80 negative earnings pre-announcements compared to just 23 positive, a trend that, if continued would be the highest percentage of negative guidance for a quarter tracked by FactSet.  Five of the ten major sectors are predicted to report a decline for the quarter with the worst results in Materials (NYSEARCA:XLB) and Energy (NYSEARCA:IYE)

FactSet calls the week ahead the first “peak week” of this earnings season with 12 members of the Dow 30 and 79 members of the S&P 500 (NYSEARCA:SPY) scheduled to deliver earnings reports.

Economic News Will Be Fast and Furious

On the economic report front, the news flow will be equally fast and furious.

Monday: September Retail Sales, October Empire State Index

Tuesday: September Consumer Prices, September Industrial Production, October Home Builders

Wednesday: September Housing Starts

Thursday: Weekly Jobless Claims, September Leading Indicators, October Philadelphia Fed

Friday: September Existing Home Sales

Bottom line: The current correction has come to a critical point on a technical basis and this week will be all about earnings on a fundamental basis as investors see how U.S. companies are holding up against the ongoing global slowdown.  Europe will stay in the news as storm clouds gather.

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