Are Stock Market Bulls Resting for a Big Record Breakthrough?

Dow Jones Industrial Average, S&P  500 Index, lose critical support levels on Monday.

spy, nysearca:spy, dia, nysearca:dia, dow jones industrial averageThe s&p 500 Index (NYSEARCA:SPY) closed below 1500 and the Dow Jones Industrial Average (NYSEARCA:DIA) closed below 14,000 on Monday, giving up technically and psychologically important in Monday’s broad based sell off.

The Dow Jones Industrial Average (NYSEARCA:DIA) fell 129 points to close at 13,880 while the S&P 500 Index (NYSEARCA:SPY) took a 1.15% decline.

Other  major U.S. stock indexes were also down sharply with the Nasdaq 100 (NYSEARCA:QQQ) losing 1.75% and the Russell 2000 (NYSEARCA:IWM) falling 1.31%.

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Gold (NYSEARCA:GLD) gained 0.34% while oil (NYSEARCA:USO) fell 1.47% to $96.17/bbl.

Notable price action was seen in Apple (NASDAQ:AAPL) dropping 2.49%, Bank of America (NYSEARCA:BAC) shedding 1.96% and Dell Computer (NASDAQ:DELL) falling 2.64%…

Monday’s losses for the Dow Jones Industrial Average (NYSEARCA:DIA) and S&P 500 Index (NYSEARCA:SPY) came just one trading day after both indexes set new short term highs.

The Dow Jones Industrial Average (NYSEARCA:DIA) closed above 14,000 on Friday for the first time above that level in more than five years (October, 2007) and the S&P 500 Index (NYSEARCA:SPY) gave up the 1500 mark, a level also reached on February 1st for the first time since late 2007.

The sell off was driven by fundamental and technical factors.  Major U.S. markets were seriously overbought as a result of the New Year’s rally and today brought renewed concerns over the upcoming “sequestration” debate between Congress and the White House, along with problems in Spain and the country’s rising borrowing costs.

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Before today’s sell off, major U.S. indexes were up in the range of 5-6%, and even after today’s drop, the S&P 500 Index (NYSEARCA:SPY) is still up 4.8% year to date.

Spain and its debt problems have been on the back burner in recent months, but now with political turmoil and an ongoing deep recession, the country’s 10 year government bonds are back above 5% while Italian bonds also jumped sharply today…

In economic news, December factory orders registered 1.8%, missing expectations, but still an improvement over the previous month’s -0.3%.  In closely watched earnings reports, Yum! Brands missed expectations with a 5% decline in profits.

Tuesday brings ISM Non Manufacturing Index and an ongoing flow of earnings reports as earnings season begins to wind down.

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Bottom line: The Dow Jones Industrial Average (NYSEARCA:DIA) and S&P 500 Index (NYSEARCA:SPY) were overdue for consolidation or correction after the recent powerful rally.  Momentum is clearly slowing as the major indexes struggle to breach lifetime highs stretching back to 2000 in a powerful triple top formation.  Fundamental headwinds include recession in Europe and Japan, along with upcoming cuts in government spending that are likely to come between now and March 1st as Congress and the White House battle over how and where to cut spending.  Risk of a double dip recession in the United States continues to mount and so downside pressure is likely to remain on the Dow Jones Industrial Average (NYSEARCA:DIA) and other major U.S. stock indexes.

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