Is the Stock Market Bracing For More Volatility Ahead?

The U.S. stock market had a bad last week, and is facing even more volatility ahead.

The U.S. stock market suffered its worst losses in five months last week as earnings reports looked mediocre and economic reports disappointed.

For the week, major stock market indexes posted sharp declines, with the Dow Jones Industrial Average (NYSEARCA:DIA) losing 2.1 percent, the S&P 500 declining (NYSEARCA:SPY) 2.1 percent, and the Nasdaq 100 (NYSEARCA:QQQ) sliding 2.7 percent. The Russell 2000 (NYSEARCA:IWM) fell 3.2 percent.

Major U.S. stock indexes are fading from recent record highs and have now broken significant support levels, with the Russell 2000 and Nasdaq Composite falling below their respective 50-day moving averages.

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On My ETF Radar

The S&P 500, which is a proxy for the U.S. stock market, has fallen 2.4 percent from its recent record high and now rests at significant support levels.

chart courtesy of StockCharts.com

In the chart above we can see how the major stock market index has fallen to its 50-day moving average and now rests on that level. Significant support rests at the 1,540 level and momentum is negative as represented by the MACD display in the bottom of the chart. A sustained decline below the 50-day moving average would be bearish for the U.S. stock market and a break of the 1,540 level would trigger a “sell” signal in point and figure methodology. Shorter-term traders, who watch the 20-day moving average, have already seen that support level broken…

Further bearish action could probe the 1,520, 1,500 or 1,480 levels, according to the Fibonacci retracement theory, which would represent a potential decline of between 1.3 percent  and 4.8 percent over the near term. Violation of those levels would set up the growing possibility for a decline to as low as 1,400 for the S&P 500, representing a potential decline of 10 percent from current levels.

ETF News You Can Really Use

For the week just ended, economic reports were mixed for the stock market as housing starts jumped sharply for March and the Fed Beige Book described moderate economic growth. However, weakness was displayed in the April Empire State Index, which fell sharply and missed expectations, and the NAHB Home Builders Index, which declined to 42 in April, down from 44 in March and widely missing expectations.

March Industrial Production declined to 0.4 percent from February’s 1.1 percent, and weekly jobless claims spiked to 352,000, up from the previous week’s 348,000 and coming in above expectations. The April Philadelphia Federal Reserve Report came in at 1.3, a sharp decline from last month’s 2.0 and way off consensus expectations of 4-5.0. Leading indicators rounded out the week on Friday with a -0.1 percent reading for March, down from +0.5 percent in February.

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Earnings season is well underway, with more than 2/3 of the S&P 500 companies so far beating expectations. However, some broad disappointments showed up in mainline tech companies such as IBM (NYSE:IBM), which fell 8.3 percent on Friday as Wall Street expressed its dissatisfaction with the company’s earnings report…

While earnings appear to be holding up, revenues for major corporations seem to be under pressure with slow year-over-year growth and a high number of missed estimates.

Overseas, China reported growth slowing to 7.7 percent, also below estimates, and Britain lost its Triple A rating according to the Fitch Ratings agency. The International Monetary fund issued a global growth forecast calling for an uneven recovery, but an improving second half of 2013. Managing Director Christine Lagarde described a “three speed” world in which emerging markets were high speed, the United States second speed, and Europe the third speed group.

This new week brings important economic reports, including:

Monday: March Existing Home Sales

Tuesday: Markit Flash PMI and New Home Sales

Wednesday: March Durable Goods Orders

Thursday: New Weekly Unemployment Claims

Friday: April Consumer Sentiment, Q1 GDP Revision

Earnings reports will also take center stage, with closely watched announcements from stock market heavyweights including Apple (NASDAQ:AAPL), Caterpillar (NYSE:CAT), Boeing (NYSE:BA), Chevron (NYSE:CVX), Procter and Gamble (NYSE:PG), Exxon (NYSE:XOM), Amazon (NASDAQ:AMZN), Starbucks (SBUS), and Yum Brands (NYSE:YUM), along with a gaggle of regional banks and major airlines. These will offer a broad overview of major S&P 500 sectors, including industrials, tech, energy, transportation, and consumer discretionary.

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Also sure to be sliced and diced will be the reasons behind Federal Reserve Chairman Ben Bernanke skipping this year’s prestigious Federal Reserve annual meeting scheduled for late August in Jackson Hole. “Personal scheduling conflict” is the official reason, but this will be Dr. Bernanke’s first miss since becoming Fed chairman and the first time a U.S. Fed Chairman has missed the meeting in a quarter century…

Finally, the sequestration comes to center stage this week as the U.S. Federal Aviation Administration cuts 10 percent from its budget and forecasts delays at major airports in the United States as a result of furloughs, reduced staffing, ground delay programs, and potential runway closures.

Delays could run from minutes to as high as three hours, depending on the day and airport, with major hubs like Chicago forecasting average delays of 50 minutes and maximum delays of over two hours. Los Angeles predicted delays could run from 10-67 minutes, while Atlanta could experience delays from 11 minutes to 3 hours and 30 minutes. Expect intense media coverage of this event and growing pressure on the Congress and the White House to resolve the sequestration issues.

Sequestration cuts are also hitting the military as the Air Force says that 30 percent of its combat planes could be grounded, and the Navy Blue Angels cancelled their summer schedule. Other impacts will be felt in the social sector as various states explore cutting long-term unemployment benefits and housing subsidies.

Bottom line: Earnings season will drive the news and stock market volatility this week, along with media pressure regarding air traffic delays and the possible economic consequences of widening sequestration cuts. Technical indicators remain weak for the short term while major stock market indexes must hold current support levels to avoid further declines.

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

 

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