Markets Trading Lower as Fear Rises

Europe continues to unravel with more downgrades for Spain’s banks. The downside risk remains in play and without some type of catalyst may head straight to the next level of support at 1265 on the S&P 500 index. The index closed at 1304, which was our next target for support, down nearly 20 points on the Thursday. Technically the charts show a clear break from the consolidation pattern starting in April and based on the pattern we hit the target for the downside move on Thursday near the 1300 mark. Now we have to watch the outcome of the move. Despite the negative news there are anlayst still calling for a move higher in the broad market. For now the microtrend is down, but you can’t assume anything with this market near term.

China remains a bigger question mark for me than Europe. I accept and understand what is happening in Europe, but what many not be taken seriously is the impact to China. While speaking this week I was told many times I was wrong about the potential downside in China getting much worse before it gets better. Technically you can look at either FXI, iShares China Index ETF or GXC, SPDR China ETF and see the downtrend in play. The challenge remains with exports to Europe and the US. There GDP growth has steadily decline over the last eighteen months. There are parts of China that are already reflecting a rescissionary type output. My challenge lies with the economic picture for China and the charts are starting to reflect the downside momentum. The current downtrend may bounce, but there is more downside on the horizon for China.

Scanning the major sectors of the US markets we find plenty to worry about still as the financials are leading the downside. The break of $14 on XLF, SPDR Financial ETF was a big negative for a sector that was the leader the first three months of the year. The big banks have not done will with the JP Morgan issue on trading and the outlook short term isn’t getting any better. The Senate is meeting over more regulations on the banks trading and with the new issues from JPM they will likely pass. The value side of me wants to say their is opportunity in the selling. Time will tell and we will keep scanning the sector looking for the turn off the lows.

Energy is another sector in turmoil as crude has declined near the $92 mark. Thus far support has held at this level and we continue to watch for a bounce. The stocks have been in a downtrend since February and the one attempt to bounce has only been met with more selling. The current outlook is not improving and the best the sector can hope for is a shift to trading sideways versus lower.

The headlines are focused on Facebook than the financial markets today. The historic IPO finally will launch today creating $100 billion in value. This is one stock and it is not likely to hold it’s opening value based on all the rhetoric that being stated relative to value. But, the technology sector overall is having challenges of it’s own dropping below support and semiconductors in a 8% free fall this week. The leadership on the downside has been evident in the charts, but the concern or lack of love for growth stocks has been evident. Tech like the other two major sectors of the US market is selling and the micro trend is down.

As the market concludes one of the worst weeks of trading this year investors have to be on guard. Even with the downside plays we taken their is still true lack of clarity going forward. The data remains mixed and the outlook is turning more pessimistic. The downside plays are in, but watch for a relief bounce as this all unfolds. The short term key will be to find some level of support for the markets to rest and define the next leg.