Thursday’s 3% surge was followed by a triple-point Dow decline on Friday, which started off in the red and stayed there for the entire session. Selling was blamed on a downgrade of Spain’s debt to AA+ from AAA, despite the country’s new austerity measures. And no doubt the long holiday weekend may have prompted traders to exit speculative positions rather than take risk over three closed days for U.S. exchanges.

For the month, stocks suffered their worst monthly decline in over a year. And small-cap stocks, as measured by the Russell 2000 Index (RUT), had their worst May performance since 1987, the year that the index was introduced. The Dow Jones Industrial Average (DJI) fell 7% for May, the biggest hit since February 2009, and the decline broke a three-month winning streak, marking this May its worst monthly performance since 1940.

Europe was on investors’ minds for the entire month, and Spain’s recent downgrade was just another reminder that the crisis is not over and will likely be with us for some time to come.

“Prior to the May 6 plunge, expectations were fairly positive and lots of rosy thinking prevailed,” said Rob Lutts, president and chief investment officer at Cabot Money Management. “What’s happened in Europe and the focus on Greece and Spain have changed that.” (Wall Street Journal)

On Friday, all 10 major S&P sectors closed in negative territory, with financial stocks again taking the worst hit, off 2.1%. Energy stocks fell 2%. BP Global plc (NYSE: BP) shares fell 5.4%, even as the company was outlining its latest plan to cap the spill in the Gulf of Mexico. Over the weekend, the method being discussed on Friday turned out to be a failure.

Personal income for April increased 0.4%, which met expectations. However personal spending was flat, where an increase of 0.3% was expected. The University of Michigan’s consumer confidence survey for May was 59.7, which was slightly below estimates.

At Friday’s close, the Dow fell 122 points to 10,137, the S&P 500 (SPX) was down 14 points to 1,089, and the Nasdaq (NASD) fell 21 points to 2,257.

The NYSE traded 1.4 billion shares, and the Nasdaq crossed 694 million shares. On both exchanges, decliners outnumbered advancers by about 2-to-1.

Crude oil for July delivery fell 58 cents to $73.97 a barrel, but the Energy Select Sector SPDR (NYSE: XLE) rose $2.19 to $54.06.

August gold was unchanged at $1,214.40 an ounce, and the PHLX Gold/Silver Sector Index (NASDAQ: XAU) fell 1.67 points to 173.93.

What the Markets Are Saying

Despite May’s lousy performance, the major indices held above their February closing lows. But that may not be much solace since the Dow, the S&P 500, and the broad-based NYSE Composite all broke their February intraday lows. And all the major indices, except the Nasdaq, are trading below their 200-day moving averages.

What may be even more distressing to the bulls, though, is that last Thursday’s reversal was almost obliterated by Friday’s setback. Reversals that are quickly “reversed upon” send a bad signal since they often break to the downside again. With the February lows looming just under May’s closing prices, this sort of negative response could lead to an early June decline.

Hoverer, there was one favorable technical development (of sorts) in May. Find out what it was here.

Today’s Trading Landscape

Earnings to be reported after the close include: Collective Brands, Lions Gate Entertainment, Shanda Games and Shanda Interactive.

Economic reports due: motor vehicle sales (the consensus expects 8.9 million), ISM manufacturing index (the consensus expects 59.5), and construction spending (the consensus expects 0%).

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