Stocks were relatively stable during most of Monday, despite early weakness resulting from Spain’s central bank’s takeover of a regional savings company. Following the assimilation of the news from Spain, stocks recovered, and even though the Dow Industrials were on the minus side of the ledger, other indices were either breakeven or held onto gains through the early afternoon. 

Some light selling came into the market at 3 p.m., but buyers quickly moved on the weakness. However, suddenly heavy selling overwhelmed the financial stocks, and within 30 minutes, all of the major indices were driven to deep losses. Financial stocks were hit with a 2.9% loss — the worst of any of the S&P 500’s sectors — with regional banks the worst performing stocks, down 4.2%.

Among the financials, Bank of America Corporation (NYSE: BAC) and JPMorgan Chase & Co. (NYSE: JPM) fell more than 3.5%, and American Express Company (NYSE: AXP) was off almost 2%. Janus Capital Group Inc. (NYSE: JNS) was hit hard, off 7.5%, following a downgrade by analysts at Goldman Sachs Capital Group Inc. (NYSE: GS).

Several key technology stocks closed higher: Google Inc. (NASDAQ: GOOG) gained 1.1% and Apple Inc. (NASDAQ: AAPL) rose 1.3%. But the technology group succumbed to selling in the last minutes of trading, and the group fell 0.6%.

There was just one economic report of note. April existing home sales rose 7.6% month-over-month to an annualized rate of 5.77 million units compared to an expected rate of 5.62 million units.

At the close, the Dow Jones Industrial Average was off 127 points to 10,067, the S&P 500 fell 14 points to 1,074, and the Nasdaq was down 15 points to 2,214. 

The NYSE traded 1.3 billion shares with decliners ahead of advancers by 3-to-2. On the Nasdaq, 597 million shares traded, and decliners there were ahead by just under 2-to-1.

Crude oil for July delivery rose 17 cents to $70.21 a barrel, and the Energy Select Sector SPDR (NYSE: XLE) fell $1.21 and closed at $51.86. 

June gold rose $17.90 to settle at $1,194 an ounce, and the PHLX Gold/Silver Sector Index (NASDAQ: XAU) fell 5 points to 166.06.

What the Markets Are Saying

Yesterday’s last half-hour sell-off was almost the mirror image in reverse of Friday’s final half hour of buying. It is just this sort of volatile and strange behavior that often accompanies thin markets with light volume, and perhaps that is the reason for the selling, since the Canadian stock exchanges and banks were closed for Victoria Day. And Friday’s bizarre last-minute buying spree could have been the result of the expiration of May options.

However, at some point we must discount the irrational behavior of a given day and concentrate on the result instead of the cause. Yesterday’s sell-off took the S&P 500 perilously close to Thursday’s close, at 1,071.59, and could be telling us that the buy programs, which so far have held prices within 2% or 3% of the February low, have run their course. If that is the case, then we are in for a broad sell-off that could take prices first to the support at S&P 1,020 to 1,030, and if that fails, back to the July 2009 peak at 950.

Even before yesterday’s strange selling spree, the markets were in an extremely oversold condition. Jeffrey Saut, the outstanding technician from Raymond James, paraphrasing another outstanding technician, Jason Goepfert, points out the following:

• “This is only the sixth time in history the S&P 500 futures have declined five days in a row and then gapped down [by] at least 1%. All five others closed above the opening price.” (Note that this time the market opened lower.)

• “The total put/call ratio is poised to close at its fourth highest level since modern reporting began in 1995. The other three were all clustered in late February/early March of 2007 [right before a 12% rally].”

• “The Up Issues Ratio is so low, at just under 4%, that only two other days since 1950 can match this bad breadth. They were Sept. 26, 1955, and Oct. 19, 1987 (the crash), after which we saw vicious short-term bounces.”

These technicians conclude that the market will probably hold at the low made in February. If they are correct, we should then consider the next resistance zones: The first area of resistance to buying is at the S&P’s 200-day moving average now at 1,104, which falls within the zone of 1,085 to 1,115. Above that is the broad resistance zone at 1,115 to 1,150.

We are now at the crucial point where the bulls must hold the line or pass control back to the bears.

Today’s Trading Landscape

Earnings to be reported before the opening include: AutoZone, Cracker Barrel, DSW, Flowers Foods, Ituran Location and Control, Medtronic, Sanderson Farms and Trina Solar.

Earnings to be reported after the close include: Dycom, HEICO, Netezza and TiVo.

Economic reports due: ICSC-Goldman Sachs store sales, Redbook, S&P Case-Shiller home price index, consumer confidence (the consensus expects 59), FHFA house price index and State Street Investor Confidence Index.

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