On Friday, the stock market fell sharply on two major headlines: Hungary may be the latest contagion victim and a serious economic problem for the rest of Europe, and the U.S. jobs report did not meet expectations.

Stocks entered Friday with two successful days and a gain for the week for the S&P 500 of more than 1%. But heavy selling throughout Friday ended with the Dow Jones Industrial Average off 3.15%, the S&P 500 down 3.44%, and the Nasdaq falling 3.64% for the day. The S&P 500 ended the week with a loss of more than 2%.

The Dow’s worst performer was Caterpillar Inc. (NYSE: CAT), off 5.5%. American Express Company (NYSE: AXP) fell 5.06%, The Boeing Company (NYSE: BA) was down 4.68%, Alcoa Inc. (NYSE: AA) fell 4.57%, and General Electric Company (NYSE: GE) lost 4.5%. The Dow fell 2% for the week, and closed below 10,000 for the second time in two weeks.

Of the two reports that shocked the market, the real surprise was that Hungarian officials had said that economic conditions were so bad there that a default was not out of the question. And there was talk of yet another possible bailout by the European Union (EU) with perhaps more former eastern-zone countries in the wings. In response, the euro closed at a four-year low of 1.1956.

Even though the jobs numbers were not as shocking as the newest EU problem, the report still contributed to the losses since many had been encouraged by the White House’s recent optimism over jobs and the economy. But non-farm payrolls, which were expected to show an increase of 500,000, instead increased by only 431,000.

The Wall Street Journal, in its summary of Friday’s sell-off opined, “In part, Friday’s market gyrations were caused by a hasty reassessment of a theme many traders had bet on recently — that the U.S. is a relatively safe place to invest at a time when other countries are still struggling.” But the jobs numbers and the impact of the European situation make everyone reassess the possibility of a double-dip recession.

At the close, the Dow fell 323 points to 9,932, the S&P 500 lost 38 points to 1,065, and the Nasdaq was down 84 points to 2,219.

The NYSE traded 1.6 billion shares with decliners ahead of advancers by more than 9-to-1. The Nasdaq crossed 688 million shares, and decliners there were ahead by almost 8-to-1.

July delivery crude oil fell $3.10 to close at $71.51 a barrel, primarily on the sharp drop of the euro versus the greenback. The Energy Select Sector SPDR (NYSE: XLE) fell $1.88, closing at $51.55.

August gold rose $7.70 to $1,217.70 an ounce, but the PHLX Gold/Silver Sector Index (NASDAQ: XAU) lost 4.15 points, closing at 169.09.

What the Markets Are Saying

In the April 20 Daily Market Outlook, just four days before the market topped, I said, “With internal and sentiment indicators telling us that the market is now dangerously overbought and the ‘Sell in May and Go Away’ strategy triggering a sell, it is time to go to cash on all rallies. It doesn’t get much better than this, so it will most likely get worse.”  I was correct; however, I had no idea that we were facing the worst May since 1940.

So I think it important to emphasize that it wasn’t just the trite little saying that blindly encourages some market-timers to liquidate their stock holdings on May 1 that triggered my above recommendation. Despite the method’s positive record, it would be unwise to counsel anyone to take an all-or-none approach based on a single strategy.

Instead it was our well-seasoned technical signals, both the internal and sentiment indicators, as well as chart analysis together with the May to September negative record that drove me to conclude that this May could be nasty. A “perfect storm” of negative indicators appeared to be descending on the markets. As one friend so generously put it, “It’s better to be lucky than smart.”

Last week, another friend made an interesting quip concerning an often-repeated Wall Street saying, “The two emotions that move markets are fear and greed.” He said, in his experience, there was but one emotion, and that was fear, saying, “Fear is the greatest motivator in any circumstance.”

He went on to say that in the stock market it is not greed that drives investors and professional managers to take enormous risks at the top of a market, but fear that they will be left behind. And at market bottoms, it is, of course, fear that even drives long-term investors to liquidate their holdings at the very bottom of a bear market.

Fear has again overcome the stock market with visions of a double-dip recession and contagion in the air. So it is possible that today may start with another early rush to sell, based on Friday’s escape to the “traditional investor “safe havens” gold futures and Treasuries.

If the market closes below the February/May lows, we could see a quick plunge to S&P 1,000. But let’s not rush into this battle between the bulls and bears. With the CBOE Volatility Index (VIX) up 20% last week, it’s time to stand aside until we determine the real winner of this conflict.

Today’s Trading Landscape

Earnings to be reported before the opening include: G-III Apparel.

Earnings to be reported after the close include: C&D Technologies, Casella Waste Systems, FuelCell Energy and Pep Boys.

Economic report due: consumer credit (the consensus expects $1 billion).

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