Call it window 'undressing.'
Stocks took a beating in the second quarter, and the final days are bringing out the worst. Typically ahead of quarter end, institutions reshuffle portfolios or "windrow dress" to lock in profits and set up for the next quarter.
This time around, stocks were thrown over board and investors dove into the comfort of U.S. Treasurys, as they worried Europe's debt woes and slower global growth could result in a new recession.
Treasury yields touched stunning lows and the whip-sawed stock market set the stage for more volatility Wednesday, which is the quarter end. The Dow lost 268 points Tuesday or 2.7 percent to 9870. The S&P 500 finished down 33 or 3.1 percent, at 1041, but not before breaking the key technical level of 1040 in afternoon trading. Industrials, financials and tech stocks took the brunt of Tuesday's selling, as investors voted against global growth and risk.
The Dow, as of Tuesday, was poised to close out the quarter with a 9 percent loss, and the S&P would be down nearly 11 percent. The Nasdaq's quarterly loss, as of Tuesday, was also near 11 percent. The dollar gained nearly 10.8 percent against the euro in the second quarter, and was at a level of $1.2197 Tuesday.
Tuesday's economic reports showed consumer confidence took a surprising dip to 52.9 in June, from 62.7 in May, the latest in a series of disappointing data points. Even before that news, stocks were well into a sharp sell off on worries about European banks, and disappointing Chinese data. Each negative economic report lately helps build a case for bond market bulls, who pushed 10-year Treasury yields beneath 3 percent, the lowest level in 14 months, and 2-year notes to an all-time low of 0.59 percent, on an intraday basis.
"A lot of what's driven the market to these levels has to do with the date, June 29," said David Ader, chief Treasury strategist at CRT Capital. "The first half of this remarkable year is about to come to an end." He said investors have moved from short-covering positions in the bond market to becoming genuine buyers.
"As we move forward through the balance of this year, all the risks are weighted to the downside and we still have a degree of uncertainty about financial regulation, which would hurt financial profits. People are still upside down in their mortgages so the ability to refinance into a better place is limited. We'll lose a few hundred census workers as unemployment will pop up to 9.9 percent," he said, noting those are just U.S. concerns but that other issues loom globally.
He also said the bond market may take a breather after the start of the quarter, and that some investors may realize, as the new quarter begins, that they are too underweight in equities. "I would not be selling the (bond) market into strength at this juncture. There are certainly things that make me nervous," he said.
Pimco strategist Tony Crescenzi said the markets have been concerned about what the second half will bring. "Whenever there's weak data, it reminds us of fiscal austerity and weak economic activity. It brings us back to the broader theme of deleveraging," he said. He said July 1 launches a new wave of austerity as state and local governments begin their fiscal year, with more frugal budgets.
Jim Paulsen, chief investment strategist at Wells Capital Management, said in a note that declining Treasury yields would hurt stocks if the double dip fears get too strong. But he is looking ahead to Friday's June employment report, a major marker for financial markets this week.
"This won't be determined by today's fears, but rather by the "fundamental reports" coming out in the next three days. Market based on "lack of any meaningful fundamental news" has not been good," he said, adding that the data could "calm mindsets when we focus on fact that we are still creating jobs and profits are growing."
Wednesday's data includes the 8:15 a.m. ADP private payroll report, watched by traders, but increasingly discounted as a measure for the monthly jobs report. Chicago purchasing managers data is reported at 9:45 a.m.
The Real Stress Test
The market has been focused on the July 1 expiration of a 12-month $442 billon euro European Central Bank lending program to European banks. Banks can either roll over from the loan program into a new 3-month facility or find private funding, and many analysts had watched the ECB's tender as a gauge of how well funded European banks are.
The European Central Bank loaned banks 131.9 billion euros ($161.4 billion) at the auction, below analyst expectations ranging from 250 billion euros to 300 billion euros.
The euro jumped after the results, and European stocks edged up.
Crescenzi said before the auction that it was "an important event in that it will provide information about the quality of collateral the banks have. In a sense, it's a form of stress test in that there will be a revelation about the quality of assets and the ability to withstand shocks implicitly."
Just as the bond market is breaching some technical levels, the stock market is also at a critical juncture. The S&P 500 broke through 1040 on an intraday basis, signaling to technicians more bearishness ahead. It also signals a head and shoulders formation is at hand.
John Roque, technical analyst at WJB Capital, said the head and shoulders formation is not quite formed yet, and it must be confirmed with heavy trading volume. "The 200-day moving average is still flat, but it's immaterial. The 200-day is going to start sloping down. It's going to happen. The pattern is less important than the action, and he action is nasty," he said.
Roque said his next downside target is 950.
Jordan Kotick, who heads technical analysis globally at Barclays, also said the pattern is not complete, but the signals are there. "The signals appeared last week, and there's the suggestion of some serious downside vulnerability in markets outside of stocks that tell you about stocks," he said. He pointed to the action in the euro versus the Swiss franc, which cracked record levels last week. He also said the break in multi-year ranges in global rates markets is another negative sign for stocks.
"The head and shoulders? That's just the bearish icing on the cake..It's not apocalyptic. It suggest a correction from the rally of March last year is not completed," he said.
He said a previous head and shoulders pattern, formed last May through July, did not result in negative activity, and the market, instead, sprang higher.
Scott Redler of T3Live.com says he believes the head and shoulders, a distribution pattern, is in place.
He said the "head and shoulders" historically leads to lower prices. The pattern started in mid-October, when the left shoulder rallied from a level of 1040 to a level of 1150 in January. At that point, the uptrend broke and created the 9 percent move lower into the Feb. 5 reversal, leading to a move to 1217. That uptrend broke May 4, creating the head. From May 4, the market declined back to 1040, which provided a bounce that became the "neck line." The market's next move to 1131, on June 21, built the top of the right shoulder.
What Else to Watch
The Financial Crisis Inquiry Commission takes testimony from former AIG Financial Products head Joseph Cassano and Goldman Sachs President Gary Cohn, as it explores the ties between Goldman Sachs and AIG.
Investors are also watching the latest developments in Congressional efforts to bring financial regulatory reform to a vote.
The House committee on Small Business will hold a hearing on claims against BP by small businesses. Kenneth Feinberg, who is administering the victims fund, will testify. Meanwhile, markets are also watching the storm in the Gulf of Mexico which has so far resulted in the shut in of 24.7 percent of Gulf oil output and 9.4 percent of natural gas output.
Earnings are expected from Monsantoand Shaw Communications. Apollo Groupreports after the close.
Electric car company Tesla Motors made its Wall Street debutand surged more than 40 percent to close at $23.89. The IPO was prices at $17 Monday night.
- Antonia Oprita in London contributed to this report.
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