As the quarter comes to a close, investors are pocketing profits with a wary eye on Europe’s sovereign crisis and sluggish global growth.
The S&P 500 Tuesday dropped 1 percent to 1,441 in its worst day of the quarter, and its biggest decline since late June. For the quarter, the S&P has a gain of 5.8 percent, and it is up 14.6 percent for the year-to-date. The Dow Tuesday slid 101 points, to 13,457, as Caterpillar lost more than 4 percent. Caterpillar’s earnings warning after the bell Monday was a reminder that China’s slowing growth has created a drag on the world economy.
Apple was a big loser Tuesday, falling 2.5 percent in a second day of losses, and Google saw a dramatic late turnaround, giving up the day’s gains to close slightly lower. “When two momentum names lose momentum, it’s a little bit of a blow to the heart of the market,” said Scott Redler, who watches the market’s short term technicals at T3Live.com.
“The upper floor that traders have been maneuvering – 1,449 to 1,452 (on the S&P) - got breached today, meaning some momentum has been lost in the market,” he said. “Today’s move below 1,449 opens the door to some lower prices.” Redler said the market could be moving toward 1,421, the breakout level when European Central Bank President Mario Draghi this summer promised the ECB would do whatever it takes to defend the euro.
Redler said the market should test the 1,435 level, the 21-day moving average. “It tested it seven times since the June 4 low. It can test the 21-day and still be considered healthy.”
“The 50-day goes all the way down to 1,406. There’s a high probability we test the 21-day, and there’s a possibility we test the 50,” he said.
Traders said markets were also spooked Tuesday by protests in Spain, which turned into violent clashes as police used sticks to turn back crowds. The Spanish government is expected to unveil a new budget with austerity measures this week. On Wednesday, Greece’s largest public and private sector unions hold a 24-hour nationwide anti-austerity strike and rally.
Meanwhile, the U.N. General Assembly continues Wednesday with a speech by Iranian President Mahmoud Ahmadinejad, who is expected to defend his country’s nuclear program.
What Else to Watch
New home sales at 10 a.m. ET is the only U.S. data expected Wednesday, and the Treasury auctions $35 billion in five-year notes at 1 p.m. There are a few earnings, including HB Fuller , Progress Software and Texas Industries after the bell.
Housing price data was a positive Tuesday, as was a big jump in consumer confidence to its highest level in seven months.
“Stocks haven’t acted that well since the immediate aftermath of ‘QE forever,’” said Barry Knapp, of Barclays Capital. Knapp, who heads equity portfolio strategy, was referring to the latest Fed policy initiative, which is an open ended program to buy mortgage securities. “You had a pretty quick reversion to stocks with bond-like characteristics, the defensive type. They’ve been the best performers.”
“Aggressive monetary policy is helpful, but you need something more. You need either the growth outlook to improve or the policy outlook to improve,” said Knapp, adding it could take months for QE to start working.
Knapp said a catalyst could come next week from PMI manufacturing data for Europe if it shows any improvement, or if Republican presidential candidate Mitt Romney looks strong in next week’s first presidential debate. Romney is the preferred candidate of many on Wall Street but he is trailing and President Obama has been gaining a bigger lead in some polls.
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