Market Insider

Stocks could continue to lose ground

Markets' selloff jitters

The bloodbath in stocks could continue, even if the market manages to bounce Friday.

Earnings season kicks off Friday with two big important financial names ahead of the open—JPMorgan and Wells Fargo. There is also PPI producer inflation data at 8:30 a.m. ET, and consumer sentiment at 9:55 a.m.

After a spectacular rally Wednesday, stocks were pummeled Thursday, in a selloff that started in the momentum names—first biotechs and then techs on the Nasdaq. The biggest casualty was itself, which was down 3.1 percent to 4,054, its biggest one-day wipeout since November, 2011.

The S&P 500 fell 2 percent to 1,833, a key threshold after it broke below its 50-day moving average of 1,843. The Dow lost 1.6 percent to 16,170.

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The selloff came after a higher opening and even with a surprisingly good jobless claims number of 300,000, the best weekly number since 2007.

Stock traders were also looking over at the bond market, where short covering drove prices higher and yields lower as investors continued to reposition after the Fed's dovish-sounding minutes Wednesday. Volume was heavy in bonds, more than 144 percent of the 10-day moving average in afternoon trading, according to CRT Capital.

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Some of the buying was viewed as a flight-to-safety play, and there was definitely some concern raised overnight by reports of a surprise 6.6 percent drop in China's exports.

But it also was investors reacting to the Fed's reassurance that it would keep short-term rates low for a long time. The minutes from the last Fed meeting seemed to erase concerns raised just after that March 19 meeting that the Fed was on a path to raise rates sooner.

The markets have also worried that the economy is still not growing at a pace that justifies the Fed's unwinding of its bond- buying program. At the March meeting, the Fed cut its bond purchases by another $10 billion and it also cut its forecast for growth to 2.8 percent to 3 percent from 2.8 percent to 3.2 percent.

As the market sank Thursday, the S&P financial sector fell 2.4 percent. "The bigger banks don't look great at all. All of your widely held names don't look so good at all. I would be careful here," said Paul LaRosa, market technician at Maxim Group.

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LaRosa said if the market continues to drop, his current target for the S&P 500 is 1,770. "Last Friday, outside days happened in both the Dow and S&P. That was a warning sign. That was coupled with the Nasdaq breaking down, and these small caps have been very weak," he said. "Even though larger caps were at a high a week ago. The breadth of the market wasn't great. I didn't see any leadership in the market. That's usually a warning sign."

Traders on the floor of the New York Stock Exchange.
Getty Images

Randy Frederick, managing director of active trading and derivatives at Charles Schwab, said he has been expecting a selloff for the past several weeks, but he is not negative on the market and still expects to see the S&P end the year at 1,900.

"I do think this correction would be a healthy thing. There was some technical support at 1,848. We ploughed through there today, and that's gone," Frederick said, adding he is now watching the 100-day moving average at 1,828.

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Meanwhile, the start of earnings season parallels a shift to negativity about stocks. Earnings are expected to grow by 1 percent for the S&P 500, while revenues are expected to grow 2.7 percent, according to Thomson Reuters. The S&P financial sector is expected to be one of the worst performers, with an earnings decline of 2.8 percent.

"I don't think any individual name is very critical but if the trend is negative, and we see big names missing, that will add to the pessimism," he said. "If they're weak, it won't do the market any good. My expectation was we'd see better revenues and weaker earnings per share. The big surprise will be if we have lower earnings and lower revenues."

Frederick said the drop off in share buybacks may also affect earnings, and this quarter there could be a decline in buybacks. As companies buy their stock, their float shrinks, driving up the amount of earnings applied to each share. A reversal of that trend would eliminate some of the earnings growth rate.

"That's part of what will cause the EPS to be a little lower. It means they're either hiring or spending it ... in the long run, that's good," he said.

Rafferty Capital analyst Dick Bove agrees the slowdown of share buybacks could impact earnings and also the stock market this year. He said the stock market will be impacted by fewer buybacks just as the Fed is removing liquidity.

Bove, vice president of equity research, financial sector, said J.P. Morgan earnings could show someoperational weakness, and Wells Fargo could continue its string of record profits

According to Thomson Reuters, JPMorgan is expected to earn $1.40 per share on revenues of $24.5 billion. The consensus for Wells Fargo is 96 cents per share on revenues of $20.595 billion.

Bove said the other major banks—Citigroup and Bank of America—are both expected to be hit by fines, but the midrange banks should have decent earnings, with a good lending environment and costs under control.

"Companies like U.S. Bancorp, PNC, Regents Financial, Suntrust—the banks that are midrange, should have good earnings in the quarter," he said.

Bove said the other major banks – Citigroup and Bank of America – are both expected to be hit by fines, but the mid-range banks should have decent earnings, with a good lending environment and costs under control.

The sector is undervalued, he said. "They're selling about half of what their normal valuation would be on a price-to-book basis," he said. "They should sell around two times book and they're selling around 1 time book value."

—By CNBC's Patti Domm. Follow her on Twitter @pattidomm.