Stocks stumbled in Monday's final hour, signaling traders that the market's sell off could still have some ways to go.
The Dow fell 103 or 1 percent, to 9908, its first close below 10,000 in three months. The Dow is now 7.6 percent below its Jan. 19 high. The S&P fell 9 points, or 0.9 percent to 1056. It is now 8.1 percent below its January high but still 56 percent above its March low.
"A 10 percent down move on a correction is the first stop, and then we'll see where it stops," said John O'Donoghue of Cowen. O'Donoghue, however, said 10 percent may be the bottom of this sell off, marking the first full-fledged double-digit correction since the stock market rally began in March. Some traders say the market could retest Friday's intraday lows, even if stocks do make gains in the next several days.
European sovereign debt worries continued to be the main weight on markets Monday. Treasurys declined ahead of Tuesday's auction of $40 billion in 3-year notes. Commodities were higher, as stocks lost ground. The euro was barely changed against the dollar, but the dollar weakened against the yen.
The financials sector was the worst performer, down 2.2 percent, while materials lost 1.5 percent. Traders pointed to fears of financial regulation behind the decline in bank stocks, as well as concern about a ripple effect from the sovereign debt exposure.
Trading was volatile in Greek and Portuguese debt issues, now watched more closely than ever by U.S. traders. At the same time in the U.S., corporate spreads, particularly on high yield debt, continued to widen against the 10-year Treasury.
Chris Towle, director of high yield and convertible securities at Lord Abbett, said the declines were even steeper in the the least credit worthy issues. For instance, since Jan. 11, when spreads were tightest, the Merrill Lynch high yield index had a total negative return of 1.26 percent, while the lower quality Triple C issues had a negative return of 2.72 percent. In the same period, Treasurys had a total return of 1.5 percent.
The Merrill Lynch high yield index spreads went from a low of 616 bps in January, to 687 bps by Friday. They continued to widen Monday.
"The market for the first time in the past 9 months is decidedly weaker," he said. "..It's a reversal of what has been a long trend of high yield bonds outperforming."
"Our high yield fund is up 51 percent...Triple Cs were up close to 100 percent. A pull back had to come," he said.
Towle said the market is wrestling with worries about sovereign debt. But he also said China's move to tighten lending and Washington's efforts to regulate banking are factors.
"I think people expected to come in on Monday and the whole Greece thing would be fixed," he said.
The euro was at $1.3660 per dollar Monday. It has weakened significantly as the Greek fiscal crisis has evolved, and is now 4.8 percent lower against the dollar since the start of the year. The dollar, in the same period, is 4 percent weaker against the yen.
"I think in the short-term, the euro drop might have gone about as far as it would go," said Robert Sinche, chief strategist at Lily Pond Capital.
"We have an EU summit on Thursday. I think they'll try to make some constructive statements. We are getting some action out of Greece and Portugal with respect to their budget situations. Greece has a bit of a hiatus here in terms of financing needs. Their finance needs pick up aggressively in April and May and that will be another pressure point," he said.
Meanwhile, Greek public sector workers are expected to strike Wednesday in protest of the government's austerity and tax plans. Further strikes are expected. The EU is expected to discuss the economic outlook at its meeting in Brussels Thursday, but there is no mention of Greece on the agenda.
Sinche said the dollar's rise is more a story about the euro than the dollar. "If you go back to the end of the year, the dollar is flat against a basket of Asian currencies. The dollar versus the yen is down," he said. "Really what we've seen in euro/dollar is more of a euro story than a dollar story. In that context, I don't think the dollar has done spectacularly well. It's really been a story of euro and British pound weakness."
He does expect the dollar to do better once the Fed signals a willingness to tighten later in the year. At the same time, he said the dollar strengthening did impact investors who were counting on a dollar decline to promote a rise in commodities prices.
"We still think there's upside against a broad basket of commodities prices. But on a short-term basis, we had some air taken out of the balloon and in some ways its justified. it's going be much more a supply, demand market in commodities as opposed to an up, down market," he said.
What to Watch
There is little data expected Tuesday. The NFIB small business survey is released at 7:15 a.m. and wholesale trade data is due at 10 a.m. Earnings news includes some big names, such as UBS and Coca-Cola before the bell, and Disney after the market close. Other companies reporting in the morning include InterActiveCorp, Biogen Idec, Molson Coors, Pulte Home, NYSE Euronext, Celanese and Cognizant Tech. Baidu reports after the close.
Electronics Arts will be in focus Tuesday morning. The video game company's shares fell sharply after it warned its 2011 earnings would miss analysts' forecasts.
The federal government is closed Tuesday as Washington continues to dig out from a major snow storm. Another storm is expected to sweep up the east coast and could impact Washington and New York on Wednesday.
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