The turbulence rocking Wall Street this week has even some bulls conceding that the markets could be on their way to their first significant pullback of the relatively-calm 14-month surge off the bear-market lows.
Worries about Europe’s ability to put out its spreading debt fire have combined with several other negative developments to send the Dow Jones Industrial Average to a pair of 200-point declines in the span of just one week.
So that begs the question: Is this it? Will the markets finally see that elusive 10% to 15% correction that the bears have been calling for for over a year?
The answer to that question will likely be decided by whether or not Wall Street’s global economic jitters are overshadowed by further signs the U.S. economy continued to improve in recent weeks, especially on the labor front.
“Is this a buying opportunity or merely the beginning of a more accelerated downtrend? We’re going to have to wait” to see how U.S. economic data later this week plays out, said Michael James, senior equities trader at Wedbush Morgan Securities.
It’s clear Wall Street has been rattled by signs Europe’s debt crisis is deepening even after the European Union and International Monetary Fund came to Greece’s rescue with a $146 billion bailout. The euro plunged to its lowest level since March 2009 on Wednesday and the price to insure the debts of Greece and other slow-growing European countries remains elevated. But will it be enough to interrupt Wall Street’s steady, upward climb?
“At the end of the day, I don’t think Europe itself will be the killer of this market,” said Nick Kalivas, vice president of financial research at MF Global.
Bullish market observers agree, pointing to relatively solid fundamentals in the U.S. The first-quarter earnings season is on track to show the largest year-over-year profit growth in the history of the Standard & Poor’s 500, albeit coming off a very weak year-ago period. While the labor markets remain slow to recover, recent indicators show the rest of the economy is rebounding, perhaps at a faster pace than most expected.
Friday could provide new evidence of recovery as the Labor Department is expected to say the U.S. created 187,000 jobs last month, after having added 162,000 jobs in March. Even though those figures are below what is needed for full employment, they do represent progress, especially given the hundreds of thousands of jobs that were lost each month a year earlier.
“The fundamental backdrop is pretty strong,” said Art Hogan, chief market strategist at Jefferies & Co., saying U.S. markets will “probably not” suffer a steep pullback. “The problem is, if everyone believes we are looking for [a serious pullback], it generally doesn’t happen, at least not to the extent we were looking for.”
It’s worth pointing out that during the course of the 4,700-point surge off the March 2009 lows, the Dow has yet to suffer a decline of 10% or more. And it’s not as if the markets haven’t had an excuse for a steep selloff, especially given high unemployment, debt crises in Dubai and Europe and looming commercial real-estate troubles.
Bears like Joe Saluzzi, co-head of trading at Themis Trading, know all too well how resilient the markets have been.
“We’ve seen so many times in the past where they just rip your face off every time you think it’s going to go lower,” said Saluzzi, who describes himself as “cautiously pessimistic.”
There are signs the bears could win out this time, however. After plunging 225 points on Tuesday -- the Dow’s worst day in three months -- the benchmark index suffered another wave of selling Wednesday and resisted comeback attempts from the bulls.
“I do think it will overwhelm and we will go lower but you still have to be careful, as a short,” said Saluzzi. “We’ve been burned many times.”
Saluzzi said he will be watching to see if the S&P 500 breaks significantly below its 50-day moving average, which is at about 1169. “There’s a big air pocket there,” he said, adding that if it fails to hold that area it could tumble to the 1100 level, from Tuesday’s close of 1173.
Wall Street’s economic outlook has been clouded in recent weeks by a number of external factors, including worries Greece’s debt crisis will spread to other, larger European countries and further hurt the euro. A stronger dollar tends to weigh on commodities and multinationals by making exports more expensive.
At the same time, new data out of China have raised questions about the Asian giant’s ability to carry the global economic recovery. The Shanghai Composite closed at its lowest level since last September on Tuesday after China’s weakest manufacturing report in six months.
“The economies of Greece, Portugal, Ireland and Spain are not going to make or break the trajectory of global economic growth. If you slow Europe down, it is a mild negative, but my bigger worry is what happens in China,” said Kalivas. He said, if China stumbles, “Who is going to then carry the torch?”
Hogan didn’t seem too worried, especially given how many times over the past year the markets have proven to be very resilient.
“A large pullback has been predicted for 13 months,” said Hogan. “This is a story we could’ve written six or nine months ago and here we are writing it again today.”
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