Normally a big decline would set up Wall Street for a technical rebound.
But that may not be the case this week, even after the market last week posted its worst weekly loss for the year and the S&P fell for six straight sessions.
With the corporate earnings season drawing to an end and recent US economic data raising doubts about the pace of growth, the S&P 500, which is down 7.3% so far in May, could decline further this week as concerns about the health of Europe persist.
Peter Cecchini, global head of institutional equity derivatives at Cantor Fitzgerald & Co in New York, said: “What has changed in the world since April? We went from hearing a constant refrain that the world is awash in money and markets must go higher, to hearing nobody wants to take any risk...all in a week.”
The S&P 500 fell 4.3% during last week, its steepest weekly decline this year, and closed below 1,300 for the first time in four months.
The hotly-awaited market debut of Facebook on Friday was marred by technology glitches on the Nasdaq in sending messages back to the brokerages that handled orders of Facebook Inc for individual, or “retail” investors. Those problems rekindled fears about the market’s electronic trading system and caused some to stay away from equities.
Weighing on sentiment is a growing sense among investors that the eurozone debt crisis is nearing new heights, fuelled by fears of the potential for a Greek euro exit and the deteriorating health of the Spanish banking system. Solid corporate earnings and upbeat US economic indicators had fuelled the rally in US stocks, offsetting jitters over Europe. But with earnings almost out of the way and data starting to disappoint, investors have shifted their focus back to headlines on Europe.
Leaders of the G8 major industrial economies met at the weekend to try to tackle the crisis in Europe. Barack Obama, the G8 host, has urged European leaders repeatedly to do more to stimulate growth, fearing contagion that could hurt the US economy and his chance of re-election in November.
“The market is extremely oversold. Nonetheless, all major indicators remain on sell signals,” said Larry McMillan, president of options research firm McMillan Analysis Corp. “We expect a powerful but short-lived rally coming soon. But at this point, barring some major shifts in our indicators, it may only be a rally in a larger down-trending market.”