It is looking to be a big week for the stock market. Momentum stocks took another hit on Friday and some sectors pushed to new lows for the year. The Nasdaq and the Russell 2000 Index, which are the favorites of the bulls, are pulling the market lower, which is not a good sign. The Dow Jones Industrial Average also reversed after hitting a new high, so for the moment it is back to signaling a sideways environment over the short-run. Defensive sectors remain solid, with utilities even gaining in the midst of Friday’s heavy selling. This may be the long overdue correction in the market that many technical analysts were anticipating or it could also mark a short-term top in the market as the adage “sell in May” kicks in early. Nevertheless, this could all be reversed with a strong rally this week.
One big catalyst for the market this week is earnings, with Alcoa (AA) reporting on Tuesday. Although the company isn’t as important to the broader market following its removal from the DJIA, it still has an impact on the the materials sector. Materials have been one of the bright spots in the market recently, but also slipped on Friday.
Similarly, financials are also a bright spot relative to the big losses in some other sectors. Financials are down just slightly in the past five weeks. Two companies to watch are J.P. Morgan (JPM) and Wells Fargo (WFC), which both report earnings this week. Analysts are looking for $1.41 per share in earnings from JPM but analyst estimates have been falling, suggesting they are losing confidence. In the case of WFC, analysts forecast earnings of $0.96 per share and those forecasts have been steady.
The main focus of traders this week will be biotechnology, Internet and other momentum leading sectors. These sectors bounced briefly last week, only to turn lower once more. On the week though, losses were relatively small. Biotechnology was representative of how these sectors performed. It was down about 2 percent for the week, though it lost about 7 percent on Thursday and Friday. If biotechnology and Internet shares are to retain their leadership in the bull market, they will need to make a strong rally over the coming days.
Economic Reports: The news that may have the largest impact on the market will be the FOMC minutes released on Wednesday. Dovish comments may help to push the market higher. Additionally, reports on consumer credit and producer prices come out this week.