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Investors may have to get used to down market

Don't be surprised if Wall Street racks up a seventh consecutive week of losses as the likelihood of more poor economic data outweigh any thoughts that stocks are cheap.
/ Source: Reuters

Don't be surprised if Wall Street racks up a seventh consecutive week of losses as the likelihood of more poor economic data and other disconcerting signals outweigh any thoughts that stocks are cheap.

After closing at its highest level in nearly three years on April 29, the S&P 500 has tumbled nearly 7 percent on the back of a barrage of soft economic data, sparking the debate over whether the economy is headed for a double-dip, or has merely hit a soft patch in its recovery.

The benchmark S&P 500 recorded its sixth straight weekly decline Friday and volume has picked up, as it typically does, on down days. Another week of selling will mark the longest stretch of weekly losses for the index since 2001.

Red flags, including ugliness in the junk bond market, options activity and the ease with which support levels have been broken, suggest more selling ahead.

"You have to be realistic. You've got to have some sort of correction to go into this marketplace just for the healthiness of the market," said Cliff Draughn, president and chief investment officer at Excelsia Investment Advisors in Savannah, Georgia.

As stocks have declined, both investment-grade and high-yield risk premiums in the bond market have slumped as investors sought safe-haven assets.

That's troublesome since the stock market often moves in sympathy with the junk bond market because rising borrowing costs crimp corporate profits.

The CDX HY16 North America index for high-yield bonds, which conversely falls as risk appetite decreases, closed below par for the first time this year on Wednesday. The CDX IG16 North American investment-grade index, which investors use to hedge against bond losses, hit its highest level since Nov. 30, according to Tradeweb.

In another signal of skittishness about the market's footing, Ally Financial, an auto and mortgage lender majority owned by the U.S. government, delayed a $6 billion IPO due to bad market conditions, two sources familiar with the situation told Reuters.

Stocks have also been easily passing through technical support levels, with the S&P 500 most recently taking out the April 18th low of 1,294.70, leaving analysts to eye the 1,250 level as the next area of support.

And the daily volume put/call ratio for equity options on the Chicago Board Options Exchange  hit an 18-month high on Wednesday, indicating that investors are significantly bearish on the stock market.

On top of all that, data expected for this week, including the Producer Price Index, the Consumer Price Index, May retail sales, manufacturing surveys for New York and Philadelphia as well as the index of leading economic indicators are forecast to mostly show a struggling economy.

"It is a busy economic week, so we expect the market to both anticipate economic data and to react to the releases — I don't necessarily see anything good coming out of the economic releases (this) week," said Tim Ghriskey, chief investment officer of Solaris Asset Management in Bedford Hills, New York.

Several of these indicators set off the first alarm bells about the economy's health when they came out a month ago.

By the end of the week, investors will also grapple with quadruple witching, when the options for stock-index futures, single-stock futures, equity options and stock-index options for June expire.

"This trade will lead to increased volume and the possibility of big moves in the market. Expiration also has the potential for increased volatility, especially intraday volatility next week," said TD Ameritrade chief derivatives strategist Joe Kinahan.

But even with the heavy losses suffered recently, the CBOE Volatility index has remained relatively unchanged, indicating market participants have yet to push the panic button.

"During this entire correction, the VIX hasn't budged much," Jason Goepfert, president of, said in a report. "That could be a sign of complacency among traders, but historically a stock market correction without a spike in the VIX has been a better 'buy' signal than 'sell' signal."

Despite the six-week slide that took the Dow Jones industrial average down below 12,000 Friday, both the Dow and the Standard & Poor's 500 Index are still slightly higher for the year. The Nasdaq , though, ended Friday's session in negative territory for 2011.

A turnaround in stocks could be stoked by any sign of progress in Washington on the debt ceiling and budget debates — an overhang on stocks that has frustrated market participants.

"The biggest thing on the horizon right now is the inability of the U.S. Congress to come to some sort of conclusion over a budget," Draughn said.

"Once that happens, that kinds of frees Bernanke's hands to where if he needs to do monetary intervention, he can. But he essentially is handcuffed at this point, due to the fact that the Treasury is happy to restrict the amount of bonds being issued for bumping up to the debt limit."