Monday morning will be decision time for traders and investors: Should they buy or sell after Friday's steep decline that pushed the S&P 500 below its 200-day moving average?
While comments out of Europe over the weekend point to signs of a more urgent push for a fiscal union in the euro zone, that may not be enough for the market that just saw the Dow turn negative for the year and the S&P 500 dip below the critical 200-day moving average for the first time since December - a level that many technical analysts view as a harbinger of more selling.
In electronic trading on Sunday, S&P 500 futures fell 0.9 point, suggesting a slight dip at the open on Monday morning.
"The sentiment backdrop continues to grow more pessimistic and remains consistent with negativity seen at major bottoms during corrective pullbacks the last few years. Hedge funds are no longer showing interest in stocks," said Todd Salamone, director of research for Schaeffer's Investment Research in Cincinnati. "The risk to bulls is that the sentiment backdrop worsens from here, but bears should also be on guard for a reversal in the sentiment backdrop, as major short-covering could follow," he said.
Spanish Prime Minister Mariano Rajoy on Saturday called for the establishment of a central authority that would oversee and coordinate fiscal policy in the euro zone. Germany also wants a big leap forward in euro integration, but investors are doubtful whether the closer integration could restore market confidence.
"There's no doubt that any kind of a show of a more aggressive move by policymakers is helpful. But the market has gotten used to the fact that the sharper the fall on a Friday, there's likely going to be some action or rumored action forthcoming in the following week," said James Paulsen, chief investment strategist at Wells Capital Management in Minneapolis.
For the week on Friday, the Dow Jones industrial average fell 2.7 percent, the Standard & Poor's 500 index <.SPX> slid 3 percent and the Nasdaq composite index <.IXIC> fell 3.2 percent. Both the Dow and the S&P 500 are off about 10 percent from their recent peaks, a retreat that would mark a so-called correction.
FED IN FOCUS
Federal Reserve Chairman Ben Bernanke will be back on Capitol Hill on Thursday to testify before a congressional committee about the state of the U.S. economy. He's not going to get an easy ride. "This puts the Fed firmly in play and they will likely feel compelled to respond," said Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York, after data on Friday showed U.S. job growth in May was the weakest in a year.
"The missing ingredient preventing the Fed from action had been the equity market, but now we are seeing it softening," he said. "Equities are falling and that was the last hurdle for Fed policy action because all the other criteria have been met."
The Fed's next policy meeting occurs on June 19-20. A Reuters poll of 15 dealers gives a 35 percent chance of the Fed extending its stimulative "Operation Twist" at that meeting. The poll showed that dealers expecting further quantitative easing, or QE3, rose to 50 percent from 33 percent in May.
Stock market rallies in each of the past three years were fueled by combinations of massive central bank and government stimulus spending. That may be the only hope for equities this year, too.