The S&P 500 had its worst week of 2013 last week, losing 1%. But that loss pales in comparison to the 2.8% the technology sector lost, the 3.2% the Dow Transports lost, and the 4% that the Russell 2000 lost. All three of these indexes are leading indicators of an impending correction. All are more economically and market sensitive, and any divergence, meaning a difference between the way the overall market (S&P 500) trades and these indexes trade signals a change in market direction. Since all three of these indexes are pointing downward, this indicates a change in direction for the overall market to the downside.
Earnings season kicked off today after the close with Alcoa reporting – the first Dow component to report. Their report was mixed – certainly not positive – so we will have to see how this impacts tomorrow’s trading. Overall I expect the first quarter earnings season to be disappointing, forcing analysts to reduce their earnings estimates for the remainder of 2013, and possibly for 2014 as well. This should have a decidedly negative impact on stocks, especially given their lofty valuations at-present.