US equities staged a dramatic, yet expected pullback for the first trading day of the week. The major equity indices all came under pressure today as concerns reemerged about the outlook for sustained earnings and solvency for the financial sector. Earnings from Bank of America were actually better than expected. However the bank’s increase of reserves to combat rising loan and credit defaults appeared to offer a general spook to the major indices, instituting what many felt was a necessary pullback in the markets after last week’s peaking financial rally. The sector came under additional pressure today after a New York Times article stated that the Obama administration was considering converting many of the low interest loans made to banks into common stock. Investors became distressed by this proposal, fearing that this arbitrary introduction of massive new stock issues would significantly dilute the value of current market shares. In the wake of this sentiment, Citigroup fell nearly 20% and Wells Fargo dropped 16.0%.
Rising levels of uncertainty within the financial sector translated into a major pullback among all the major indices. Energy and material stocks had one of their worst performances in April as a flight to safety spurred interest in secure fixed income as well as low yielding currencies such as the US Dollar. The result-commodities took it on the chin, pulling down the underlying equity sectors along with them. Homebuilders also pulled backed on concerns regarding the bottom feeding that the housing market appears to be going through as increased sales appear to be occurring only through extensive price cutting that fails to alleviate eroding consumer home values.
Technologies failed to spur any defense against the negative sentiment, despite the surprise announcement of Oracle’s purchase of Sun Microsystems for $7.5 billion. The deal came about even as talks were supposedly restarting between Sun and IBM. A number of companies also reported better than expected earnings, only to have their shares pulled lower. This suggests that the move lower today could be defined as an expected correction and a possible setup for another move to test the high end of the recent range.
Technically, June Dow futures continue to range trade, with Monday’s pullback holding well above key near term support at 7729. If this level is pierced, market could make an attempt at 7580. A recovery rally would likely find resistance at 7990.
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