After a six week rally that took the S&P 500 up 28.5% from the March 9 bear market low, stocks endured a 4% selloff on Monday.  Financial stocks led the decline, as Bank of America’s earnings report and concerns over upcoming results of the bank stress tests sparked an 11% loss in the S&P Financials Index.  But the declines were widespread, with declining stocks outnumbering advancers 17 to 1, and declining volume exceeding upside volume by nearly 30 times.  Stats such as these are not what one would expect in a “bull market”.

Is this the start of significant correction?  Interestingly enough, the S&P 500 closed Friday right at the level from which the index began to plummet to new lows back on February 10th.  What happened on that day?  It was the infamous Treasury Secretary Geithner speech that was long on general principles but short on meaningful details.  Of course, Geithner’s subsequent speech in March was better received by investors and helped add fuel to the recent rally.

In any event, the market was bound to run into trouble after the strongest and swiftest advance since the 1930s.  As we have been writing over the past few weeks, the rally has been based on a string of “less bad than expected” earnings reports and other economic news.  If you step back and look at the so called “green shoots” from a distance, the surrounding dead trees dominate the landscape.  For example, the “strong operating earnings” reported by big banks in the first quarter were heavily distorted by accounting gimmicks.  Secretary Geithner has said that there is a “$2 trillion hole in the banks”, yet the banks tout their strong first quarter earnings?

Whether a larger correction is upon us remains to be seen.  The next two weeks will be dominated by earnings reports, including a good one tonight from IBM.  The S&P should find good support at the 800 level absent materially worse news.

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