From Cabot Options Trader

The pattern of two weeks of gains and two weeks of losses went out the window last week when the S&P lost ground for a third straight week. Not only was it a down week, but it was the worst weekly loss for the index in the last six months. The final tally was -4.3% on the S&P while the Nasdaq lost 5.3%. The Dow held up the best of the three, but it still lost 3.3%. The S&P has now lost ground for six consecutive sessions and in 11 of the last 13 days. This is the S&P’s longest losing streak since November.

Many investors and analysts were counting on the debut of Facebook shares to give the market a lift on Friday, but even the much-anticipated IPO couldn’t lift the market. Between disappointing economic reports in the U.S. and continued concerns about Europe’s debt situation, the negative outlook was too much to overcome.

The good news is the way the weekly chart is starting to look. The S&P is approaching oversold territory based on the slow stochastic readings as well as the 10-week RSI. The second reason for optimism is the trendline connecting the lows of the past three and half years. This trendline and the 104-week moving average are currently resting just below the 1,250 level, and should act as support during the next few weeks. The S&P daily chart shows the index is already grossly oversold with the lowest slow stochastic readings in the last five years.

Market Watch

All 10 sectors lost ground last week, but performance varied greatly. Utilities and Consumer Staples were the “top” performers with losses of 1.42% and 1.5%, respectively. Six of the sectors lost over 4% and four lost more than 5%.

The economic calendar is relatively light this week with only 10 reports scheduled. The biggest impact will likely come from the April Durable Orders Report, which is expected to show growth of 0.3% after a decline of 3.9% in March. Excluding transportation, durable orders are expected to increase 1.0%.

The Michigan Sentiment Survey could be an interesting report after the Leading Indicators report hit negative territory in April. This is the first time since last September that Leading Indicators were in negative territory and only the fourth negative reading in two years. This suggests that the Michigan Sentiment survey may come in below the expected reading of 77.5.

Sentiment indicators were mixed last week: both bullish and bearish percentages increased in the Investors Intelligence Report, while the Rydex Nova/Ursa Ratio vacillated back and forth all week. However, the 21-day moving average on the CBOE Equity Put/Call ratio jumped to its highest reading since last September, indicating that option traders are the most bearish they’ve been in the last eight months; from a contrarian viewpoint, this is encouraging.

The daily slow stochastic readings show 85% of stocks in the S&P 500 are in oversold territory. By comparison, only 11 stocks (2.3%) are in overbought territory. Based on these numbers, we could see a sharp rally in the near future.

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