What a Week: Technical Damage

Market trends often reverse on Fridays, as traders square up positions and book profits (or losses) ahead of the weekend. That was the case this holiday-shortened week, in which major averages stumbled in the wake of myriad profit warnings and disappointing guidance from Yahoo! ( YHOO).

Most of the high-profile warnings were in technology, starting Tuesday with Veritas ( VRTS) and Conextant ( CNXT), and continuing throughout the week from names such as PeopleSoft ( PSFT), Siebel ( SEBL), BMC Software ( BMC), and Unisys ( UIS).

In reaction to the negative preannouncements, the Nasdaq Composite fell 3% for the week. The Dow Jones Industrial Average lost 0.6%, while the S&P 500 declined 1% as Friday's modest rebound -- aided by raised guidance by SAP ( SAP) and solid earnings from General Electric ( GE) -- proved the exception to the market's decidedly downbeat rule.

The declines came as crude oil prices briefly climbed back above $40 per barrel, ending the week up 4% at $39.96. Meanwhile, gold surged back above $400 per ounce, ending the week up 2.6% to $407.90, as the dollar fell to a four-month low vs. the euro, which was trading at $124.14 late Friday.

In the absence of major economic data, Treasury prices were notably subdued; the yield on the benchmark 10-year note ended Friday at 4.46%, virtually unchanged for the week.

Weakness in shares -- particularly Tuesday's slide and the selloff Thursday afternoon -- caused technical damage, leaving stock proxies below their simple 50-day moving averages and the Comp below its 200-day moving average.

"We think that the U.S. equity market is potentially poised for its most significant selloff since the 2004 highs were put in place," commented Rick Bensignor, chief technical analyst at Morgan Stanley. "We remain cautious on putting new capital to work whenever the S&P 500 is anywhere above the 1130 area."

Bensignor's midweek report -- "The Market Shows Even More Vulnerability" -- correctly predicted weekly sell signals would be triggered Friday, based on Tom DeMark's Sequential Indicator, as the S&P closed below 1136.47 and the Comp below 1999. These are the first weekly sell signals since the March 2003 lows, he reported.

"Though an oversold bounce may ensue," Bensignor suggested the S&P's 200-day moving average at 1101 is a key inflection point going forward. "We believe a breach of this average will likely bring in further selling as it, whether rightly or wrongly, has become a de facto trend indicator," he wrote, citing subsequent downside targets in the 1076-1083 range (the 2004 lows), and then possibly a move down to the 1020-25 area.

That's a steeper decline than most traders are currently anticipating, but this week did cause a reversal among some previously bullish participants. For example, James Rohrbach of Investment Models issued a sell signal on the Nasdaq after the close Thursday, reversing a buy signal issued on May 26. (His NYSE buy signal of May 25 remained intact.)

Ghost in the Machine

As noted here, the amount of negative preannouncements was historically low heading into this week. So it's quite possible that the aforementioned warnings, along with creeping concerns about the economy, were responsible for this week's declines. ( Period, end of story.)

But given it's often the things people are totally unfocused on that hurt financial assets most, perhaps overseas developments were a larger-than-discussed contributor to the stock market's slide. For a change, the issue wasn't Iraq, which (rightly or wrongly) seems to have receded from the market's consciousness since the sovereignty handover last week. Instead, developments in Russia could be causing some fraying at the market's edge.

Russia's financial assets -- notably the ruble -- have been rattled lately by the possible bankruptcy of oil giant Yukos, which the government is forcing to repay about $3.4 billion back taxes. Yukos, which has $1.3 billion in liquid assets, according to Dow Jones, has been served a default notice by its lenders, spurring concerns about its creditors' well-being in the event of a default.

Recalling how Russia's debt default in 1998 triggered the unraveling of Long Term Capital Management and subsequent market upheaval, some U.S. investors were understandably concerned about the possibility of a "banking crisis" in Russia and the impact on crude prices should Yukos go under, or have its assets nationalized.

"Although the situation is highly risky in the very short term, we do not believe the Russian financial sector is on the edge of a crisis of the scale of 1998," Standard & Poor's reported Thursday.

Brian Reynolds, chief market strategist at MS Howells, took a similar view Friday, noting the amount of leverage in the emerging market debt arena is far less today vs. the summer of 1998. Additionally, "the probability of that country melting down is smaller than it was back then," he wrote, citing Russia's higher foreign reserves.

Finally, "the Treasury market is saying that a financial crisis is unlikely," Reynolds observed, noting Treasury volatility is relatively low, swap spreads have been "well behaved," and corporate spreads tightened this week. "We are seeing none of the odd intangibles that we saw in summer 1998."

Hopefully this analysis will prove accurate; at the end of another trying week, Wall Street could use a little reassurance.

Tune-In TaskMaster

I'll be back on John Batchelor's ABC Radio Network show to discuss these and related issues Friday night/Saturday morning, around 9:05 p.m. PDT/12:05 a.m. EDT. Check the ABC Radio Web site for Webcast options.

Aaron L. Task is the assistant managing editor for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to atask@thestreet.com.

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