NEW YORK ( Real Money) -- There are very few certainties that touch us all in this mortal experience, but one of the absolutes is that we will experience hardship and stress at some point.-- James C. DobsonThe market has been struggling for a week now. Have we purged some of the excess that has built up amid the straight-up move in the first quarter of 2012, or is this just the start of more stress and a deeper correction? The correction over the past week has actually been more severe than the indices have indicated. Big-cap names, Apple ( AAPL) and Priceline ( PCLN) in particular, have held up well, offsetting the poor action in hundreds of small stocks that don't influence the indices as much. Market players are obviously looking for safety as they shift money into the more liquid names and out of small-caps. Although the market is becoming increasingly narrow as money flows into a few big-cap names, that relative strength is preventing sentiment from becoming too negative. Market players are feeling somewhat secure because there still are places to hide. If AAPL is still trending up, how bad can things be? But if the big-cap names lose their footing then the danger of some panic selling will ramp up quickly. At this juncture we are oversold enough that a bounce would not be at all surprising, but don't be too quick to assume that this selling has played out. Over the past few years we have often seen the market pull off very dramatic recoveries just as it looked like we were on the brink of major breakdown. I don't know how many times I've written about the "V"-shaped bounces that push us right back up to highs after a few days of poor action -- but it just isn't prudent to bet that such a recovery will occur again. There has been technical and fundamental deterioration in the market and it can expand further. We will likely have some bounces in the near term; the challenge will be deciding how far we can trust them. Typically the answer has been that bounces will carry further than seems reasonable, but we have to stay particularly attuned to the possibility that this time the dip-buyers may run out of steam.
Whether the market bounces back quickly or sees further downside is likely to be determined by the sentiment that develops as earnings start to roll out this week. Although the media like to make a fuss about it Alcoa ( AA) earnings that are due tonight, it really isn't very important and has little market impact. But since it is the first report of the quarter it receives a lot of attention ... before it's very quickly forgotten. The first important report comes on Thursday night when Google ( GOOG) issues its number, and then on Friday morning JPMorgan ( JPM) and Wells Fargo ( WFC) will provide some insight into the financial sector. Those reports are going to have some market impact and will tell us something about the mood that will develop as major reports hit over the next couple weeks. At this juncture some sort of relief bounce is likely, but the technical conditions have shifted and increased defensiveness is necessary. Big-cap names like AAPL should help to provide some support as long as they continue to hold, but many market participants will be looking to get out of Dodge very quickly if they start to lose their relative strength. We have a mixed start this morning as Europe struggles and Asia is mixed. Stay selective and play it tight. The market is under stress, and the cracks have been growing.