For the past three weeks, the Dow Jones industrials index has flirted with the 18,000 level last touched in July 2015. The rally out of the Feb. 11 low has been impressive, erasing memories of 2016's early unpleasantness, which marked the worst-ever start to a year for U.S. equities.
Yet the justification for the uptrend is looking extremely shaky as, one by one, negative catalysts accumulate. Fundamental headwinds from weak earnings to a hawkish turn by the Federal Reserve and disappointing economic growth can no longer be ignored.
Until now, investors were willing to give the bulls the benefit of the doubt.
When the super-hyped OPEC-Russia oil production freeze meeting in Doha ended in acrimony, crude oil ironically rallied as traders focused on ongoing declines in U.S. drilling rig counts. When the first-quarter earnings season started on April 11 -- with expectations of the worst drop in profitability since 2009 marking the fourth consecutive quarter of falling earnings -- better-than-expected (but still bad, mind you) results from the big banks took the sting out. And when first-quarter economic data weakened, many dismissed this as being caused by temporary, seasonal factors.
But now, it looks like sentiment is shifting.
U.S. equities were hit with their hardest sell-off in months on Thursday, taking large-cap stocks back below their 20-day moving average for the first loss of more than 1 percent since February. Uptrend support from the Feb. 11 low is being tested in a serious way, and that makes a turnaround necessary by the bulls as soon as possible -- or else the vitality of the two-month rally gets called into question.
Three main catalysts were behind Thursday's decline.
The first was a surprise "no stimulus" decision by the Bank of Japan overnight despite headline consumer price inflation falling into negative territory on a year-over-year basis for the first time since 2013. Japan's Nikkei lost more than 3 percent and the yen surged. This was also in the wake of the worst GDP growth report in two years.
The second was more pressure on Apple (AAPL) as activist investor Carl Icahn told CNBC he had sold his long position in Apple after trumpeting back in 2014 that the stock was a "no brainer." This after pushing the company's debt load from $35 billion to just shy of $80 billion and earning himself hundreds of millions in the process.
Apple -- the one-time momentum favorite, hedge fund hotel and single most important stock in the market -- is now down nearly 16 percent from its high two weeks ago and some 29 percent off the high set last April following its latest report. Those results included a top- and bottom-line miss for the first quarter as iPhone sales slowed for the first time ever and expectations are lowered for the launch of the iPhone 7 later this year.
The third catalyst was a surprisingly weak advance reading on first-quarter GDP growth, which clocked in at just 0.5 percent vs. the 0.7 percent that was expected. This is down from the 1.4 percent gain in 2015's fourth quarter and is the weakest result since the beginning of 2014. Business investment weighed on overall growth by dropping 5.9 percent following a 2.1 percent decline in fourth quarter.
This is all in the context of a more-hawkish-than-expected policy statement from the Federal Reserve on Wednesday. While analysts are still reading the tea leaves, it appears the Fed was somewhat hawkish despite the removal of language about inflation "picking up." There was also a single dissent from a policymaker who wanted to raise rates another 0.25 percent.
Overall, the futures market slightly increased the odds of a June rate hike.
Looking ahead, on a technical basis, weakness among big tech stocks like AAPL, Microsoft (MSFT) and others has already pulled the Nasdaq Composite back below its 20-day and 200-day moving averages in a clear violation of the post-February uptrend. Watch for the other major averages to follow suit as the calendar flips to May and the stock market enters a period of seasonal weakness (you know, "sell in May...").
On a fundamental basis, the next big data point will be the April payroll report, due next Friday. A strong report would further raise odds of a June rate hike from the Fed.