Dow's Third Straight Triple-Digit Loss Signals Correction in the Works

The Dow Jones Industrial Average suffered a third straight triple-digit setback on Friday as investors struggled to reposition their portfolios after a weeks' worth of negative news. Analysts suggest a minor market correction that could spill over into next week may be in motion.The Dow plunged 216.90 points, the S&P 500 fell 24.72 points and the Nasdaq dropped 60.41 points as the week's news soured investor sentiment. This was the worst week for the Dow since it hit its lows last March. Positive earnings reports from Google (GOOG), General Electric (GE), American Express (AXP) and McDonald's (MCD) couldn't even to stop the financial free fall.

"The market was looking for something to pause for and it got a package of items," said Ticonderoga Securities director and senior market strategist, John Stoltzfus.

"We're not thinking of this as a long-term pullback or a defeat to the recovery," he emphasized, "but rather a pause and reevaluation."

Over the last two weeks, the financial markets have had to deal with a number of issues that have caused concern and uncertainty:
  • China's efforts to slow its economy by tightening its short term treasury rate and increasing the amount of reserves banks need to cover outstanding loans;
  • Concerns about Greece defaulting on its debt and the effect that might have on the Euro;
  • President Obama's $90 billion claw-back tax on the largest banks and his opening proposal at bank reforms;
  • A number of significant earnings disappointments, including Alcoa (AA) and Bank of America (BAC);
  • A mixed bag of economic news reports.
All these issues have conspired to create an overall negative sentiment that finally caused the markets to begin to correct themselves this week.

The president's continuing battle with the banks drew most of the blame for the second consecutive 200-point decline. Questions over what the financial sector will look like and be able to do under the new regulations have some investors spooked.

Russell chief market strategist, Stephen Wood said investors don't know exactly what type of bank regulations will pass, how they will truly affect the banks or how quickly they will go into affect.

"We knew [new regulations] were coming," said Wood, "but the big question is, how will the market respond to a significant change in the regulatory environment?"

Stoltzfus said that with all the uncertainty, investors are taking profits to lock in gains from last year. He suggested investors "protect positions where you have profits, while at the same time, recognize that any pull back here is likely part of the process of exiting the whole crisis era we've been in."

To reverse the pullback, Stoltzfus said positive news, including a string of better-than-expected earnings reports, improvement in the financial situation in Greece and greater detail regarding Obama's financial industry restructuring plans would help. But he admits the downward trend "could drag into next week for a few days."
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