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Heavy Selling Spreads from Commodities to Stocks

John Darsie

The market suffered its largest drop in five months Monday while commodities continued to get pummeled after Friday's break of macro support. After a lower, but not disastrous, open in the indices, stocks faded throughout the session, with selling intensifying after news of fatal explosions near the finish line of the Boston Marathon. The S&P dropped 2.3%, while Gold dropped nearly 9%.

The sell-off in the market was broad and harsh, with sectors that had recently shown relative weakness leading the day lower. In recent weeks we have harped on the faulty signs that have started to add up in the market, but every significant down day has been met with buying. The rest of the week it will be interesting to see if that trend continues, although this time around the carnage in commodities suggest more significant dislocation occurring in world markets.

The precious metals continue to make the loudest headlines as investors appear to be unloading large positions. Today, Gold (GLD) dropped another 8.78%, making that a nearly 14% loss in the last two trading days. The catalyst for the extreme weakness in Gold remains unclear, but it could be that concerns about potential deflation, the force the Fed has been hell-bent on fighting with QE, are growing. The sell-off in Silver (SLV) has been even more pronounced as it fell another 12.62% today.

The relatively weak sectors that have led most declines recently have been the small-cap Russell 2000 (IWM), Transports (IYT) and Homebuilders (XHB). The Russell and Transports in particular are seen as leading indicators for healthy risk appetite and healthy economic growth, respectively. After today's sharp sell-off, each of those three sector ETFs look to have formed head and shoulders type patterns that could forecast lower prices. The IWM, IYT and XHB shed 3.77%, 3.94% and 4.96% respectively.

No sectors were spared in today's action, although the financials tried to hold firm early before panic started to hit the tape. The Financial Sector ETF (XLF) was still positive just before 11am ET, but succumbed to the weakness in the broader market. The banks have kicked off their earnings season with solid earnings last week from JP Morgan (JPM) and Wells Fargo (WFC) (although both stocks closed lower Friday) and a strong report from Citigroup (NYSE:C) this morning, but macro forces have conspired to prevent a bounce in the sector. Traders will be watching Goldman Sachs' (GS) report before the open tomorrow.

Apple (AAPL) was not spared in today's sell-off, and now the stock is teetering on the edge of major pivot support. A break of this $419 level could trigger a move down into the $360-380 area.

Every time this year we have pointed out faulty signs and seen the market pull-back, it has responded resiliently and made new highs. Will this time be different? We don't have a crystal ball, but as a trader you equip yourself to be prepared for anything.

*DISCLOSURES: Scott Redler is long BAC, short SPY.