Ladies and Gentlmen, Santa Has Left the Building

A dramatic three-day decline in the S&P brought the index down to pre-"Santa Rally" levels. The sell-off was broad and volume was high across the board as stocks were unable to fight a barrage of disappointing earnings mixed with general uncertainties in the marketplace and tossed with the certainty of an eventual pull back. Leading stocks and sectors (Financials: GS, JPM. Tech: GOOG, APPL, Industrials: X)  turned low before the S&P 500 signaling distribution and possible shifts in money allocation among the big players in the market.
A quick recap of what's weighing down the market is in order:

1. Sovereign debt - sovereign debt concerns continue to linger as Greece struggles to dig itself out of a hole and  mounting pressures elsewhere (California, Spain, Italy, Dubai, East Europe) continue to linger.
2. China - concerns over China's latest steps to curb its booming economy.
3. US bank regulations - talks about new bank regulations, designed to limit the risk big institutions can take, have been  major drag on finanacials and the broader market.
4. Uncertainty regarding the futures of Mr. Bernanke and Mr. Geithner have also contributed to the general lack of enthusiasm in the markets. 
5. US Earnings - a mixed bags of earning reports left the market underwhelmed and served as yet another indication that we are still in recovery mode.
6. S&P break trend lines and key support levels - nothing sums everything up better than price action and a quick look at the S&P is quite revealing. The broad index busted though major support and fell decisively below its 50 day MA, a prior support.
   

So what's next for the stock market? and why should we care? after all this is a FX blog, isn't it? well, the pullback in the stock market is a long awaited one. As such, we can assume that many investors who had their money in stocks were dancing close to the door, so to speak, ready to sell on a short notice. At the same time, we can assume there are many out there with dry powder who have been patiently waiting for a chance to get in. How far down will the market go is anyone's guess. However, it is unlikely to test the March lows. Instead, it is more likely the S&P will find a new, more relevant, support level from which it will trade sideways in a range until new catalysts (e.g. more stimulus, lower unemployment rates, etc) can send it higher. In my opinion, the S&P will find support around the 950-1000 level. We care about the stock market because its direction is indicative of risk tolerance/appetite and because the perception of risk has played such a dominant role in the foreign exchange markets, particularly since the beginning of the financial crisis.