The major US stock market indices were solidly in the red for the week ending May 7^th, with the S&P 500, Dow Jones Industrals and  NASDAQ falling -6.4%, -5.7% and -8.0% respectively for the week. US markets had an easier go of it than those in Europe however; Britain, France and Germany saw their main stock market indices fall -11.8%, -14.7% and -10.6% over the week in US$ terms. The beleaguered Greek stock market saw its market composite index drop another -16.3% to cap a -34.0% year-to-date slide in US$ terms.

The market tone has clearly shifted over the past couple of weeks to one of discomfort; the focus has shifted from solid 1Q10 corporate earnings that have come in better than expected in most cases, and broadly positive economic data, to center on turmoil in Greece and the European Union.  Greece’s predicament has been known for months but the market’s negative reaction to last week’s downgrade of Greece’s debt is a prime example of the old stock market adage “buy the rumor, sell the news.”

The week’s highlight (or low-light) was Thursday’s brief downward spike in stock prices. Although the Dow Jones Industrial Average had trended lower since the opening of the trading day, around 2:30PM eastern time the Index registered a drop of about 1000 points, and a rebound of about 700 points moments later. Similar action was observed on other US indices like the S&P500 and NASDAQ.  Initial reports today call the spike downward a computer glitch, but like a momentary power outage on an aircraft flying at 35,000 feet, that kind of “oops” is simply unacceptable.  Look for renewed scrutiny and possible restrictions on high frequency trading and other computerized trading.

Given the week’s overall poor performance, the sector level returns were predictable. Cyclical sectors that benefit from economic growth, such as Consumer Discretionary and Industrials, were the hardest hit. Defensive sectors, such as Consumer Staples and Healthcare, showed negative returns for the week but much less so than their more cyclical peers.

CHART: Bloomberg

We are concerned that the breakdown in the markets that began around the end of April may have further distance to go on the downside.  Breadth and other internal market readings have been supportive, as have the aforementioned earnings reports; to our eyes, though, the market had become a bit speculative and sentiment over-bullish of late. The lack of a resolution to Greece’s fiscal problem (and potentially those of other nations) seems to have been the trigger the market needed to pause in its 13 month climb off the recession low.

To close with a bit of positive news, Dr. Pepper Snapple Group was up almost 10% on the week as the company beat its earnings expectations and raised its forecast. Reminds me of their old slogan “wouldn’t you like to be a Pepper”…