MarketView for May 11

Summary 

Wednesday’s trading activity erased a three-day rally on Wednesday as energy and other commodity shares sank, once again raising concerns regarding the market's ability to stay on its upward path. The second major breakdown in commodities in a week fueled selling in other risky assets, including stocks. A stronger dollar and data showing a rise in fuel supplies sent crude oil prices down more than 5 percent. The iShares silver exchange-traded fund (SLV.P) dropped 8.3 percent at $34.39.

In a sign of weakness, the S&P 500 broke below 1,340, a key technical level, and some analysts said a close below 1,330 would be bearish for the market. Worries about global demand have fed losses in energy and materials shares. The S&P energy sector is now down 7.8 percent since the start of the month.

The 1,340 level roughly coincides with the 20-day average, which the market has closed above since April 20. If the S&P 500 closes below that average, the Bollinger bands chart shows a near-term target just above 1,300. The S&P 500 index is still up 27.9 percent since the start of September, roughly when the market's recent rally began.

After the market's close, shares of Cisco fell 2.1 percent to $17.40 as the company reported results and warned of another weak quarter.

In the foreign exchange market, the euro hit a three-week low against the dollar as funds moved from risky trades in commodities and higher-yielding currencies and into the dollar in a flight to quality bid. Treasury debt prices also rose in a safety bid.

Concerns about growth in China hit cyclical sectors. A report indicated that industrial output growth in China eased in April, suggesting China's economy was moderating the pace of expansion, although Chinese inflation remained high.

About 7.75 billion shares were traded on the major exchanges as compared to an average of 7.73 billion so far in 2011.

Crude Falls Again

Oil prices fell over 4 percent on Wednesday after an unexpected rise in gasoline stocks amid slowing demand sent prices into a tailspin, triggering a five-minute halt in trade and fueling the second big commodities sell-off in a week.

The momentum of gasoline's largest decline in over two years washed across the oil complex and hit everything from silver to copper to the euro. Early losses stemming from weak Chinese industrial output data and gains in the dollar tied to Greek debt woes spiraled through the day, setting off sell-stops.

The abrupt decline drove oil volatility to its highest close since mid-March as traders struggled to figure out where markets might find equilibrium after diving more than $13 a barrel from their peak just last week.

Unlike last Thursday's precipitous fall concentrated in the crude oil market, activity focused on gasoline, which fell after the first rise in stocks in 12 weeks and as traders reckoned it less likely that flooding would affect refineries bordering the Mississippi River.

Trading of crude and refined products halted after gasoline futures dropped 25 cents, the limit down, tripping a five-minute circuit breaker aimed to calm feverish markets. It was the first time the breakers had been hit since the financial crisis in September 2008. Gasoline fell further after trading resumed, breaking technical levels. Total volume reached a record 240,000 lots.

Brent crude settled down $5.06 to $112.57 a barrel. Domestic sweet crude fell $5.67 to $98.21 a barrel, after touching as low as $97.50 a barrel.

Gasoline futures suffered the largest daily drop since September 2008, with the June contract settling at $3.1228 a gallon, losing 25.69 cents, or 7.6 percent. It was the largest loss in dollar terms since September 2008.

Trading volumes, which have spiked amid the frenzied trade seen over the past week, surged again. Brent trading exceeded 770,000 lots in late U.S. activity, about 72 percent over the 30-day moving average, while trading on U.S. crude futures was about 40 percent over that average.

Oil market volatility rose sharply after the release of inventory data from the Energy Information Administration, sending the CBOE's oil volatility index out of a narrow trading range to hit a high of 43.8 percent.

In addition to the surprise build in gasoline inventories, the first rise in stocks after 11 consecutive declines, the EIA report showed a large rise in crude oil stockpiles as gasoline demand continued to trail year-ago levels. The largest increase came in the U.S. Northeast, including the New York harbor delivery point for the NYMEX gasoline contract.

Early pressure on prices came after data showed China's industrial output growth eased much more than expected in April, suggesting the world's second-biggest economy is cooling. Consumer inflation eased modestly to 5.3 percent in April from a 32-month high in March of 5.4 percent.

CME Group, which owns the NYMEX, increased margin requirements on gasoline futures on Wednesday, following a similar move for crude futures on Monday amid soaring volatility. ICE Clear Europe also raised margins for Brent crude on Wednesday, creating more downward pressure on prices.