FIVE MARCH TO NEW HIGHS
This past Friday, February 24, 2012, five of the eight major U.S. equity indices that we follow advanced to new recovery highs. The five included the Dow Jones Industrial Average, the Standard & Poor’s 500, the New York Stock Exchange Composite, the NASDAQ 100 and the NASDAQ Composite. Each of the five surpassed recovery highs established earlier last week. Indeed, four of the distinguished five posted three recovery highs last week, the NASDAQ 100 two.

BREADTH LAGS
Cumulative advance-decline lines failed to confirm last week’s new highs in the cap-, float- and price-weighted indices.

• Advance-decline lines in the Standard & Poor’s 500 and New York Stock Exchange Composite traded essentially flat for the week.
• The advance-decline line in the NASDAQ Composite, which peaked this past February 3, 2012, continued to drift a bit lower.
• The number of stocks advancing to new 52-week highs also failed to confirm the new highs in the New York Stock Exchange Composite and NASDAQ Composite.

These negative divergences are currently minor, but signify that most stocks did not perform as well as the major averages last week. Persistent much less more extreme divergences would suggest that the major averages are increasingly susceptible to a near-term technical pause or pullback.

THREE LAGGARDS
The Dow Jones Transportation Average, Dow Jones Utility Average and Russell 2000 were last week’s laggards. Unlike the other aforementioned equity indices, none of the three managed to advance to even a single recovery high last week.

• The Russell 2000, a consistent leader in the recent rally, flirted with a new high last Monday, February 20 and then again this past Friday, February 24, but ultimately failed to muster enough strength to follow its counterparts, somewhat surprisingly so considering the continuing good news on the U.S. economy.
• The persistent lag in the Dow Jones Utility Average, which has traded flat since the turn of the year, seems easy enough to explain. Cyclical sectors and stocks have been the leaders in this year’s advance as investors eagerly anticipate the favorable economic impact of hospitable shifts in monetary policy in the European Union, many emerging-market countries, importantly including Brazil, India and China, and elsewhere around the globe. Utilities, defensive in character and stalwart performers last year, predictably fell out of favor. Successive declines in utility output over the past few months also help to explain the lag. The declines reflect the historically mild winter in the United States. January was the fourth warmest since 1900. Temperatures in February feel equally mild.
• The laggard performance of the Dow Jones Transportation Average is a different story (likewise, parenthetically, the equally conspicuous lag in copper, the quintessential industrial metal and among the most reliable of leading economic indicators). If we are correct in believing that the anticipated economic impact of a worldwide relaxation of monetary policy is the primary driver of the current rally, then the Dow Jones Transportation Average, deeply cyclical and which ranked among the very best performers in the earliest stages of the four-month rally, should have maintained its leadership or at least joined the other five averages in advancing to new recovery highs last week. However, that didn’t occur. On the contrary, the Transports conspicuously fell to short-term reaction lows last Tuesday, Wednesday and Thursday. Moreover, an attempted rally on Friday suffered the same fate as its recent predecessors. The Transports, up more than forty-two points at Friday’s session high, closed down more than twenty-two points, a reversal of some promising intra-day strength. The short-term ten-day moving average, which hardly represents formidable resistance, again proved insurmountable, capping an intra-day rally for the seventh time since the index violated its October 2011 uptrend two weeks ago.

In a positive vein, today the index is easily the strongest of the eight major averages that we follow. Hopefully the superior relative strength represents a turning point in the performance of the index. It is also encouraging that the 50-day moving average has provided a firm technical floor over the past five days, including again this morning. Behavior surrounding the pending convergence of the falling 10-day and rising 50-day moving averages could provide important clues regarding the next important directional move in the index and how the current divergence between the Dow Industrials and Transports is likely to be corrected.

DOW JONES TRANSPORTATION AVERAGE NINE-MONTH DAILY Data Courtesy of Bloomberg; Annotations by Clark Yingst, Chief Market Analyst, Joseph Gunnar

DOW TRANSPORTS VS DOW INDUSTRIALSData Courtesy of Bloomberg; Annotations by Clark Yingst, Chief Market Analyst, Joseph Gunnar

SHIFT IN WORLDWIDE MONETARY POLICY
Evidence of the aforementioned friendly shift in the worldwide conduct of monetary policy abounds:

• Mario Draghi, the new President of the European Central Bank, reversed the rate hikes implemented by his predecessor Jean-Claude Trichet shortly after assuming office. Draghi then quickly extended a three-year financial lifeline to European lenders suffering a liquidity squeeze.
• Brazil’s central bank slashed the target for its benchmark lending rate another fifty basis points this past January 18. The cut was the fourth since only last August.
• This past January 24 the Reserve Bank of India reduced its cash reserve ratio for the first time since 2009 and announced an official shift in the primary focus of its monetary policy away from combating inflation to fostering growth.
• Last week the People’s Bank of China reduced its bank reserve ratio from 21.00% to 20.50%. The cut was the second since early this past December.

INVESTORS TAKE HEED
Investors have reacted to the shift in policy:

• Note, for example, the roughly coincident bottom, turn and surge in Brazil’s benchmark equity average, the Bovespa, comprised of the most liquid stocks traded on the Sao Paulo Stock Exchange.

BOVESPA VERSUS SELIC TARGET RATE ONE-YEAR DAILYData Courtesy of Bloomberg

• Note, too, that the Shanghai Composite, finally mimicking the action in benchmark financial and property indices, recently penetrated its April 2011 downtrend and soared behind last week’s announcement of the second cut in the bank reserve ratio.

SHANGHAI COMPOSITE TWO-YEAR DAILYData Courtesy of Bloomberg; Annotations by Clark Yingst, Chief Market Analyst, Joseph Gunnar

Will the Dow Transports soon resume their upward flight? Stand-by.

Analyst Certification
The views expressed in this research report reflect the opinions and personal views of Clark Yingst, Chief Market Strategist of Joseph Gunnar & Co., LLC at this particular point in time. Market volatility and economic news may at any time after this report alter the information thus affecting the opinions and personal views of Mr. Yingst. No part of compensation paid to Mr. Yingst was, is, or will be directly related to these specific recommendations.

Disclosure
Joseph Gunnar & Co.,LLC (the Firm) is a member of the Financial Industry Regulatory Authority (FINRA) and has access to other principal exchanges and is a registered U.S. Broker-Dealer. Readers are advised that this report is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy. The information is based on public sources that are believed to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of all available data. Member FINRA, MSRB, SIPC.

PERFECT TWO-FOR-TWO IN 2011
Consider 2011. Claims soared last April 2011 and remained well above 400,000 per week throughout the second quarter as companies focused anew on reducing unit labor costs to cushion margins against the impact of broadly rising commodity prices. Claims began to decline early last September, fell below 400,000 in early November and then began to trend sharply lower. Thus the evolving trends in claims both last spring and fall 2011 correctly foretold the eventual trends in private non-farm payrolls and the unemployment rate. Just the latest illustrations of the reliability of the indicator, imperfect, of course, but unquestionably ranking among the most reliable that we have utilized over the
course of our career. Well what, then, is the indicator currently foretelling?

THE LATEST NEWS ON CLAIMS
Yesterday, Thursday, February 24, 2012, the Labor Department reported the
number of initial claims filed in the latest survey week ended this past Saturday,
February 18, 2012. Highlights of the report, again encouraging regarding the nearterm
prospects for the U.S. labor market, included the following:

• First, the Labor Department revised the figure for the week ended the previous Saturday, February 11, 2012. According to the revision, more claims were filed than first reported. Claims during the week totaled 351,000, not the 348,000 initially estimated. However, claims were still 10,000 fewer than the 361,000 filed during the prior week ended Saturday, February 4, 2012.
• The Labor Department reported that 351,000 persons filed initial claims for unemployment insurance in the latest survey week ended this past Saturday, February 18, unchanged from the revised total the previous week.
• While not declining for the first time since the week ended Saturday, January 21, 2012, claims last week were still fewer than forecast. According to the median forecast in a Bloomberg poll, economists estimated that claims increased to 355,000 during the week, 7,000 more than the 348,000 first reported to have been filed the previous week, 4,000 more than the revised number.
• Last week’s claims remained at the lowest level since the week ended Saturday, March 8, 2008, nearly four years ago, when, parenthetically, the U.S. economy was in the early stages of a recession that would not end until June 2009 and when claims were trending sharply higher, not lower, as in presently the case.
• Claims also remained below 400,000 for the sixth week in a row and for the fourteenth in the last sixteen weeks.
• While unchanged last week, the accelerated September 2011 downtrend in initial claims remains fully intact. The downtrend now extends twenty-three weeks.
• A longer-term downtrend, launched off the short-term spike last April 2011, also remains intact and now spans forty-two weeks.
• The four-week moving average, which smoothes the influence of very short-term ultimately transient non-economic forces and factors and thus provides a truer measure of underlying strictly fundamental trends in claims, declined again last week, falling to 359,000 from a trailing 366,000.
• Last week’s decline in the moving average was the sixth in a row.
• 359,000 represented the lowest reading in the moving-average since the week ended Saturday, March 22, 2008, when, as already noted above, the U.S. economy was in the early stages of a recession that, according to the National Bureau of Economic Research, lasted another fifteen months and when the moving average was trending significantly higher, foretelling further economic weakness, not lower, foretelling further economic expansion, as is currently the case.
• The latest decline in the four-week moving average produced another extension of the accelerated downtrend launched in the week ended Saturday, September 24, 2011. The downtrend now extends twenty-two weeks.
• A longer-term downtrend, launched the week ended Saturday, May 21, 2011, now extends a full forty weeks.
• The four week-moving average has now been below 400,000 for fifteen weeks in a row. Many economists believe that 400,000 is the level above and below which payroll growth can be expected to accelerate or slow and the unemployment rate rise or fall. It’s pivotal.

What, then, does the current trend in claims portend? It seems obvious, wouldn’t you agree? Continued growth in private non-farm payrolls and (all else assumed equal, including no significant increase in the labor force participation rate) corresponding declines in the unemployment rate, at least for the foreseeable future. As noted in our report entitled “Handcuffed Fed?” and published just yesterday, Thursday, February 23, 2012, we worry that if oil, which emerged from a formidable reverse head-and-shoulders consolidation earlier this week, continues to trade higher, companies could begin to slow hiring to offset the potential impact of higher energy prices on margins and earnings, comparable to what occurred last spring when broadly higher commodity prices not only slowed hiring but triggered a new round of corporate layoffs. Thus the increase in claims last April and the elevated level throughout the second quarter. Whether that less optimistic script eventually unfolds remains to be seen. Let’s hope not, lest a repeat of last year’s false economic start could recur. Meanwhile, claims alone continue to suggest that additional improvement in the U.S. labor market probably lies ahead.

INITIAL CLAIMS FOUR-WEEK MOVING AVERAGEData Courtesy of Bloomberg; Annotations by Clark Yingst, Chief Market Analyst, Joseph Gunnar

Analyst Certification
The views expressed in this research report reflect the opinions and personal views of Clark Yingst, Chief Market Strategist of Joseph Gunnar & Co., LLC at this particular point in time. Market volatility and economic news may at any time after this report alter the information thus affecting the opinions and personal views of Mr. Yingst. No part of compensation paid to Mr. Yingst was, is, or will be directly related to these specific recommendations.

Disclosure
Joseph Gunnar & Co.,LLC (the Firm) is a member of the Financial Industry Regulatory Authority (FINRA) and has access to other principal exchanges and is a registered U.S. Broker-Dealer. Readers are advised that this report is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy. The information is based on public sources that are believed to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of all available data. Member FINRA, MSRB, SIPC.

DOW TRANSPORTS DESCEND

In our report entitled “Cyclicals Retreat,” published Monday, February 13, 2012, we cautioned that the highly cyclical Dow Jones Transportation Average had suffered some technical damage, minor, to be sure, and thus not yet a cause for undue concern, but at the same time representing an unwelcome change in near-term technical profile and prospects that, in our view, warranted investor attention.

As detailed in “Cyclicals Retreat,” the initial near-term technical damage in the Dow Transports consisted of the following:

• a violation of the roughly four-month uptrend launched off the intra-day low Tuesday, October 4, 2011 (when rumors of a purportedly credible plan to recapitalize distressed European banks, specific details of which, more than four months later, we have yet to learn, triggered a textbook intra-day reversal in stocks, including the transports)
• a subsequent violation of the short-term ten-day moving average
• a roll in the ten-day moving average, the first since mid-November 2011, then a harbinger of a very short-term seven-day but also precipitous decline in the index itself.

Happily, the Dow Jones Transportation Average was the only major equity index that we track then suffering any discernible technical damage, but in light of both its deep cyclicality and leadership in the earliest phases of the rally off the lows established early last October, we wondered whether the deterioration in the Transports could represent a telltale technical sign of a broader pause or pullback in a market that had enjoyed such a strong and only briefly interrupted four-to-five month surge.

THE DESCENT CONTINUES
Unfortunately, the Transportation Average has suffered some additional technical damage since we wrote “Cyclicals Retreat.” Interim damage, doubly disturbing because it has occurred despite the rain of better-than-expected news on the U.S. economy, includes the following:

• a continued roll in the ten-day moving average, now clearly declining
• inability to absorb and overtake ten-day supply on recent rallies
• violation of the thirty-day moving average

parenthetically, the third since the launch of the four-month rally, the first, which occurred during the aforementioned seven-day drop last November, followed by four days of significant incremental weakness and therefore a ‘true’ short-term sell signal, the second, which took place approximately one month later, occurring within just a single day of a solid short-term bottom and therefore ‘false’

• construction of a short-term ‘black’ cross, the falling ten-day moving average, representing ten-day supply, meeting and violating the still rising thirty-day moving average, representing thirty-day demand.

To conclude today’s discussion of the Dow Transports, today the index is re-engaging its 50-day moving average. The 50-day moving average, which continues to trend higher and which represents more formidable support than either the ten- or the thirty-day moving averages, provided the effective technical floor on the sharp seven-day drop last November. It did the same on the shallower pullback in mid-December. Hopefully it will do so again.

DOW JONES TRANSPORTATION AVERAGE SIX-MONTH DAILYData Courtesy of Bloomberg; Annotations by Clark Yingst, Chief Market Analyst, Joseph Gunnar

DOW DIVERGENCE
None of the other major equity indices that we monitor has yet suffered any discernible technical damage. On the contrary, four of the other seven rallied to new recovery highs as recently as yesterday, Tuesday, February 21, 2012.

The four included the popular Dow Jones Industrial Average. The short-term divergence between the performances of the Dow Transports and Dow Industrials, the former, as detailed above, suffering a short-term technical breakdown, the latter posting three new recovery highs since the Transports first began to falter, is undoubtedly a concern to proponents of Dow Theory. Hopefully the divergence will be corrected through a powerful near-term resurgence in the Transports, not an eventual retreat in the Industrials. Stay tuned.

DOW TRANSPORTS VS DOW INDUSTRIALS YEAR-TO DATE DAILYData Courtesy of Bloomberg; Annotations by Clark Yingst, Chief Market Analyst, Joseph Gunnar

Analyst Certification

The views expressed in this research report reflect the opinions and personal views of Clark Yingst, Chief Market Strategist of Joseph Gunnar & Co., LLC at this particular point in time. Market volatility and economic news may at any time after this report alter the information thus affecting the opinions and personal views of Mr. Yingst. No part of compensation paid to Mr. Yingst was, is, or will be directly related to these specific recommendations.

Disclosure

Joseph Gunnar & Co.,LLC (the Firm) is a member of the Financial Industry Regulatory Authority (FINRA) and has access to other principal exchanges and is a registered U.S. Broker-Dealer. Readers are advised that this report is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy. The information is based on public sources that are believed to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of all available data. Member FINRA, MSRB, SIPC.

Investors may be itching to pull the trigger and sell their stocks, but perhaps people can take comfort in knowing that, historically, September is always the market’s worst month.

According to Marketwatch, on average the Dow Jones industrial index falls about 1.13% in September. Since 1971, the Nasdaq has fallen an average of 1.02% during the month, while since 1950, the S&P 500 has dropped an average of 0.69% in September.

As of today, though, this month has been a lot worse than the average. The S&P 500 has fallen about 7%; the DJIA is down 7.4%; Nasdaq is down 4.29%, while the S&P/TSX has dropped the most—a whopping 9.4%.

Some people believe that September is the worst month for two reasons: people come back from vacation and start trading again, and many portfolio managers sell out of losing positions because their fund companies report year ends that month.

So even if the economy wasn’t in turmoil, it’s likely your portfolio would be down. But, of course, what we’re seeing now is much different. The main reason for the late-September market dump is because the Federal Reserve announced that it would, once again, purchase long-term Treasury bonds, about $400-billion dollars worth. It’s also selling more short-term government debt.

The U.S. government has done this twice before and it hasn’t had the positive economic impact that most people had hoped. So when the Fed announced on Sept. 21 that it was buying more bonds, it didn’t help assuage anyone’s fears. In fact, it made people more nervous—many think the U.S. is grasping for solutions to its economic woes.

Clark Yingst, chief market analyst with investment firm Joseph Gunnar told The New York Times that improving access to cheap credit—the bond buy has pushed long-term interest rates lower—may not even be the problem. Lower interest rates, he says, could make banks want to lend less.

“It could backfire,” he told the Times.

With Europe’s economic crisis worsening too—Italy was just downgraded by S&P and many people seem to think Greece is on the verge of default—it’s anyone’s guess as to whether the coming months will be even worse than this September.

If history’s any indication though, be prepared for a dismal October. It’s the month that’s seen the largest market crashes.

On Oct. 29, 1929, the Dow fell by 12.8%, starting the depression. On Oct. 19, 1987, the Dow fell 22.6%. Incredibly, North American markets also crashed in October 2008—between Oct. 6 and 10 the Dow fell about 18%.

So hang on to your stocks, it’s likely the bumpy ride won’t be over for a while—at least until November.

U.S. stock indexes lost more than 3 percent of their value, as the Dow Jones Industrial Average plummeted 3.51 percent to 10,733.83 and the S&P 500 fell 3.19 percent. With new data pouring in suggesting that China’s growth is slowing and Europe may be entering a recession, investors panicked, pushing equities and commodities such as gold and oil downward.

Many investors had entertained modest hopes for Federal Reserve action that would help the global economy avoid a possible recession. But disappointed by the broad outline of the Fed’s program to shift its portfolio toward longer-term securities, dubbed Operation Twist, they retreated as they became increasingly convinced that the global economy is headed for a slowdown.

“Europe is going through their Lehman Brothers moment now,” said Philip J. Orlando, chief equity market strategist at Federated Investors.

Hedge funds led the global sell-off on Wednesday and Thursday, since they are “absolutely certain that we’re already in a double-dip recession,” Orlando said. He added that the markets have been swinging further up and down this past summer because investors are caught in a “tug-of-war” deciding between whether the economy is experiencing slow growth or a double-dip recession.

New data showed that business activity in the European Union is contracting, increasing the likelihood of a double-dip recession in Europe. In response, major European stock indices plummeted 5 percent on Thursday.

Europe probably is about to enter a recession that will drag down on growth in the United States, said Gus Faucher, director of macroeconomics at Moody’s Analytics. He said that a recession in Europe would tighten lending from European banks to American companies, reduce American exports to Europe, and bring down U.S. stock prices, spurring American consumers to spend less because they would be more nervous about the economy.

China, an engine of global economic growth, also appears to be in retreat. Recent data revealed that China’s manufacturing sector seems to be contracting, fueling fears that China’s overall economy is slowing as China’s central bank tightens the money supply.

Investors are nervous about the prospect of a slowdown in China, since China has largely fueled global growth with its increasing demand for goods and services, Faucher said. “As growth in China weakens, then yes, I think we could have a substantial global slowdown,” he said.

Stocks started to plummet on Wednesday after the Federal Reserve released a report noting that there are “significant downside risks” to the American economy — sending stocks reeling.

“Given the fragile state of the markets, I think investors were hoping for something a little more out of the box from the Fed,” said Anthony Valeri, markets strategist for fixed income with LPL Financial.

While investors hoped that the Fed would announce more drastic action to alleviate the slowing economy, stocks started to plummet after the Fed announcement, and the Fed’s decision to shift its portfolio toward longer-term securities would not have a “material impact” on the economy, Valeri said. But he emphasized that the markets are being driven primarily by “economic data” indicating a global slowdown.

Investors wondered why the Fed would release such a gloomy statement without announcing more drastic action to stimulate the economy, said Clark Yingst, chief market analyst for the investment firm Joseph Gunnar.

As investors grapple with a potential slowdown in Europe and Asia, the likely direction for the stock market may be further down. Mark Vitner, senior economist at Wells Fargo Securities, said of the stock market, “I think we’re headed down for a while.”

Markets dropped sharply Friday as rumors of a possible Greek default circled the globe. The default could come as early as this weekend. Whether or not something happens in Greece will largely rule market sentiment as the market opens in New York Monday.

“I think if we don’t hear anything on Greece, there could be a relief rally on Monday,” says Sam Ginzburg, head of capital markets at First New York.

Investors sold stocks Friday in fear that Athens may not get its next installment of bailout money from the European Union, International Monetary Fund and European Central Bank and that the bankruptcy could come to light over the weekend.

Europe’s debt crisis: 5 things you need to know

Meanwhile investors continue to cling to any reading on the fragile state of the economy. On Thursday, the Commerce Department will release the consumer price index, the government’s main inflation gauge.

The CPI index will be the final reading on inflation ahead of the two-day meeting of the Federal Reserve beginning September 20. Investors are betting that if the U.S. economy shows evidence of deflation, the Fed may be more willing to take steps to shore up the economy.

Investors could bid up stock prices if they expect the Fed to introduce another round of bond buying, or so-called QE3, after the meeting. According to minutes from the previous Fed meeting, the three so-called inflation doves dissented against Fed intervention because the U.S. economy showed signs of a healthy rate of inflation.

“The market wants to handicap every event so they might take any indication of deflation or no inflation as a sign that dissent within the Fed won’t be significant,” says Clark Yingst, chief market analyst at Joseph Gunnar.

Stocks ended sharply lower Friday, as bad news out of Europe kept piling up. The day’s steep losses pushed all three indexes to end in the red for the week. The Dow declined more than 2%, the S&P fell 1.7% and the Nasdaq slipped 0.5%.The sell-off triggered the sixth weekly decline in seven weeks for the Dow and S&P 500.

On the docket

One thing investors should bet on: continued volatility. “The market is in a really binary situation. Investors think the world is going to get better or worse,” says Ginzburg. “Macro factors and psychology are the most important factors for investors right now and are more important than the fundamentals of any one company.”

Monday: Investors will anxiously await Bank of America (BAC, Fortune 500) CEO Brian Moynihan’s 9 a.m. presentation at the Barclays investors conference in New York for any insights into the bank’s plans.

Tuesday: A report on August’s import and export prices is due in the morning.

Big-box retailer Best Buy (BBY, Fortune 500) will report quarterly earnings before the opening bell.

Wednesday: The Producer Price Index, a measure of wholesale inflation, is due out from the Commerce Department ahead of the opening bell. The index is expected to have stayed the same in August after rising 0.2% in July. The so-called core PPI, which strips out volatile food and energy prices, is expected to have risen 0.2% after increasing 0.4% the previous month.

Economists expect the Commerce Department to report that retail sales rose 0.2% in August after a 0.5% rise the previous month, according to consensus estimates gathered by Briefing.com. Sales excluding volatile autos are expected to have ticked up 0.3%.

No ‘F’ in VIX. It measures volatility, not fear.

The July reading on business inventories, due from the government later in the morning, is likely to show an increase of 0.5%.

Thursday: The U.S. consumer price index is expected to show that prices rose 0.2% in August, after rising 0.5% the previous month. Economists expect consumer prices excluding food and energy to inch up 0.2%, matching July’s uptick.

The government’s weekly report on initial claims for jobless benefits is expected to drop to 410,000, from 414,000 the previous week.

The Empire Manufacturing survey is also due before the start of trading. The regional reading on manufacturing is forecast to have risen to negative 4 in September from negative 7.7 in August, according to consensus estimates from Briefing.com.

Government data on industrial production and capacity utilization for August are also due before the market opens.

Also out at 10 a.m. ET in the morning is the Philadelphia Fed index for September, a regional reading on manufacturing. The index is forecast to fall to negative 10, up from negative 30.7 the previous month.

BlackBerry maker Research in Motion is scheduled to report earnings after the markets close.

Friday: Shortly after the opening bell, the University of Michigan will put out its initial reading on consumer sentiment in September. Economists expect the figure to move slightly higher to 56.3 up from 55.7.

“There’s that nagging thought that we can continue to have a downward spiral in Europe,” James Dunigan, chief investment officer for PNC Wealth Management, told Bloomberg News. “There’s concern of a default, of risk in banks, of a liquidity crisis. In the U.S., even as President Obama made an effort to put that plan together, there’s not a whole lot of confidence that Congress will pass.”

Clark Yingst, the chief market analyst at Joseph Gunnar, told the New York Times that positive moves in the markets earlier this week were in preparation for Obama’s announcement of a pro-jobs stimulus plan, but that “the market just doesn’t believe that it is going to be passed by that Republican House.”

In Europe, Juergen Stark, the top economist at the European Central Bank, resigned, causing a ripple of fear about possible debt default by struggling countries there. He reportedly quit because he opposed the ECB’s extensive purchases of those nations’ debt, according to the Associated Press.

With many of those countries’ bonds held by major banks throughout Europe, a default would severely hurt the continent’s economy, so the resignation of a key economist who had been fighting the moves was seen as “a bit of news that contributes to a worse outcome, so if you’re thinking of being a seller, today that’s what you are,” Andrew Goldberg, market strategist with J.P. Morgan Funds, told AP.

No matter the reason, the effects were large. Several Silicon Valley stocks tumbled with the markets Friday, including drops of more than 4 percent by Hewlett-Packard (HPQ), eBay (EBAY), Gilead, SunPower (SPWRA) and AMD. The Dow Jones industrial average closed below 11,000.

AOL CEO checks in on possible merger with Yahoo

One of the few stocks to increase on Friday was Yahoo (a scant 0.3 percent rise), but that was not because a sense of stability arrived at the Web company’s Sunnyvale headquarters.

A Bloomberg News report Friday said AOL was discussing a merger of the two companies with Yahoo advisers, with AOL CEO Tim Armstrong leading the talks.

According to the report, Armstrong made similar overtures while Bartz was at the helm, but she had no interest. Now, with Bartz out of the way, Armstrong is pushing for a deal which would have Yahoo buy AOL and install him as CEO of the merged companies.

This sort of deal has been rumored for some time, and analysts are not enthralled by the idea. As Karsten Weide, an industry analyst at IDC, told Mercury News columnist Chris O’Brien earlier this week about an AOL-Yahoo merger, “Two turkeys don’t make an eagle.”

CNBC later tweeted that Yahoo is not interested in Armstrong’s plan, but the company is obviously preparing for something, as they have been in contact with two different banks that could help manage a sale or merger for all or part of the company.

Sprint considering unlimited data for iPhone users

When Sprint begins offering the iPhone next month, it will offer unlimited data plans for $99.99 a month in order to distinguish itself from bigger rivals AT&T and Verizon, according to a report.

Verizon and AT&T both cap data usage and charge different amounts depending on how much their customers use the device. Sprint, which has not turned a profit in more than a year, wants to offer something better to users in their long-awaited entry into the market for the popular Apple (AAPL) smartphone, Bloomberg reported.

Will the tactic succeed?

“The advantage of unlimited is, it’s cheaper for the big users,” said Peter Rhamey, an analyst at Bank of Montreal. “Consumers will pay a premium for unlimited.”

Silicon Valley tech stocks

Up: Yahoo

Down: Hewlett-Packard, eBay, Gilead, SunPower, AMD, Electronic Arts (ERTS), Cisco (CSCO), Oracle (ORCL), Google (GOOG), Apple

The tech-heavy Nasdaq composite index: Down 61.15, or 2.42 percent, to 2,467.99

The blue chip Dow Jones industrial average: Down 303.68, or 2.69 percent, to 10,992.13

And the widely watched Standard & Poor’s 500 index: Down 31.67, or 2.67 percent, to 1,154.23