Market Stalling Out

Stocks are grossly overbought and in need of a correction

   
Market Stalling Out

Buyers and sellers jousted yesterday in a session marked by a mere 70-point spread on the Dow Industrials. The opening belonged to the bears, but then buyers drove prices back to a modest gain, which held for most of the morning. With little in the way of news to bolster prices, profit-taking then drove the Dow down 60 points from 3 p.m. to 3:30 p.m. But just as it began to look nasty, the cavalry arrived and buyers cut the damage by more than half, leaving the Dow with only a fractional loss for the day.

Most of the weakness yesterday was due to losses in the financial sector. Like the broad market, the financials started strong, but by the close they were off by almost 1%. More talk of a banking crisis in Ireland and the selling of bank stocks in Europe drove the major exchanges there to a minus and had a direct impact on the financials here. JPMorgan Chase & Co. (NYSE: JPM) fell 2.2%, and Bank of America Corporation (NYSE: BAC) was off 1.2%. 

Energy stocks rose with 35 of the 39 stocks in the sector closing higher. The gains were attributed to lower stockpiles of crude oil, which drove crude prices higher. Sunoco, Inc. (NYSE: SUN) rose 3.4%, Chevron Corporation (NYSE: CVX) gained 0.5%, and BP Plc (NYSE: BP) rose 1.8%. Exxon Mobil Corporation (NYSE: XOM) and Murphy Oil Corporation (NYSE: MUR) closed fractionally lower.

Following a comment by Philly Fed President Charles Plosser that he does not favor additional asset purchases, Treasury bonds sagged. The benchmark 10-year note’s yield rose to 2.506%. 

The greenback fell to an eight-month low, finishing off 0.3% against a basket of currencies. 

At the close, the Dow Jones Industrial Average closed 23 points lower at 10,835, the S&P 500 fell 3 points to 1,145, and the Nasdaq fell 3 points to 2,377. 

The NYSE traded just over 1 billion shares, and the Nasdaq crossed 603 million shares. Advancers on both exchanges exceeded decliners by a slight margin.

Crude oil for delivery in November rose $1.68 to settle at $77.86 a barrel on a drop in fuel inventories. The Energy Select Sector SPDR (NYSE: XLE) gained 59 cents to $56.04. 

December gold rose $2 to $1,310.30 an ounce, and the PHLX Gold/Silver Sector Index (NASDAQ: XAU) closed at 198.94 for a loss of 0.37 points.

What the Markets Are Saying

For almost five months, investors were frustrated by a range-bound market that was marked by support at 1,040 and resistance at 1,130. So, on Sept. 21, when the S&P 500 finally pierced 1,130 with a close at 1,142, it seemed to some that stocks were off to the races.

That, of course, did not happen. Instead of a rush of buyers, which normally accompanies a successful breakout, the market settled into a narrow channel with support at 1,130 and resistance at 1,150.  

Tuesday’s range, with a low of 1,132 and a high of 1,150, almost perfectly fit into the channel. And yesterday’s lethargic trading, with a high of 1,149 and a low of 1,140, gives rise to the notion that the engine may have run out of fuel.

But the reason for the stall is understandable. After months of slugging it out in a broad range, buyers entered what is traditionally the toughest month of the year and managed to put together a remarkable series of advances. The round of buying resulted in the most successful September in over 70 years with direct impact on the near-term and intermediate-term trends of the broad market, both of which are now positive.

With such a successful run, our internal indicators — Moving Average Convergence/Divergence (MACD), stochastic, Relative Strength Index (RSI) and momentum — are now grossly overbought and in need of a correction.

The sentiment numbers for this week from one of my favorite sources, the AAII Sentiment Survey, is not yet available, but another reliable service, Investors Intelligence (II), yesterday produced their survey of advisers. Like the AAII study, it is a reverse or “contra” indicator, i.e., higher is bad, lower is good. II reports that bullish advisor sentiment has moved higher for the fourth consecutive week. The current reading is 43.3% from 41.4% last week and 29.4% four weeks ago. The bearish reading fell to 27.8% from 29.3% last week and from 37.7% four weeks ago. This tells us that the likelihood of a correction is now very high and is in agreement with our four internal indicators.

So far, this year has produced a very “technical market,” i.e., the daily bar charts of the indices have been very helpful by producing visually meaningful resistance and support zones. Coupled with the traditional analysis of the internal and sentiment indicators, this has led to a higher degree of predictability for traders who follow this method. But the market has generally confounded the “momentum” players. These programs include point-and-figure and some types of candlestick analysis.

In the Daily Market Outlook and Trade of the Day I use traditional chart analysis coupled with internal and sentiment indicators. Is it always accurate? Emphatically no! But it does give both the trader and long-term investor an edge by providing a model of acceptable probabilities. That model is now telling investors to hold back on long-term investments until the long-term trend is up. And it is telling the trader that short-term positions on the bearish side will more likely be rewarded than on the long (buy) side.

On Wednesday, I asked our readers to render insights on a Seeking Alpha article titled, “The Only Reason Stocks Have Rallied.” Thanks to all who responded with many scholarly and insightful e-mails. However, they are simply overwhelming in both quantity and quality, and it will take me some time to read them all. Next week I will attempt to condense them and report some of the most thoughtful analysis.

To get a top dividend stock to buy, see the Trade of the Day.

Today’s Trading Landscape

Earnings to be reported before the opening include: CRA International and McCormick.

Earnings to be reported after the close include: Accenture, AZZ, Christopher & Banks, Demandtec, Lawson Software, Resources Connect and Smart Modular Technologies.

Economic reports due: GDP (the consensus expects 1.6%), jobless claims (the consensus expects 459,000), corporate profits, Chicago PMI (the consensus expects 56), EIA natural gas report, Fed balance sheet and money supply.

If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.

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Article printed from InvestorPlace Media, http://investorplace.com/2010/09/market-analysis-market-stalling-out/.

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