On Wednesday, stocks opened slightly higher but quickly turned lower on news that Israel had killed the top Hamas leader. The turn lower accelerated on news of further European economic weakness and dropped sharply following “the tough stance taken by President Obama” (The Wall Street Journal) at his news conference.
Little progress was seen in the negotiations to avoid the fiscal cliff, and stocks descended into a downward spiral with the Dow Jones Industrial Average falling 185 points to 12,571. The S&P 500 lost 19 points at 1,355, and the Nasdaq fell 37 points to close at 2,847. The NYSE traded 829 million shares and the Nasdaq crossed 503 million. Decliners outpaced advancers by 8.7-to-1 on the NYSE and by 3.8-to-1 on the Nasdaq, but of greater significance is the fact that downside volume was ahead by 11.2-to-1.
The impact of the fiscal cliff negotiations can be seen in the chart of the Dow Jones Utility Average. This normally plodding index of relatively high-yielding securities is down 11.7% from its late July high, which is more than the Dow industrials, which are off 8%, or Dow Jones Transportation Average, which is down 9%. And it has even fallen more than the relatively speculative Nasdaq, which is off 10.9% from its high.
The Dow Jones Utility Average is now oversold. Note the lowest RSI reading of the year, which is now at the very oversold solid blue line at the bottom.
This weekly chart of the Dow Jones Utility Average shows that even though the index has had a steady advance, it has also had a series of “corrections.” The bear market of 2007-2009 resulted in a decline of 48% for utility stocks. Since then, corrections in Q2 of 2010 and the “flash crash” of 2011 illustrate the vulnerability of what are normally considered stable equities.
Conclusion: Wednesday’s 185-point decline in the Dow Jones Industrial Average and the continuation of the correction in the Dow Jones Utility Average are dramatic reactions to the great divide between the White House’s tax demands and Republican resistance.
The Dow industrials closed just above the first support at the June-July line from 12,450-12,522, and the target of the head-and-shoulders breakdown at 12,419 (see Nov. 13 Daily Market Outlook).
The impact on long-term investors seeking above-average yield from utility portfolios is huge. However, we should also note that every decline in this sector has offered investors a great buying opportunity — and the current decline is no different.
Even if dividends were to be taxed at 25% rather than 15% and profits for the stocks declined, there seems little to justify this sell-off. In several days, I will offer a list of quality utilities at bargain prices.
Note: I always enjoy our readers’ comments. However, the recent discussions have been more political than I’d like to see. Please confine your responses to technical issues so that we may all benefit from insightful commentary on the markets.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.