On Monday, a combination of weakness in technology stocks and problems in Italy and Spain led to the first triple-digit decline in the Dow since Dec. 28. In Spain, Prime Minister Mariano Rajoy and others in his party were reported by the country’s largest newspaper to allegedly be involved in a kickback scheme. And Italy appears to be facing a new banking crisis. Italy’s stock market fell 4.5% and Spain’s IBEX lost 3.8%. In contrast, our correction of just 1.15% in the S&P 500 looks tame.
At Monday’s close, the Dow Jones Industrial Average was off 130 points to 13,880, the S&P 500 fell 17 points to 1,496, and the Nasdaq was down 48 points to 3,131. The NYSE traded 694 million shares and the Nasdaq crossed 462 million. On both the Big Board and Nasdaq, decliners outpaced advancers by 3.4-to-1.
The CBOE Volatility Index (VIX) popped almost 14 points Monday for the biggest rise in fear this year. However, the jump appears to be more of a knee-jerk reaction after languishing at under 13 for almost one week than a real threat by the bears. At least we now know that the bears have a pulse. A pop into the 18-20 range would cause some concern, but at this stage, that appears unlikely.
After a jump of over 6% in one month, with only one very slight correction, it is time to take a rest. MACD issued a short-term sell signal Monday for the first real evidence that a minor pullback could be under way. The first support for profit-taking is at 1,485 (20-day moving average), followed by the support line at 1,475, and finally, at 1,448 (50-day moving average).
Conclusion: I mentioned previously that the Nasdaq’s MACD was in bearish territory but appeared to be turning up. Actually, the Nasdaq is still in bearish territory and it now appears that was the first hint that a round of profit-taking was about to occur.
You have to feel just a bit sad for the small-cap folks. The Russell 2000 came so close to breaking out, but is now 66 points from the September high. However, it is only a matter of time before the index gets another shot at a breakout.
Minor corrections are an advantage to traders and investors alike. It appears that Monday’s reversal on the S&P 500 from five-year highs could last a week or two. But the underpinnings of the bull market are strong and are buoyed by a powerful January run of buying. You just can’t sustain that sort of strength forever. We should welcome the opportunity to buy stocks at more reasonable levels.
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.