Japan’s Nikkei plunged 7.3% Thursday, and other world markets fell following comments from Fed Chairman Ben Bernanke on Wednesday. Weak Chinese manufacturing data also contributed to panic selling in both stocks and bonds. But although U.S. stocks opened lower, with the Dow industrials initially off more than 125 points, a recovery erased much of the losses and many speculative stocks showed gains.
At Thursday’s close, the Dow Jones Industrial Average was off 13 points at 15,295, the S&P 500 fell 5 points to 1,651, and the Nasdaq lost 4 points at 3,459. The NYSE traded 852 million shares and the Nasdaq crossed 456 million. Decliners outpaced advancers on the Big Board by 1.5-to-1, but on the Nasdaq, advancers were ahead by 1.1-to-1.
Wednesday’s sell-off found support at the S&P 500′s 1,650 line, and Thursday closed at that important line. A further penetration could find support at the 20-day moving average. But more likely, it would first test Thursday’s low at 1,635, and if that failed, plunge to the bull channel’s support line and 50-day moving average at 1,590. MACD is turning down but has not issued a sell signal.
If the S&P 500 turns north from Thursday’s close, the similarity between Wednesday’s key reversal day (KRD) and the KRD of February will be strong and probably result in a test of Wednesday’s all-time high at 1,687.
The Dow Jones Utility Average has broken down. Wednesday’s dramatic plunge through the index’s primary trendline and 50-day moving average, and the resulting MACD bearish fall, should be a warning to income-oriented investors.
When the Fed threatens to raise rates, both income-oriented stocks and bonds will feel the heat. Thus far, the index has experienced a mild retreat compared to what will happen if the Fed cuts bond purchases.
Conclusion: May is traditionally one of the worst months of the year for stocks; however, this year it ended with the bull market intact and suffered only minor damage from selling in the last days of the month. That being said, volatility has increased, illustrated by the CBOE Volatility Index (VIX), which hit 15 Thursday — a significant increase from the low of 12.26 last Friday.
High volatility often follows a major advance. This creates uncertainty, and uncertainty leads to profit-taking. Thus, the first shot has been fired across the bow of the bull market. And so, traders and investors alike should add a measure of caution to investment decisions as we enter the summer months.
My guess is that we have seen the highs of the summer and that the markets will turn lower but hold at the support lines of the bull channels of the S&P 500 and the Dow industrials. This could make for some interesting trading opportunities for those who are adept at it. But investors should be cautious and only buy at significant support zones.
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.