On Thursday, the U.S. stock markets suffered their biggest losses of the year, extending the two-day loss for the S&P 500 to 3.9%. Worry over the Fed’s timing on reducing its stimulus efforts led the list of concerns. But the probable departure of Fed Chairman Ben Bernanke and his replacement’s policies also added a measure of uncertainty.
The yield on the 10-year Treasury note reached 2.419%, the highest in 20 months. Since there is an inverse relationship between yields and prices, bond prices fell sharply.
The possibility of higher financing rates sent the building industry into a tailspin. The iShares Dow Jones US Home Construction (ITB) fell 5.7%. And some of the most defensive, income-oriented groups were hit the hardest: Utilities fell 2.9%, health care was down 2.6%, and consumer staples dropped 3%.
At Thursday’s close, the Dow Jones Industrial Average was off 354 points at 14,758, the S&P 500 fell 41 points to 1,588, and the Nasdaq lost 79 points at 3,365. The NYSE traded 1.1 billion shares and the Nasdaq crossed 531 million. On the Big Board, decliners outnumbered advancers by 12-to-1, and on the Nasdaq, decliners were ahead by 5.9-to-1.
The S&P 500 fell 2.5% Thursday, breaking its intermediate support line and 50-day moving average at 1,618. The next support for the index is the line at 1,540. A decline to that line would be 8.7% from the May high at 1,687 — just an average correction.
The Dow industrials’ chart looks much like the S&P 500′s chart. The index has broken its intermediate trendline and 50-day moving average. The next support for the Dow is at the round number of 14,500. A decline from the May high at 15,521 to 14,500 would only be a 6.6% pullback.
Conclusion: The emotional disappointment over the Fed’s hints of putting the economy on its own support system seems excessive. However, technically, both of the above charts show a series of lower highs and lower lows. And so whether we can explain it in logical terms or not, both indices have turned bearish for the intermediate term.
Traders and investors alike should not ignore this warning, and should raise and hold cash until the next buying opportunity surfaces. That opportunity could be at the S&P 500′s support line at 1,540 and the Dow’s support line at 14,500.
However, even if the market suddenly falls to those levels, it is prudent to wait for prices to stabilize and form a bottom before becoming an aggressive buyer. Yes, it is going to be a long, hot summer. But by being patient we could get an opportunity to obtain some outstanding bargains since the long-term bull market is still intact.
Exception: Extreme reactions to Fed announcements can be overly emotional, so yesterday’s selling could have been overdone. Thus, if the market executes a key reversal day up today — a remote possibility — all bets on the downside are off.
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.