Much of last week’s angst over falling bond prices and fear of a Federal Reserve change from an easy money policy led to a broad market decline on Monday.
There was little in the way of news on which to focus, but a new probe of banks and their foreign policies led to selling in the financial sector. Other interest rate sensitive sectors like housing, construction and utilities underperformed.
At Monday’s close, the Dow Jones Industrial Average was off 71 points at 15,011, the S&P 500 fell 10 points to 1,646, and the Nasdaq lost 14 points at 3,589. The NYSE traded 640 million shares and the Nasdaq crossed 342 million. Decliners outpaced advancers on the Big Board by 4.4-to-1 and on the Nasdaq by 2.3-to-1.
The S&P 500 continued to fall Monday, and following the close, it is 64 points, or 3.7%, from its all-time time high made just 12 sessions ago. Those who were bullish at the top must be very frustrated since Monday’s clear penetration of the index’s 50-day moving average qualifies the August high as a “false breakout.”
And Monday’s drop also confirmed that the near-term trend is down and the intermediate-term trend is likely to be down since the 50-day moving average is generally considered to be an inflection point.
Conclusion: Monday’s price action is the coup de grace for those who expected the market to recover and break to new highs again this summer. The 20/20 nature of hindsight reveals that investors had numerous opportunities to be skeptical of the August “breakout.”
Several times, I’ve mentioned the lack of breadth, an overbought McClellan oscillator, the unlikelihood that small caps would lead to a solid advance, etc.
The downside targets of the recent breakdown were outlined in Friday’s Daily Market Outlook: “S&P 500 1,642, then 1,573 (June closing low); Dow 14,660 (June closing low); and Nasdaq 3,320 (June closing low) after penetrating its 50-day moving average at 3,533. In other words, look for a 3%-7% decline with the high-tech and small- and mid-cap stocks hurt the most. It is time for defensive strategies since a pullback of this extent could be followed by a period of consolidation that may last for several months.”
Other technicians with high credentials, like Jeffrey Saut of Raymond James, expect a full 10% correction and look for a downside target of 1,560 to 1,530 on the S&P 500.
Today, however, with many of our internal indicators oversold (McClellan oscillator, MACD, etc.), I look for a weak bounce followed by a resumption of an intermediate correction. Thus, traders should sell into rallies.
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.