“Uncertainty” was the word most often heard Wednesday following the release of the minutes of the Federal Reserve’s policy meeting in July. “Tapering,” the gradual cutting of the Fed’s bond purchase plan, will probably begin in September, according to the interpretation of the minutes.
Bonds fell in reaction to the notes, as did stocks, mainly because the injection of cash into the financial system appears to have had only a small impact on jobs growth.
The report said, “Nonetheless, the unemployment rate remained elevated, and the continuing low readings on the participation rate and the employment-to-population ratio, together with a high incidence of workers being employed part time for economic reasons, were generally seen as indicating that overall labor market conditions remained weak.”
At Wednesday’s close, the Dow Jones Industrial Average was off 105 points at 14,898, the S&P 500 fell 10 points to 1,643, and the Nasdaq lost 14 points at 3,600. The NYSE traded 657 million shares and the Nasdaq crossed 359 million. Decliners outpaced advancers on the NYSE by 2.8- to-1 and on the Nasdaq by 2.1-to-1.
The New York Stock Exchange Composite Index contains generally higher-quality stocks. But like the other higher-quality indices, the Dow 30 and the S&P 500, it too has failed to find support at the crucial 50-day moving average mark. Its next support is at the intermediate support line at around 9,200. MACD is on a sell signal.
The Dow Jones Industrial Average broke its 50-day moving average, as well as its intermediate support line five sessions ago. Wednesday’s late sell-off puts the index in line for a serious attack on the support line at 14,845, its breakout point in August. A failure to hold that line would put the 200-day moving average in its sight — and threaten the long-term bull market.
Conclusion: Technically, the better-quality stocks are facing a battery of resistance that should stymie short-term rallies. When each support line is broken, that line then becomes a resistance line — a place which has proven to be where sellers lurk. In addition, the overall configuration of the Dow is taking on the form of a broad topping process that would be complete with a close under 14,845.
In his recent Street Smart Report, Sy Harding referred to another excellent technician, Mark Hulbert, who sees three signs of a market top:
First, the S&P 500 is up 23% in the last 12 months. Most bull markets top at over 21%.
Next, one of the most striking patterns about the month leading to a top is that the “riskiest stocks far outperform conservative ones.” We’ve discussed that at length in this column.
Finally, he mentions Warren Buffett’s favorite measure of market valuation — market capitalization versus GDP. In July, it reached 118%. The last times it went over 100% were in 1999 and 2007.
I, like Sy, don’t believe that we are beginning a bear market, although as he puts it, “But the risk is as high as in 2000 and 2007.” Ouch!
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.