Stocks sold off on a broad front on Thursday following an earnings disappointment from Walmart (WMT) and a word of caution from a major hedge-fund manager.
Walmart fell 2.4%, leading the Dow Jones Industrial Average to a loss of 1%, after the giant retailer reported earnings that missed Wall Street’s target and sales that declined for the fifth consecutive quarter. The retailer’s forecast for the current quarter also came in below projections.
Meanwhile, David Tepper, founder of $20 billion hedge fund Appaloosa Management LP, said that he favored some cash and that “this is the time to preserve money.”
The small caps started yesterday as the most heavily sold sector. But by the close, the Russell 2000 — the index that most closely represents small-cap stocks — regained much of its early losses and closed lower by 0.7%.
Economic data was generally better than expected: Initial claims fell to 297,000 vs. Briefing.com’s estimate that claims would increase to 325,000. Consumer prices increased 0.3% in April, up from a 0.2% increase in March. The Empire Manufacturing Survey for May was 19 — a four-year high — vs. an expected 4.8. But the Philly Fed’s Business Outlook showed a slight deceleration of manufacturing growth in May. Most important, the May NAHB Housing Index fell to 45, missing expectations of 48.
At the close, the Dow Jones Industrial Average fell 167 points to 16,447, the S&P 500 lost 18 points to finish at 1871 and the Nasdaq fell 31 points to 4069. The primary NYSE market traded 750 million shares with total volume of 3.5 billion shares, while the Nasdaq crossed just over 2 billion shares. Decliners topped advancers by a ratio of about 2.2-to-1 on both major exchanges.
The Dow Jones Industrial Average still is (barely) holding above its 50-day moving average at 16,402. Resistance is at 16,576 and support at 16,175. There also is a support line at 16,015, just above its 200-day moving average at 15,878. On Thursday, the MACD indicator flashed a short-term sell signal.
The Russell 2000 escaped a breakdown by the hair of a bear on Thursday. It closed at 1095.87, which is above the support line at 1094, the closing low of February. Resistance to an advance starts at the 200-day moving average at 1117, then the resistance line at 1134.
Conclusion
The two very different-looking charts illustrate the struggle being fought over the next direction of the market.
The bulls say that a Dow Theory buy signal has been confirmed and that the theory has a 90%-plus record of accuracy. They also point to the enormous advance in technology stocks in February and last year, and so we should expect some “retracement to the norm.” And they are heartened by the late buying yesterday that rescued the Russell 2000 from a close below the February low close of 1,094.
The bears have another point of view: They point to the tepid economic data and the falling interest rates that prove to them that stock sales are being put into bonds. They also point out that the small- and mid-cap stocks should lead the way to new highs, indicating a healthy market in which buyers’ optimism prevails. And finally they would point out that in the last two weeks, downside volume has exceeded volume on the upside.
Both points of view are worth considering. However, the overriding, fundamental rule is that investors should always follow the major trend — and that is up. The bull might have slowed down, and it might even even injured … but it’s not dead.
Still, the last two days should shake the optimism of the most optimistic bull.
Cash is still king, and the accumulation of it should be our priority until a clear vision of the short and intermediate trends evolve.
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.
