After two weeks of oddly persistent gains carrying the Dow and S&P 500 into record high territory, the market’s vulnerability to at least some mild profit-taking finally reared its head on Wednesday. With the exception of the energy sector, all sectors ended the session in the red.
The catalyst for the pullback was primarily the World Bank’s updated outlook for global growth. The organization initially planned on global economic growth of 3.2% for 2014, but dialed its enthusiasm down to a growth forecast of only 2.8%.
Even so, investors’ response to the news was only half-heartedly dire. The biggest loser of any consequence was Bank of America (BAC) with a 2.1% sell-off, and that had to do with settlement negotiations with the Department of Justice regarding mortgage investments a hitting a roadblock.
The S&P 500 fell 0.35% to close at 1,944. The Nasdaq Composite lost 0.14% to end the session at 4,332. The Russell 2000 closed at 1,167, off 0.51%. And the Dow Jones Industrial Average was surprisingly the biggest loser, closing 102 points lower (-0.6%) to end the day at 16,844.
Breadth and depth weren’t as bearish as the losses would imply. The NYSE decliner/advancer ratio rolled in at 1.34-to-1, with the down-volume/up-volume ratio reading a comparable 1.63-to-1. The Nasdaq saw even more tempered breadth and depth. Its decliner/advancer ratio came in at 1.59-to-1, with more bullish volume than bearish volume for the day. The Nasdaq’s up-volume/down-volume ratio ended the session at 1.04-to-1.
While few would deny the recent rally has left stocks riper for a corrective move, Wednesday’s action wasn’t exactly a sign of impending doom. It’s possible we could see a very soft landing not too far from where the indices peaked on Monday.
Though all the indices are due for a correction of some sort, it’s the Russell 2000 that’s developing the most likely technical floor that could bring a quick end to any selling effort.
The 20-day and 50-day moving averages are close to converging at 1,132, and the 200-day moving average is resting just below that at 1,125. The bulls should put up a fight there, and though it remains to be seen if the 1,125/1,132 zone is going to hold up as a floor, the convergence of all those lines makes for the best support area — aside from 1,080 — the Russell 2000 has seen in weeks.
The most plausible floor for the S&P 500 here is the 1,900 area. That level was a key ceiling in April and May, and by the time it could be tested by a sell-off, the 50-day moving average line should be in that area as well. Should that level fail to hold up as support, the next floor is 1,850. First things first though.
Conclusion: This is clearly a tough time to be a true short-term trader. Common sense and the law of averages say that after 32 months of avoiding a 10% (or more) correction, the S&P 500 is due. The fact that the index is so technically overbought at this point suggests now would be a prime time for one.
Yet, even a bad day for the market wasn’t that bad. The volume behind the selling was relatively light, and there are several routes stocks could still take to minimize the downside. It all depends on what happens at the aforementioned support levels.
For the time being, it is best to stay on the sidelines. There’s a pretty good chance some bulls could interpret Wednesday’s not-so-bearish day as a sign that the bulls are still in charge, and they may try to rekindle the rally on Thursday. While that’s probably a lost cause until we get a sharp tumble to hit the market’s reset button, we don’t want to sell/short against the last of the straggling bulls who are going to try and re-inflate the recent euphoria.
In the bigger picture, it looks like we’re poised to fall back to the floors discussed above before making any meaningfully higher highs.
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.
