While the bulls may have been willing to make a modest pushback effort on Wednesday, they weren’t as keen to fight the tape Thursday. Stocks suffered their biggest blow in nearly a month and on relatively solid volume. The only sectors to eke out gains were utilities and energy.
The most significant reason for the pullback remains the simple fact that stocks are still overbought and ripe for profit-taking. Traders, however, used disappointing retail sales figures for May as the justification to shed stocks. Retail sales were only up 0.3%, missing expectations of 0.6%, while core retail sales (ex auto and gas) were flat versus expectations of a 0.4% increase.
Initial unemployment claims for the week ending June 7 totaled 317,000, which was a tad higher than the previous week’s 313,000. Ongoing unemployment claims inched higher, from 2.603 million to 2.614 million for the week ending May 31. Both data sets have been at stable levels for several weeks now.
At the close, the S&P 500 declined 14 points to 1,930 (-0.7%), the Dow Jones Industrial Average gave up 110 points at 16,734 (-0.7%), and the Nasdaq Composite was off 34 points at 4,298 (-0.8%).
Volume and breadth were as bearish as the market’s losses would imply. The Big Board saw 1.38 decliners for every advancing issue, and the down/up volume ratio rolled in at 2.24-to-1. The Nasdaq’s decline/advance reading was 1.86-to-1, with a down/up volume ratio of 2.03-to-1. Total volume for the NYSE was the most we’d seen since May 16.
While Thursday’s action may have been the most dramatic activity traders have seen in a while, when all was said and done, we are still no closer to a bullish pivot or a significant breakdown than we were the day before.
To give credit where it’s due, an InvestorPlace reader summed up the current situation as concisely yet as completely as is merited at this point, explaining the market is “too bullish to go down and too far overbought to go up.”Fortunately, the market is capable (though it remains to be seen if it’s willing) of solving both of those problems by the time we get to a key inflection point.
I mentioned yesterday that one of the more salient inflection points was the Russell 2000′s floor near 1,134, where its 20-day and 50-day moving averages have converged. The small-cap index would need to slide 25 points lower – a 2.2% tumble – to get there. Such a move would constitute a 4% pullback from Monday’s peak, which in the current environment could be seen as enough of a correction to merit another round of buying.
Although it’s indecisive, the reality is nobody really knows what’s going to happen if and when the Russell revisits 1,134; we just know something significant should start there.
The Dow Jones Industrial Average has a comparable floor near 16,544 – and rising fast. That’s the combination of an intermediate-term support line and the 50-day moving average. The Dow still has 189 points to play with between here and there, or about 1.1% of its current value. Based on momentum and a growing degree of doubt about the market’s near-term prospects, odds are good it will use all of that room to test the potential floor.
Conclusion: From a market technician’s perspective, stocks are presently in a proverbial no-man’s land. There are no strong technical indications pointing stocks in either direction. While opinions from both sides of the table remain strong, conviction from both sides of the table is weak. Most investors seem to be waiting for greater clarity, and in so doing, are causing the very lack of clarity that vexes them.
From a market realist’s perspective, however, 32 months of a significant-correction-free rally doesn’t exactly establish a cushion of safety, particularly when the economic data continues to roll in at levels less than hoped. That’s the indirect way of saying, in the current situation, should the Dow move under 16,545 and/or the Russell 2000 move below 1,134, things are apt to unravel on a slightly bigger scale – and at a slightly faster pace – than we’ve seen in a while. This makes the next few days critical.
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.