The Dow industrials managed to squeak by with a small gain on Tuesday, but small- and mid-cap stocks closed lower following an expression of caution by Federal Reserve Chair Janet Yellen. While the Dow gained 0.03%, the Nasdaq fell 0.5%, and the Russell 2000 lost 1%.
Some compared Yellen’s words to Alan Greenspan’s now-famous “irrational exuberance” statement, but that was made almost three years prior to a major top. She, however, seemed to indicate that the Fed was in no rush to raise interest rates saying, “Given the economic situation that I just described, we judge that a high degree of monetary policy accommodation remains appropriate.”
She singled out biotechs and social media stocks as “substantially stretched.” The iShares Nasdaq Biotechnology (IBB) fell 2.4% for the day.
The financial sector rose following better-than-expected earnings from Goldman Sachs (GS), which was up 1.3%, and JPMorgan Chase (JPM), up 3.5%. But the advance of one sector was not enough to keep the S&P 500 in the black.
The leading index again was the Dow Jones Transportation Average, up 0.4%, led by JB Hunt Transport Services (JBHT), which rose 3.6% after reporting in-line earnings.
Retail sales were up 0.2% in June versus an expected 0.6%. The Empire State Manufacturing Survey for July climbed to 25.6, ahead of forecasts for 17.3, and business inventories increased 0.5% in May versus an expected 0.6%. None of the reports had an impact on the market.
At Tuesday’s close, the Dow Jones Industrial Average rose 5 points to 17,061, the S&P 500 fell 4 points to 1,973, and the Nasdaq lost 24 points at 4,416. The NYSE’s primary market traded 716 million shares with total volume of 3.3 billion shares, and the Nasdaq crossed 1.8 billion shares. Decliners outpaced advancers on the Big Board by 1.8-to-1, and on the Nasdaq, decliners were ahead by a ratio of 2.6-to-1.
Yellen’s remarks drove the Russell 2000 to its second test of the 50-day moving average at 1,151. MACD is now somewhat oversold, but it could become slightly more oversold with a drive down to its 200-day moving average at 1,140. Note the three other oversold readings of MACD in February, March and April.
The failure of the Russell 2000 to make a new closing high on July 3 by just half a point was enough to result in the current decline.
The failure of the mid- and small-cap stocks is likely to lead to more selling, but be prepared for a reversal between the Russell’s 200-day moving average at 1,140 and the 50-day moving average at 1,151.
Even though the small caps are selling at about 20 times earnings, an extremely overbought number for small caps has traditionally been in the high 20s. Thus, be on the lookout for bargains, especially in the now oversold biotech sector.
The Fed’s new statement of “overexuberance” could provide speculators with some unexpectedly low prices in what has been a light-volume and equally low-volatility environment.
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.