A Market Bottom? Not Quite!

by Sam Collins | August 7, 2014 6:52 am

Stocks had a flat day of trading Wednesday as concern over the lack of growth in the euro-zone dominated the early news. And later, the threat of a Russian invasion of Ukraine stifled afternoon action.

German manufacturing orders widely missed estimates, and data showed that Italy slipped back into recession, according to The Wall Street Journal. The Stoxx Europe 600 closed with a 0.9% decline.

Two potential mergers were called off: 21st Century Fox (FOXA[1]) terminated its talks with Time Warner (TWX[2]), and Sprint (S[3]) withdrew its offer for T-Mobile (TMUS[4]). But Walgreen (WAG[5]) decided to go ahead with the purchase of the 55% remaining shares of in Alliance Boots, and it will not move its headquarters from the U.S. WAG fell almost 12%.

Gold futures rose 1.8%, and the yield on the 10-year Treasury note fell 2 basis points to 2.47%, the lowest yield this year, according to FactSet.

At the close, the Dow Jones Industrial Average rose 14 points to 16,443, the S&P 500 had a slight gain at 1920 and the Nasdaq rose 2 points, closing at 4355. The Russell 2000 gained 4 points at 1126. The New York Stock Exchange traded total volume of 3.5 billion shares, and the Nasdaq crossed 1.8 billion shares. Advancers outpaced decliners on both major exchanges by 1.5-to-1.

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Along with a number of major indices, the S&P 500 is now grossly oversold. And serious technical damage was inflicted on the index when it plowed through the resistance zone at 1925-1951, which contained its 50-day moving average at 1,955. But this is the sixth time in a year that the S&P 500 has broken through the 50-day, and so far this breach of the 50-day is not as serious as the January/February decline. The next support for the index is at 1900, then the 200-day MA at 1861.

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Of even more concern to long-term income investors is the breach of major support on the Dow Jones Utility Average.

The chart indicates that the intermediate trend has been broken, and the long-term trend — defined as support at the 200-day moving average at 522 — is now under attack. The index broke sharply lower in May 2013, which might surprise some investors since many consider utility stocks to be conservative income-producers, while in fact the index can be volatile.

The downside break is due to an overreaction to a possible rate hike by the Fed that investors fear could arrive this year.

Conclusion

Even though the major indices are oversold and a near-term bounce is likely, there is little to indicate that a rally will be anything more than just a reaction to a temporary oversold condition. The low volume indicates that the panic that normally accompanies a bottom is absent. Following significant breakdowns of major indices, it is surprising that selling has not yet reached a crescendo. We normally consider several days of selling volume to exceed buying volume by at least 9-to-1 before concluding that a selling climax has occurred. Thus far, the most imbalance of selling was on July 30 at 7-to-1.

The bottom has not yet been firmly established. And so, I think it wise to continue to accumulate cash and not be tempted by seeming bargains that could become even better bargains.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[6].

For a list of this week’s economic reports due out, click here[7].

Source URL: https://investorplace.com/2014/08/sp-500-not-oversold/

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