On Tuesday, the Dow industrials fell for the second straight session, and the S&P 500 dropped for the third day. Weak economic reports from Europe and an escalation of hostilities in the Middle East kept buyers out of the market.
The small-cap Russell 2000 was down 0.9% and the Nasdaq lost 0.4% as sellers continued to concentrate on divesting lower-quality stocks.
Institutional investors have become nervous over the Treasury Department’s study of tax-avoidance “inversion” deals, and mixed economic data from the euro zone added to an already cautious mindset.
One bright spot was Chinese manufacturing activity, which was higher in September, but this had little impact on the market. Here at home, U.S. manufacturing activity in July held steady at a 52-month high, but this also failed to move buyers into the market.
At Tuesday’s close, the Dow Jones Industrial Average fell 117 points to 17,056, the S&P 500 lost 12 points at 1,983, the Nasdaq was off 19 points at 4,509, and the Russell 2000 fell 11 points to 1,119.
The NYSE traded total volume of 3.3 billion shares, and the Nasdaq crossed 1.8 billion shares. On both major exchanges, decliners outpaced advancers by about 2.3-to-1.
The S&P MidCap 400 and small-cap Russell 2000 (see Tuesday’s Daily Market Outlook) are in danger of breaking down for a full 10% correction. Many of these stocks are already down over 15%.
Despite the weakness in small and mid caps, the major indices are still in good shape. Even though the S&P 500’s first line of support at 1,990 was penetrated, the 50-day moving average has held, and the intermediate advance line at 1,950 is in the middle of a major support zone beginning at 1,900.
Conclusion
I, with the help of my Stock Trader’s Almanac, warned that this would be a tough week for stocks. And it has been especially rough for the small and mid caps. Yet, it appears that some of our readers are applying my comments about just this week to the overall market, and that is wrong!
Stocks are in a long-term bull market with year-end targets at S&P 500 2,200 and Dow 17,945. However, if you are a trader, you should short small and mid caps using support and resistance lines as your guide until these stocks consolidate and return to a full-blown uptrend.
By now most of our readers are aware of what I mean by short-, intermediate- and long-term trends. But some new readers may have been confused by my comments on Sept. 18, when the Dow industrials and transports rose to new highs and confirmed a Dow Theory buy signal. This is a long-term bull market signal that has little to do with near-term trading.
Please don’t be confused by time frames. Reading an explanation of them, as well as other well-tested technical strategies, in “Technical Analysis of Stock Trends” by Edwards and Magee will help you become a better trader and give you an enormous leg up on other investors.
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.
