Blue Chips Are Not the Place to Hunt for Bargains

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On Monday, mid- and small-cap stocks rallied, with the Nasdaq rising 1.4% and the Russell 2000 gaining 1.2%, leading the large-cap S&P 500 (+0.9%) and Dow industrials (+0.1%).

Part of the reason for the lagging Dow was a poor earnings report from key component IBM (IBM). Big Blue fell 7.1% to $169.10 after the company reported a quarterly revenue and earnings shortfall. Since the Dow is price weighted (i.e., higher-priced stocks have greater influence), IBM’s decline accounted for an 83-point drag on the index.

The Nasdaq’s strength was partially due to Apple (AAPL), which popped 2.1% in anticipation of its quarterly earnings report today. Chipmakers also gained, and the iShares PHLX SOX Semiconductor Sector (SOXX) rose 1.6%. Biotech was another bright spot with iShares Nasdaq Biotechnology (IBB) up 1.6% (see the Trade of the Day).

Noted strategist for S&P Capital IQ, Sam Stovall, said the S&P 500 is due for a pullback of 10% or more. It has already fallen 5.3% from its Sept. 18 record close.

At Monday’s close, the Dow Jones Industrial Average rose 19 points to 16,400, the S&P 500 gained 17 points at 1,904, the Nasdaq rose 58 points to 4,316, and the Russell 2000 jumped 13 points to 1,095.

The NYSE’s primary market traded 742 million shares with total volume of 3.3 billion. The Nasdaq crossed 1.7 billion shares. On the Big Board, advancers outpaced decliners by 2.8-to-1, and on the Nasdaq, advancers were ahead by over 2-to-1. Block trades on the NYSE fell sharply to 4,422 compared with Friday’s 5,897.

Dow Chart
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Chart Key

The Dow Jones Industrial Average is the weakest of all the major indices, and IBM’s earnings miss did additional damage.

The major resistance to a rally is the zone from 16,334 to 16,600, which includes the 200-day moving average at 16,586, a major inflection point.

A rally beyond 16,426, which is the 38% Fibonacci retracement of the October low, would put pressure on the bears to cover their shorts. But the index is so technically damaged that it seems likely it will lag despite future rallies in the more volatile indices.

Conclusion

The blue chips of the Dow industrials are currently not the place to go shopping for bargains. The index has been hit hard for over six months, and it may take at least that long for it to overcome the extreme damage inflicted as it sliced through one important support feature after another.

When bargain hunting, go for names less associated with international trade, since the problem with the Dow seems focused on a deteriorating global economy.

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.


Article printed from InvestorPlace Media, https://investorplace.com/2014/10/blue-chips-place-hunt-bargains/.

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