Stocks took back some of Wednesday’s gains in a slow day of trading Thursday that ended with a slight recovery in the final hour. The Dow Jones Industrial Average fell just 0.1%, but the Nasdaq lost 0.4% and the Russell 2000 fell more than 1%.
Semiconductor stocks were weak throughout the session with the PHLX Semiconductor (SOX) down 3%. This was mostly the result of a 19.7% plunge in NXP Semiconductors NV (NXPI), which reported lower-than-expected Q3 sales and forecasted a decline in Q4 revenues.
Another semi stock, STMicroelectronics NV (ADR) (STM), dropped 5.8% after issuing disappointing guidance and saying it was not interested in acquiring Fairchild Semiconductor Intl Inc (FCS), which fell 5.6% on the day.
It was not a good day for technology stocks in general either. In addition to losses in the semiconductor group, lower guidance from GoPro Inc (GPRO) led to a 15.2% decline in the stock. And Cirrus Logic, Inc. (CRUS) fell 4.1% even though the company beat both earnings and revenue forecasts.
Crude oil was up 0.3% to $46.06 a barrel. What really boosted the energy sector, though, was strong earnings from companies like ConocoPhillips (COP), Marathon Petroleum Corp (MPC), Tesoro Corporation (TSO) and Trade of the Day Suncor Energy Inc. (USA) (SU).
Gold fell to a three-week low ending at $1,147.20 an ounce, down 2.4%. Bond yields jumped in anticipation of a rate hike in December. The yield on the 10-year Treasury note rose to 2.19%, up from 2.10% on Wednesday. The euro was up slightly against the U.S. dollar at $1.0987.
At Thursday’s close, the Dow Jones Industrial Average fell 24 points to 17,756, the S&P 500 dropped 1 point to 2,089, the Nasdaq lost 21 points at 5,074, and the Russell 2000 was down 13 points at 1,166.
The NYSE Composite’s primary exchange traded over 870 million shares with total volume of 4 billion. The Nasdaq crossed 1.9 billion shares. On the Big Board, decliners outpaced advancers by 1.5-to-1, and on the Nasdaq, decliners led by 1.8-to-1. Block trades on the NYSE fell to 5,161 from 5,603 on Wednesday.
For the past two days, the S&P 500 has held above the important line at 2,080, which is the midpoint of the overhead facing the index. Support is now at 2,080 and the 200-day moving average at 2,061. Volume is relatively low, MACD is overbought, and the small and mid caps have yet to catch fire.
The iShares Russell 2000 Index (ETF) (IWM), which represents the small-cap Russell 2000, has not confirmed a “W” breakout. It is, however, holding above its 50-day moving average at $114. But there has been no serious move against the more important 200-day moving average at $121, which is a key resistance line.
Conclusion
As noted in previous Daily Market Outlooks, the 10%-plus correction in August is confirmed by the big caps, and that correction is over. But before we jump on the long side of the market, anticipating a big breakout before December, consider the fact that the major large-cap indices are now very overbought and due for a round of profit-taking.
Jeff Saut, chief investment strategist at Raymond James, is one of the brightest technicians I follow. On CNBC this morning, he said his investment model indicates the Fed’s rate cut will be delayed until Q1 of next year. He also said the model indicates a trading top should form late this week or early next week. Note that Saut called the Aug. 24 bottom.
In his “Morning Tack,” he cites a study by Furey Partners that shows there have been just three times since 1953 when the difference between the market’s highs and lows in a two-year period was smaller than now. The study also shows the returns after these periods have been very strong. In fact, the small caps resolve prolonged sideways markets with substantial gains for extended periods.
I project a pullback that should test support at about 2,000 on the S&P 500. Thus, our strategy is to prepare for a pullback by taking trading profits now and committing cash roughly between the 50-day moving average at 1,980 and the 2,000 level.
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.
