An earnings shortfall from Macy’s, Inc. (M) sparked fears about consumer spending strength and resulted in a broad market decline.
Consumer spending has actually been slowing for the past three quarters, while U.S. GDP grew at a tepid rate of 0.5% in Q1.
Predictably, the retail and consumer discretionary sectors led the way down Wednesday on what some analysts felt was an overreaction to Macy’s earnings shortfall. However, lower guidance and disappointing results from Walt Disney Co (DIS) and Fossil Group Inc (FOSL) also weighed on consumer sentiment.
This was reflected in a shift in investor assets to more defensive positions. Gold advanced 0.8% to $1,274.60 an ounce. And the yield on the 10-year U.S. Treasury note fell to 1.73% from 1.77% as investors sought the safety of bonds.
Crude oil rose 3.5% to $46.23 a barrel, the highest close since November. The U.S. dollar showed weakness, falling 0.8% against the yen, while the euro rose 0.5% against the greenback.
At Wednesday’s close, the Dow Jones Industrial Average fell 217 points to 17,711, the S&P 500 lost 20 points at 2,064, the Nasdaq declined 49 points to 4,761, and the Russell 2000 was down 14 points at 1,115.
The NYSE Composite’s primary exchange traded 946 million shares with total volume of 3.8 billion. The Nasdaq crossed 1.8 billion shares. On the Big Board, decliners outpaced advancers by 1.7-to-1, and decliners led advancers on the Nasdaq by 2.4-to-1. Block trades on the NYSE increased to 5,156 from 5,023 on Tuesday.
While some technicians will be focusing on the chart of the Dow industrials, I believe that Nasdaq’s test of resistance at its 50-day moving average has greater overall significance.
The conjunction of the 50-day, the bearish resistance line and support at 4,715 is a clear technical line in the sand. If breached, this will have significant predictive value.
The bulls will stress the overall “bullish” nature of a reverse head-and-shoulders formation, and the bears will focus on the inability to penetrate the bearish resistance line.
Conclusion
There is still no action — negative or positive — to indicate the near-term direction of the market. However, since we have entered the “worst six months” of the year, I would not be surprised to see stocks drop at least 5% and the Nasdaq trade in a range of 4,500 to 4,600 until fall.
The “Best Six Months” switching strategy is based on the better-known “Sell in May and go away” strategy.
From the Stock Trader’s Almanac: “Investing in the Dow Jones Industrial Average between November 1st and April 30th each year and then switching into fixed income for the other six months has produced reliable returns with reduced risk since 1950.”
And an article by Fidelity Investments points out that between 1950 and 2012, an initial investment of $10,000 would show a gain of $674,073 for the November-to-April period, overwhelming a loss of $1,024 for equity investments made in May to October. Results for shorter periods are also impressive. Between 1988 and 2012, a gain of $585,910 in the “best” six months compared to a gain of just $498 in the “worst” six months.
Keep in mind that this is not a daily trading strategy, and its results will vary depending on different time frames and/or investments. I highlight it to point out how difficult it will be for those investors trying to go against a firmly established negative seasonal trend to play the long side. Short-selling strategies and bond funds are likely to be more effective in the months ahead.
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.
