Stocks fell Thursday as investors reacted negatively to a possible shift in the Federal Reserve’s accommodative interest rate policy.
The Dow Jones Industrial Average lost 0.5%, erasing its gains for the year and violating a key technical support line. The S&P 500 lost 0.4% and came within a fraction of a point of a serious technical violation.
But despite recent earnings malaise, Wal-Mart Stores, Inc. (WMT) beat analysts’ revenue forecasts for the quarter, and management delivered a positive out for the full year. The stock jumped 9.6%, which accounted for 41 points on the Dow.
Financial stocks, which should benefit from a rate increase, fell 1%. Utilities, which were hit hard on Wednesday, rebounded (+1%), and consumer staples (+0.8%), materials (+0.4%) and energy (+0.3%) were the only other sectors of the S&P 500 to gain.
WTI crude oil dropped 0.1% to $48.16 a barrel, while gold lost 1.5% at $1,254.20 an ounce. The U.S. dollar rose against a basket of currencies.
At Thursday’s close, the Dow Jones Industrial Average fell 91 points to 17,435, the S&P 500 was off 8 points at 2,040, the Nasdaq lost 27 points at 4,713, and the Russell 2000 was down 8 points at 1,095.
The NYSE Composite’s primary exchange traded 947 million shares with total volume of 3.8 billion shares. The Nasdaq crossed 1.8 billion shares. On the Big Board, decliners outpaced advancers by 2.4-to-1, and on the Nasdaq, decliners led by 2.3-to-1. Block trades on the NYSE increased to 5,369 from 4,593 on Wednesday.
The S&P 500 sliced through the often noted support line at 2,040 Thursday. But an intraday rally boosted the index from a low at 2,026 to a close just 0.04 of a point above it.
The importance of this line can’t be overstated since it has held despite over a dozen threats. But Thursday’s penetration was the deepest violation since late March. And it violated a buy signal from my proprietary internal indicator, the Collins-Bollinger Reversal (CBR), which usually means the index will continue its decline.
As noted in Monday’s Daily Market Outlook, the target for a full breakdown of 2,040 on the close would be about 1,969.
While the S&P 500 held above its support line, the Dow Jones Industrial Average broke its neckline at 17,650. In terms of other head-and-shoulders breaks, this appears minor in that the target is limited to between the support line at 17,200 and the 200-day moving average at 17,117, approximately 250 points from yesterday’s close.
Conclusion
Despite the shallow break on the Dow, this is no time to be long. Traders will want to trade the possible downside, which could set up the index for a further, more serious decline.
As noted above, the initial target is modest, but a break at the support line at 17,200 could develop into a selling stampede and even a test of the January/February lows.
A significant technical test is being played out amid the Fed’s language. Two Fed governors started the talk of a rate hike last week, but the more potent message was delivered by the April meeting notes.
Don’t fight the Fed. Its message is genuine, and it is leading to a broad technical breakdown.
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.
