On Wednesday, stocks gave up the biggest gains since February following the Federal Reserve’s release of its March policy meeting notes. In that meeting, officials agreed to begin reducing the Fed’s balance sheet later this year. And at about the same time, Speaker of the House Paul Ryan said that changes to taxes are not yet formalized by the White House and Republicans, thus taking longer than the healthcare bill to address and propose.
As a result, the Nasdaq reversed after making a new high and closed lower by 0.6%, its most extreme reversal since early in 2016. The Dow Jones Industrial Average, which gained almost 200 points earlier, fell 0.2%, and the S&P 500 lost 0.3%; the Russell 2000 fell 1.2%.
In the Fed minutes, some of the governors said that stocks are higher relative to accepted valuations. They said that there was a possibility of a correction in the financial markets, which risked their economic forecasts. FactSet confirmed that stocks in the S&P 500 have traded at more than 20 times past 12-month earnings for 106 straight sessions. They said that it is the longest stretch of over 20X earnings since 2010.
The defensive sectors of the 500 showed gains with a 0.4% gain by utilities, and only a slight loss by real estate. Financial stocks led the decliners, falling 0.9%. Energy fell 0.6% despite a gain in May crude oil of 0.24%, up 12 cents at $51.15 per barrel.
At the close, the Dow Jones Industrial Average fell 41 points to 20,648, the S&P 500 lost 7 to close at 2,353, the Nasdaq fell 34 to 5,864, and the Russell 2000 lost 16 points at 1,352. The NYSE’s primary exchange traded 942 million shares with total volume of 3.7 billion shares, and the Nasdaq crossed 2.2 billion shares. On the Big Board, decliners outpaced advancers by 1.9-to-1, and on the Nasdaq, decliners led by 2.6-to-1. Blocks on the NYSE increased to 7,196 from 6,739 on Tuesday.
Although many stocks executed “outside reversals,” like our “Trade of the Day,” the two major indices did not. However, a CBR sell on the S&P 500 and a threat by both major indices to their respective 50-day moving averages should not be taken lightly. Low volume for the Dow Jones and average volume for the S&P 500 do not support a pending breakdown.
Conclusion: The 50-day moving average of both major indices are major support lines. A close under the blue lines could result in a sell-off to the 2,300 area on the S&P 500 and to 20,000 on the Dow Jones.
As noted yesterday, it is time to raise cash and wait for the market to clearly define its next move. Since reversals occurred in many stocks following higher prices in the morning, the near-term trend is down, but stocks are still in a secular bull market, and that means that prices should eventually break to new highs.
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.
Tell us what you think about this article! Drop us an email at editor@investorplace.com, chat with us on Twitter at @InvestorPlace or comment on the post on Facebook. Read more about our comments policy here.
