The global economy and especially Eastern Europe’s dire financial situation hit the United States hard.
A broader sell-off that drove the major indices to new lows and the Dow Industrials (DJI) to their lowest close in almost 12 years was triggered by fears that European financial goliath HSBC (HBC) will embark on a plan to retreat in the face of an onslaught of debt. With the Citigroup (C) announcement late last week of the U.S. government’s 36% stake in the company, investors sold in anticipation of more bad news today.
Financial stocks ended Monday with a 6.8% loss, but as bad as that was, it was not far off from the losses for other groups.
The S&P 500 (SPX) fell 4.66% and the Dow (DJI) was down 4.24%. All of the 30 Dow stocks were down, with General Electric (GE) off 11% to a new low at $7.51, and other industrials were hit after the Institute for Supply Management (ISM) showed little improvement from its January numbers.
Boeing (BA) was off 6.14%, Deere (DE) fell 9.68%, and Du Pont (DD) lost 7.04%. Alcoa (AA) was the second biggest loser on the Dow, off 11.88%.
At the close, the Dow (DJI) was off 300 points at 6,763, the S&P 500 (SPX) fell 34 points to 701, and the Nasdaq (NASD) fell 55 points to 1,323.
The New York Stock Exchange traded nearly 2 billion shares, with decliners ahead of advancers by almost 16-to-1. On the Nasdaq, which traded 886 million shares, decliners were ahead by almost 7-to-1.
The April crude oil contract fell $4.61 to $40.15 a barrel, and the Amex Energy SPDR (XLE) fell $3.01, closing at $38.12 — breaking support. There is some support for the XLE at last night’s close, but the stronger support is at $34.50.
Gold fell along with everything else, with the April contract down $2.50, closing at $940 an ounce. The PHLX Gold/Silver Index (XAU) was off $9.09 to $110.03.
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What the Markets Are Saying
The Dow Industrials (DJI) broke down as long ago as Feb. 20, and it looked like any breakdowns might be confined to just those few stocks. But with Friday’s new closing low on the S&P 500 (SPX) and yesterday’s massive sell-off with very wide breadth, it is clear that the near-term trend clearly supports lower prices.
But how low?
Support zones just don’t give a clear answer to that, since we must go back to 1996 before any support shows. Mid-year to mid-fall 1996 show a support zone for the Dow Industrials (DJI) at 5,300 to 5,800 and the S&P 500 (SPX) at 625 to 680. That is more than 12 years back and, since time takes away from accuracy, we will go to another source for our “guestimate.”
For that we go to Leonardo Fibonacci, 13th-century mathematician, for the answer. For reasons too long to discuss here Signor Fibonacci discovered that “key numbers” expressed in ratios occurred naturally and seemed to be expressed in virtually everything in the universe from snail shells to the diameter of the earth.
In stock market analysis, Fibonacci retracement is created by taking two extreme points (usually a major peak and trough) on a stock chart and dividing the vertical distance by the key Fibonacci ratios of 60%, 61.8%, and 66.6%.
Measured from the last significant mega-market intraday low in December 1974 of Dow 570 to the intraday market top in October 2007, which was 14,280, the ratio analysis on the Dow works out like this:
• 60% = 6,054
• 61.8% = 5,808, and
• 66.6% = 5,150.
But the analysis of possible market bottoms may not be as important now as the direction.
We’ve patiently waited for the market to speak and it has issued a clear sell signal. Even though there may be sharp rallies, the trend is down and those who ignore it will be sliced with the falling knife.
Today’s Trading Landscape
Earnings of note to be reported include: Abraxis Biosciences, America Service Group, Arena Resources, AutoZone, Bank of Montreal, Bank of Nova Scotia, Carrizo Oil & Gas and Culp.
Energy Future Holdings, Energy Recovery, Henry Bros Electronics, HickoryTech, Home Diagnostics, Hutchison Telecommunications Int’l Ltd, Inspire Pharmaceuticals, Jackson Hewitt Tax Service and John Bean Technologies Corp.
Kenneth Cole, Masimo Corp, MBIA, Seaspan Corp, Sun Healthcare Group, Superior Well Services, Systemax, Trina Solar Ltd, USA Mobility, Vector Group Ltd, VeriFone Holdings, Virgin Mobile USA, and Xilinx.
The following economic reports are due today: International Council of Shopping Centers (ICSC) Chain Store Sales Index for Feb. 28, Redbook Retail Sales Index for Feb. 28, January Pending Home Sales (the consensus expects a 3.5% drop), API Oil Industry Report for Feb. 27, and ABC/Washington Post Consumer Confidence for Feb. 28.
Late news: Fed Chairman Ben Bernanke will testify before the Senate Budget Committee today and Treasury Secretary Tim Geithner will testify to the House Ways and Means Committee.
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Sam Collins is a registered, fee-based portfolio manager who may be contacted at samailc@cox.net. You can also check out an archive of some of his most recent market outlooks by clicking here.
