The loud crack at the closing bell Thursday was the breaking of old support lines. Every day, the market seems to find an ancient barrier to break; this time it was levels not seen since 1996 and once again the financial stocks led the way lower.
Bank of America (BAC) was down after Moody’s (MCO) said that it is reviewing its credit rating. Wells Fargo (WFC) took it on the chin because of rumors of a downgrade, and Moody’s lowered the rating on JPMorgan Chase (JPM) to “negative” from “stable” and the stock plunged 14%.
Before the opening, Asian markets were higher on rumors of an impending economic stimulus package from China. But it didn’t arrive yesterday and the market reacted accordingly.
General Motors (GM) fell another 15% to $1.86 on new hints of bankruptcy. And General Electric (GE) fell just 3 cents to $6.66 despite concerns of a downgrade from its lofty AAA status.
Factory orders fell and job losses mounted, but both figures were better than expected. And unit labor costs increased by 5.7% — a surprise to analysts who predicted a rise of 3.5%.
The Dow Jones Industrial Average (DJI) fell 281 points to 6,594, the S&P 500 (SPX) was down 30 points, closing at 683, and the Nasdaq (NASD) fell 54 points at 1,300.
Volume on the New York Stock Exchange exceeded 1.9 billion shares, with decliners ahead of advancers by 14-to-1. On the Nasdaq, 899 million shares were exchanged and there decliners were ahead by almost 6-to-1.
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What the Markets Are Saying
The S&P 500 (SPX) double-bottom finally collapsed Feb. 27, after holding firm for more than four months. But the strong 800 to 820 support zone gave way several weeks before, led by the Dow Industrials (DJI), which cracked its support at 7,940 even before that.
The breakdown hit a plateau at the Dow 7,390 area, which also marked the market’s low on Nov. 21. After several days of indecision sellers drove stocks to new lows and the Dow headed for lower ground. So where do we go from here?
A trend line drawn from the October 1987 low of Dow (DJI) 1,950 that connects to 2,334 in October of 1990 extends to 6,526 — a possible target. And the Fibonacci numbers shown in Tuesday’s Daily Market Outlook indicate support at 6,054. My estimate is that the next solid support is within the range of 6,050 to 6,525.
Until then, it would be best to either take a vacation and ignore the market or jump onto your favorite Ultra Exchange-Traded Fund (ETF) and try to make lemonade from lemons. (Check out our Trade of the Day for my favorite Ultra ETF right now.)
But if you decide on the ETF lemonade, be aware of the oversold nature of the market and the possibility of a brutal rally by panicked short sellers. In all cases, use a stop-loss order that prevents your lemonade from going sour.
Today’s Trading Landscape
Earnings of note to be reported include: AnnTaylor Stores (ANN), H&R Block (HRB), Logility (LGTY), Metrogas S.A. (MGS), Petroleo Brasileiro S.A.-Petrobras (PZE), Pinnacle Entertainment (PNK), Standard Motor Products (SMP), Tasty Baking Co (TSTY) and Veolia Environnement SA (VE).
In terms of economic reports, today the February non-farm payrolls (the consensus expects a drop of 675,000), the February unemployment rate (the consensus expects 8%), and the January consumer credit report (the consensus expects negative $7 billion) are expected.
This morning, according to The Wall Street Journal, General Motors (GM) execs are more open to a speedy bankruptcy financed by the government. Also in the WSJ, GE Capital’s CFO said that the risk in his division is “overdone” and that it has enough capital to fund itself through 2010.
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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.
