The Obama administration’s forced resignation of General Motors’ (GM) chief executive shook investors’ confidence and resulted in a broad sell-off of stocks Monday.
During the weekend, the White House’s auto taskforce concluded that bankruptcy may be the only alternative for both GM and Chrysler. And on Sunday Treasury Secretary Tim Geithner said the banks are still in trouble and may need additional government aid.
The combination was a killer and cut short a rally that almost seemed destined to take stocks higher. The decline yesterday was so broad that it took down all ten sectors of the S&P 500 (SPX), but the drop was especially brutal for auto supply companies and banks.
Lear (LEA) fell 20%, Goodyear Tire and Rubber (GT) dropped almost 10%, and Alcoa (AA) fell more than 14%. Bank of America (BAC) lost almost 18% and Citigroup (C) fell nearly 12%.
At the close, the Dow Jones Industrial Average (DJI) was off 254 points to 7,522. The S&P 500 (SPX) fell 28 points to 788, and the Nasdaq (NASD) dropped 43 points ending the day at 1,502.
On the New York Stock Exchange, just over 1.5 billion shares traded with decliners outpacing advancers by 9-to-1. The Nasdaq traded 728 million shares with decliners there ahead by over 3-to-1.
Crude oil for May delivery fell to $48.41 a barrel, down $3.97, and the Amex Energy SPDR (XLE) was off $1.65 to $42.82.
The April gold contract fell $7.70 to $915.50 an ounce, and the PHLX Gold/Silver Index (XAU) closed at $133.91, down $2.23.
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What the Markets Are Saying
Monday’s sell-off was caused by the forced resignation of General Motors’ (GM) chief and the threat that both GM and Chrysler would face bankruptcy. This classic example of a news-triggered correction, or perhaps even a confirmation of the bear market, came just as stocks were broadly overpriced.
In addition to a sell signal from most of the internal indicators (most graphic being the stochastic), the close below the psychologically important 800 number on the S&P 500 (SPX) and the Dow’s (DJI) failure to surmount 8,000 sent a clear signal that prices are headed lower.
But even though breadth was decidedly negative, volume is on the low side, which may mean that the March 6 lows may hold.
However, in this situation, investors shouldn’t rely on that too heavily since it takes much less volume to drive stocks lower than higher. And that is simply because the bears are “in the open” in contrast to the bulls who have a broader overhead of potential sellers to deal with and must generate relatively high volume to succeed.
The initial downside objective is at the 20-day moving average at SPX 757 and the Fibonacci 50% number of 752. For those holding contra Exchange-Traded Funds (ETFs) and were caught in the rally, you should now make up for your losses. And traders who are just hearing the bear’s renewed voice should scan the list of financials and ETFs and take either a quick trade or hold for a full test of the market’s lows.
Today’s Trading Landscape
Earnings to be reported include: Aluminum Corp of China Ltd, American CareSource Holdings, Apollo Group, Banks.com, Borders Group, China National Offshore Oil Corp, China Sky One Medical, Community Bankers Trust Corp and Corriente Resources.
Document Security Systems, Exfo Electro-Optical Engineering, Fusion Telecomm Int’l, GigaMedia Ltd, G-III Apparel Group, H.B. Fuller Co, Huaneng Power Int’l, Kowabunga!, Lennar Corp, Lifeway Foods, Northern Dynasty Minerals Ltd and Nuveen Investments.
Petro Resources Corp, Physicians Formula Holdings, Russ Berrie, Saba Software, Saga Communications, Sealy Corp, Sonic Automotive, Spire, Steelcase, Stonemor Partners LP, Tam S.A., Team, Telkonet, Uluru, and WidePoint.
Several economic reports due including the International Council of Shopping Centers (ICSC) Chain Store Sales Index for March 28, Redbook Retail Sales Index for March 28, January S&P/Case-Shiller Home Price Index, March Chicago Purchasing Managers Index (or PMI, the consensus expects 34.5), March Conference Board Consumer Confidence (the consensus expects 27.7), API Oil Industry Report for March 27, and ABC/Washington Post Consumer Confidence for March 28.
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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.
