Stocks opened higher yesterday, and held the gains until noon when a slide began that flattened off mid-afternoon. But in the last five minutes of trading, a crescendo of sell orders hit the exchanges and stocks closed on their low of the day.
So, for the second day in a row, stocks have closed lower on relatively light volume. The selling was attributed to a PPI report that didn’t live up to expectations, but some interpreted that as a good sign since it didn’t show an increase in inflation. Then there was the industrial production and capacity utilization for May, both of which declined but almost met forecasts.
With economics not favoring stocks yesterday, the consumer, energy and materials stocks led the broad tape lower. Materials stocks fell hardest, down 2.4%, and was the worst performing sector in the last two days, off 5%.
Better-than-expected earnings from retail giant Best Buy (BBY) had little impact on the rest of its group. Retail stocks ended the day off 3.1%.
At the close, the Dow Jones Industrial Average (DJI) was down 107 points to 8,505, the S&P 500 (SPX) fell 12 to 912, and Nasdaq (NASD) lost 20, falling to 1,796.
Volume on the NYSE totaled 1.2 billion shares, with decliners over advancers by just under 3-to-1. On Nasdaq nearly 677 million shares traded, and decliners there were also ahead by under 3-to-1.
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July crude oil ended the day at $70.47, down 15 cents, but closed above the important psychological barrier of $70. The Energy Select Sector SPDR (XLE) fell $1.11 to $50.98. August gold rose $4.70 to $932.20 an ounce in reaction to a weaker U.S. dollar, and the PHLX Gold/Silver Index (XAU) gained 66 cents to $140.66.
What the Markets Are Saying
A week ago, I voiced my concern that Nasdaq was chugging along and making new highs almost every day but that the market, as measured by the S&P 500 and other broad indices, was not keeping pace.
The romp by one index while others lag or turn lower is usually a harbinger of a nasty turn down, and is known a “non-confirmation.” The term is most often applied to the Dow Jones indices, the Industrials, Transportation and Utilities, and their trading relationship to each other.
Looking back to June 5, when the Dow popped to a new intraday high of 8,900, the Dow Jones Transportation Average failed to do the same, double-topped several days later, and headed lower. This is an example of a classic non-confirmation as was correctly reported on Monday by Geoffrey Rogow of Dow Jones Newswires.
And now, with just two consecutive days of selling, the direction of stocks is causing some alarm as technicians dust off their copies of Charles Dow’s works and Technical Analysis of Stock Trends by Edwards and McGee.
And with the CBOE Volatility Index (VIX) jumping again, this time up 1.87 to 32.68, some are even saying that the bull market is over, and that we are most certainly headed to a full test and even a break of the March lows.
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Fasten your seat belts folks. There is no reason at this time to jump overboard. Yes, we do have a non-confirmation, but that is not a signal that a new bear market has begun — just a correction, and possibly a serious correction. My guess is that we will very quickly test the support at Dow 8,150 to 8,165, and if stocks fail to hold there, the next support is at 7,725 to 7,800.
It is time to log some hard-earned gains and squirrel away some cash. But it is not time to sell the farm. The long-term trend is still up, and we will use the cash to buy the best quality stocks in the most outstanding sectors at the right price.
Today’s Trading Landscape
Earnings to be reported include: Actuant Corp. (ATU), Clarcor (CLC), FedEx (FDX), IHS (IHS) and Somanetics Corp. (SMTS).
Economic reports due: June 1 Mortgage Bankers Association’s refinance applications index, May consumer price index (the consensus expects 0.3%), May consumer price index, ex-food and energy (the consensus expects +0.1%), Q1 current Aaccount (the consensus expects -$85 billion), and U.S. Energy Department oil inventories.
Late news: Adobe (ADBE) profits fell 41% on weaker sales, but earnings matched expectations.
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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 his most recent market outlooks.
