A sell-off in commodities yesterday (primarily energy and precious metals) led to the worst day for stocks in more than two months. The financial sector took the hardest beating with a focus on Dow 30 stocks American Express (AXP), off 5.72%, Bank of America (BAC), down 9.68%, and J.P.Morgan Chase (JPM), off 6.09%. The financial sector of the S&P 500 (SPX) fell 6.2%, with declining issues over advancers by a margin of 10-to-1.
Much of the selling came following a World Bank report that estimated a contraction in the global economy of 2.9%. This was much worse than their earlier estimate of a contraction of 1.7%, and brought heavy selling to exchanges around the world.
In this country, some of the biggest industrial companies took major hits: General Electric (GE) fell 4.8%, Caterpillar (CAT) was down 3.8%, and Alcoa (AA) lost 8.91%.
Only the defensive sectors like utilities and telecommunications showed strength yesterday. And even the pharmaceutical stocks were hit with a round of profit-taking following gains in the last two weeks.
At the close, the Dow Jones Industrial Average (DJI) was down 201 points to 8,339, the S&P 500 fell 28 points to 893, and Nasdaq (NASD) lost 61 points to 1,766.
The NYSE traded 1.4 billion shares with decliners ahead of advancers by 9-to-1. Nasdaq was the hardest hit of the major indices, off 3.35%, with volume of 739 million shares and decliners ahead by about 7-to-1.
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August crude oil fell $2.52 to $67.50 on reports of lower gasoline sales, and the Energy Select Sector SPDR (XLE) lost $2.46, closing at $46.75.
August gold fell $15.20, finally settling at $921 an ounce, and the PHLX Gold/Silver Index (XAU) lost $10.58, closing at $131.06.
What the Markets Are Saying
After weeks of trading within a very narrow range following the impressive rally off of the March lows, stocks finally signaled the near-term direction of the market — and it is down.
Yesterday, the major indices were hit with the broadest round of selling in months. The S&P 500 closed at its low of the day and under the conjunction of the 50- and 200-day moving averages, confirming that a downtrend actually started with the failure of the major indices to hold above the resistance lines drawn in early June. For the S&P 500, that was the false breakout at 956, and for the Dow it was 8,900.
And so it appears that one of the most important technical signals, the non-confirmation, discussed at length here during the past 10 days, has again proven its worth by giving an early signal that all was not well.
The next support line for the S&P is at 880, and for the Dow it is 8,200. All eyes will be focused on those numbers. But don’t get caught up in numbers that are so obvious — it usually isn’t that easy.
S&P’s technical guru Chris Burba points out that yesterday decliners reach more than 450 on the S&P 500. Since November 2007, he says that this has happened 27 times, and on 18 of those occasions, or 67% of the time, the index rose the next day — this is called a “reflex rally.”
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The point is this: If you are a trader, it’s best not to jump into a declining opening after a day like yesterday. Wait to see if a late-day rally appears, and then sell into it in the afternoon or even wait until Wednesday for an extension of the reflex rally.
This has been a tricky market with comments from politicians that disrupt your favorite trading plan. Be careful and only take positions at extreme support and resistance areas, and then only with the near-term trend. For example, a rally now to the S&P 920 area could be a good place to enter new shorts.
Ultimately, the selling will abate and a support level will be established. But it may take weeks, perhaps even months, to develop. My guess is that the support at 880 will not hold, and that the bottom of this correction lies somewhere south of 825 but north of 800.
Today’s Trading Landscape
Earnings to be reported include: AeroVironment, America’s Car-Mart, Apogee Enterprises, Cascal N.V., Commercial Metals Co., Culp, H.B. Fuller Co., Jabil Circuit, Oracle, Sonic Corp., Steelcase and The Kroger Co.
Economic reports due: ICSC chain store sales index for June 20, Redbook Retail Sales Index for June 20, May existing home sales (the consensus expects +2.6%), June Richmond Fed’s Manufacturing Index, June 1 API Oil Industry Report and ABC/Washington Post consumer confidence for June 20.
Late news: The Fed begins two days of meetings today, but no one expects a change in interest rates.
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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.
