Wednesday turned out to be a day of profit-taking in the broad market, and also in commodity-based stocks and futures. After four days of advances, some analysts “pre-announced” a pullback, and economic data released prior to the opening accommodated that view.
Commodities fell and the U.S. dollar rose, making the best gain since January, up 1.3%. Energy stocks fell after Valero (VLO) announced that it will post a Q2 loss. And the broad market sold off on the opening as a result of reports of lower-than-expected data from the services industry and lower factory orders.
The big oil companies were a target of selling with Dow members Chevron (CVX) and Exxon Mobil (XOM) down more than 1% as oil futures fell 3.5%. Alcoa (AA), which gained 7% on Tuesday, gave back 4.3%. Even gold favorites like Barrick Gold (ABX), down 3.56%, and ASA Ltd. (ASA), down 6.81%, were hit with profit-taking.
Fed Chairman Bernanke’s testimony to Congress didn’t help the stock market, as he described the economic recovery as “subdued.” However, he later said that he expects the economy to turn up later this year.
At the close, the Dow Jones Industrial Average (DJI) was down 66 points to 8,675, the S&P 500 (SPX) lost 13 points to close at 932, and Nasdaq (NASD) fell 11 to close at 1,826. The NYSE traded 1.3 billion shares with decliners ahead of advancers by 7-to-3. Nasdaq traded 710 million shares with decliners ahead by 3-to-2.
July crude oil fell $2.43 to $66.12 a barrel, as stockpiles rose to levels that were above average for this time of the year. The Energy Select Sector SPDR (XLE) fell $2.06 to $51.38. Gold for June delivery fell $18.70, closing at $964.50 an ounce, while the PHLX Gold and Silver Index (XAU) lost $8.67, closing at $152.51.
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What the Markets Are Saying
The markets have turned away from their recent highs after a four-day run hit a wall of profit-taking at exactly where we might have expected selling to emerge — at very close to the S&P 500’s intraday high of Jan. 6 at 944, and the 210-day exponential moving average at 952.
This turn from the resistance zone on the S&P at 944 to 1,000 could lead to a pullback and test of support at the May consolidation lows at around 880 where the 50-day moving average now resides.
And it could even develop into a more serious correction — S&P is looking for more than the 5% correction that we saw in May. But NYSE volume on yesterday’s pullback was a tepid 1.3 billion shares, so unless volume increases, my guess is that the 880 area has a strong chance of holding back the sellers. But a break below 880 could cause some real damage since the next support is at 800.
For now, we are putting the defense on the field for traders, while long-term buyers will want to use any pullback as an opportunity to load up on commodities-based stocks in energy and precious metals, some technology issues, and emerging market ETFs.
Today’s Trading Landscape
Earnings to be reported include: ABM Industries Inc. (ABM), Analogic Corp. (ALOG), Bio-Reference Laboratories (BRLI), Cantel Medical (CMN), Cascade Corp. (CAE), Ciena Corp (CIEN), Conn’s Appliances (CONN), CorVel (CRVL), Guess (GES), Krispy Kreme Doughnuts (KKD), Medical Action Industries (MDCI), SeaChange International (SEAC), Signet Jewelers Ltd. (SIG), Sycamore Networks (SCMR), Teekay Corp. (TK), The Cooper Companies (COO), Ulta Salon, Cosmetics & Fragrance (ULTA), Uroplasty Inc. (UPI), UTi Worldwide (UTI), Vail Resorts (MTN), Wind River Systems (WIND) and Xinyuan Real Estate Co., Ltd. (XIN).
Economic reports due: initial jobless claims for the week ended May 30 (the consensus expects -3,000), Q1 productivity (the consensus expects +1.2%), Q1 labor costs (the consensus expects +2.9%), DJ-BTMU Business Barometer for May 23, May 29 EIA natural gas inventories, and May chain-store sales.
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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.
