Following a big day down, the market will often bounce as bargain-hunters snap up undervalued stocks. That was not the case yesterday.
Stocks opened slightly higher and gained ground until just after 10 a.m., at which point the tentative buying turned sour and stocks sold off until late in the afternoon when several buy programs hit and stocks struggled to a mixed close.
Retailers were the best performers, up 2%, with Family Dollar Stores (FDO) gaining 12.36% on better-than-expected quarterly earnings.
Health care stocks did well, too. Amgen (AMGN) gained almost 14% due to a favorable drug trial. And Dow stocks Merck (MRK) and Johnson & Johnson (JNJ) closed higher, as well.
Thomson Reuters expects S&P 500 (SPX) stocks to show a decline of about 36% for Q2.
The first of those earnings came after the close when Alcoa (AA) reported a second-quarter loss of $454 million, or 47 cents a share, versus a profit of 66 cents a share, or $546 million, a year ago. But, despite the loss, the results were better than expected.
At the close, the Dow Jones Industrial Average (DJI) was up 15 points to 8,178, the S&P 500 fell a point to 880, and the Nasdaq (NASD) gained 1 point to 1,747.
Volume rose to the highest level in two weeks to 1.4 billion shares on the NYSE, but decliners beat advancers by almost 2-to-1. On the Nasdaq decliners were also ahead by 2-to-1 and volume totaled 818 million shares.
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August crude oil fell $2.79 to $60.14 a barrel for another loss and a seven-week low as inventories rose for the second week in a row. The Energy Select Sector SPDR (XLE) gained a cent, closing at $44.53.
August gold fell $19.80 to $909.30 an ounce, and the PHLX Gold/Silver Index (XAU) closed at $129.30, down $4.21.
What the Markets Are Saying
Yesterday’s mixed reaction following the tentative head-and-shoulders breakdown on Tuesday is a sign of real weakness. In addition to neckline breaks on the Dow and the S&P 500, the NYSE also broke, and six of the 10 S&P sectors broke down from topping formations.
A Standard and Poor’s analyst said last night that the following groups have broken down: consumer discretionary, financials, energy, materials, industrials and telecom. And they pointed out that there has been a “clear breakout to the upside in the CBOE total put/call ratio as well as the CBOE equity-only put/call ratio.”
Also, the CBOE Volatility Index (VIX) rose for the fourth-straight day and is “tracing out a bottom,” another characteristic of market weakness.
But top-making is a tricky business, and a decisive break has not yet reached the 3% level noted in Monday’s Daily Market Outlook as Dow 8,012 and S&P 861.
Thus, with most of the internal indicators oversold and Q2 earnings starting to trickle in, I wouldn’t be surprised by a dead-cat-bounce.
A bounce is also indicated by our own internal indicator, the Collins-Bollinger Reversal (CBR), which flashed a short-term trading buy signal.
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Note the increase in volume yesterday as stops were knocked off, and then the late rally by bargain-hunters — all falling in line with my prior comments.
The rally, however, should be short-lived — every major index is now below its 50- and 200-day moving averages, except for the Nasdaq. But even the Nasdaq is in a channel-down situation.
Conclusion: A quick-but-doomed rally is about to occur. Use it to lighten up on your disappointing long-term positions and establish trading shorts.
The cat is dead, but bounce it will.
Today’s Trading Landscape
Earnings to be reported include: 3Com Corp., Adams Express, Chattem, Chevron, FCStone Group, Franklin Covey Co., Helen of Troy Ltd., Lawson Software, Rocky Mountain Chocolate Factory, Shaw Group, Tortoise Capital Resources Corp. and Value Line.
Economic reports due: initial jobless claims for the week of July 4 (the consensus expects -4,000), May wholesale trade inventories (the consensus expects -1%), DJ-BTMU U.S. Business Barometer for June 26, and June 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.
