With some positive economic news at its back, the Dow Jones Industrial Average (DJI) opened strong yesterday. Within minutes, the key index was ahead by more than 60 points. And then the advanced billings that September is usually a tough month for stocks turned the tide and, led by the financial stocks, the market suffered its worst day since mid-August.
With almost 95% of the S&P 500 (SPX) down, investors ignored the strong economic reports.
The ISM manufacturing index for August came in at 52.9, which not only crushed analysts’ forecasts of 50.5, but it was the first time since January 2008 that the index scored above 50. And new orders increased to 64.9, an increase of almost 10%.
Pending home sales for July were expected to increase by about 1.5%, and instead increased by 3.2% for the sixth-consecutive month of increases.
And to top off the good news, the Wall Street Journal said that the International Monetary Fund (IMF) forecasts a global economic expansion of almost 3% in 2010. This was an increase over a prior estimated expansion of 2.5%.
Most of the heavy selling was centered on the financial sector, apparently because it was the financials that led the August rally.
AIG (AIG) fell 21%, ETrade Financial Corp. (ETFC) was off almost 15%, and Citigroup (C), which gained 58% in August, lost 9.2%.
Of the Dow 30, all but one lost, with American Express (AXP) down more than 5%, Bank of America (BAC) off more than 6%, and JPMorgan (JPM) down 4%. The only Dow winner was Wal-Mart (WMT) with a fractional gain.
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The Dow fell 186 points to 9,311, the S&P 500 lost 23 points to 998, and the Nasdaq (NASD) was down 40 to 1,969.
The NYSE traded more than 1.6 billion shares with decliners ahead of advancers by 5-to-1. On the Nasdaq, decliners were ahead by about 5-to-2 with volume at 847 million shares.
October crude oil closed at $68.05 a barrel, down $1.91 due to the sell-off in stocks and the lack of confidence in a recovery. The Energy Select Sector SPDR (XLE) lost 89 cents to $50.28.
December gold rose to $956.50 an ounce, up $3, and the PHLX Gold/Silver Index (XAU) fell $2.52 to $144.52.
What the Markets Are Saying
There is no way to sugarcoat yesterday’s sell-off. It was a nasty turn following a strong month of buying that was focused on the financial stocks, so it was the financials that took the brunt of yesterday’s selling.
It is especially jolting to have some very strong economic news greeted with an emotional flood of liquidations. Some of the selling was prompted, I think, by the much-heralded quote from Ned Davis Research: “Since 1900, the Dow has fallen 1.1% on average in September, the only month with a significant average drop.”
But it is curious that yesterday’s selling came not when the indicators were grossly overbought, but when they were becoming somewhat oversold. This is especially true of the emerging markets ETFs, which I closely monitor. Many have had six consecutive days of selling with yesterday experiencing a high-water mark of downside volume and the beginning of a possible selling climax.
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Yesterday I suggested that stocks could “take a breather” until after Labor Day, but that the trend is still up. And even after yesterday’s jolt, momentum is still bullish, sentiment is again bullish, and the monetary indicators are bullish.
On Aug. 27, the 50-day moving average crossed above the 30-week (210-day) exponential moving average for a very strong buy signal.
Yesterday’s selling could continue for a couple more sessions, but it is more likely that it will end soon. Be prepared to buy on this pullback.
Today’s Trading Landscape
Earnings to be reported include: ABM Industries, AeroVironment, American Software, Bio-Reference Laboratories, Brown-Forman Corp., Casella Waste Systems, Casey’s General Stores, Collective Brands, Dollar Financial Corp., Greif Brothers, Hovnanian Enterprises, J. Crew Group, Jos. A. Bank Clothiers, Joy Global, Martek Biosciences Corp., Quanex Building Products Corp., SAIC and Synovis Life Technologies.
Economic reports due: MBA purchase applications, Challenger job-cut report, ADP employment report, productivity and costs (the consensus expects 6.4%), factory orders (the consensus expects 2.3%), EIA Petroleum Status Report and FOMC minutes.
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