Editor’s note: OptionsZone editor Jim Woods will be filling in for Sam Collins today.
On Friday, in a classic day of profit-taking, the Dow Jones Industrial Average (DJI) and its companion indices took back the gains of the week, closing at a small loss on light volume. The mild sell-off occurred despite gains in the housing market and better-than-expected earnings from a key technology stock and a key financial stock.
American Express (AXP) fell 5.1% despite better earnings, but Microsoft (MSFT) jumped 5.1% following its Q3 report that came in with better-than-expected earnings. Amazon.com (AMZN) astounded analysts by posting a 69% earnings gain, and the stock cooperated by rising 27%.
The Dow Jones Transportation Index (DJT) fell 3.5% after a nasty forecast by Burlington Northern Sante Fe (BNI) saying that freight demand had not yet turned the corner. Since this is a key indicator of the economy, the index led other groups lower. Coupled with a rally in the U.S. dollar and a decline in commodities, sellers ruled the day.
At the close, the Dow was off 109 points to 9,972, the S&P 500 (SPX) fell 13 points to 1,080, and the Nasdaq (NASD) was down 11 points at 2,154.
The NYSE traded 1.3 billion shares with decliners ahead of advancers by 3-to-1, while the Nasdaq traded 807 million shares with advancers leading by the same margin.
December crude oil fell 69 cents to $80.50 a barrel, and the Energy Select Sector SPDR (XLE) lost $1.15, closing at $58.30.
December gold fell $2.20 to $1,056.40 an ounce, and the PHLX Gold/Silver Index (XAU) fell $2.03 to $172.09.
For the week, the Dow lost 0.2%, the S&P 500 was off 0.7%, and the Nasdaq fell 0.1%.
What the Markets Are Saying
Friday’s sell-off despite the excellent earnings from Microsoft and Amazon, and a favorable housing report, appears to be a case of stocks rallying on the expectation of good news, with the start of the move higher beginning Oct. 5, at S&P 500 1,025, and ending Oct. 21, at 1,081, when the news was announced.
The S&P has had trouble breaking through the bullish resistance line of the bull channel since March. So the sell-off was no surprise, and we warned of the possibility of a reversal last week. But Friday’s action was a clear technical signal that prices will likely head back down to the well-established support line at 1,050.
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Not only did stocks react badly to good news (a classic warning), but a reversal occurred on the Dow on Wednesday, and then the Nasdaq flashed back-to-back reversals on Thursday and Friday.
Immediate support for the S&P 500 is at its 20-day moving average at 1,070, and Friday’s intraday low came mighty close to it at 1,075.
For now, then, it’s time for traders to exit the market and build cash while longer-term investors will want to pare back on non-performers. Both kinds of investors should prepare to buy into the decline, which most likely will not last long.
As noted above, the support line of the bull channel is now at S&P 1,050, which also coincides with another major technical indicator — the 50-day moving average.
Today’s Trading Landscape
Earnings to be reported include: Albemarle Corp., Alberto-Culver Co., America Movil S.A.B. de C.V., American Dental Partners, Arch Capital Group Ltd, Arris Group, Atlas Air Worldwide Holdings, Baidu, Bank of Hawaii Corp., Barrett Business Services, Boardwalk Pipeline Partners L.P., Cabot Oil & Gas Corp., Ceragon Networks Ltd., CF Industries Holdings, Changyou.com Ltd., Chemical Financial Corp., Chi Mei Optoelectronics, Covenant Transport, Crane Co., DryShips, Electrolux AB, Enterprise Products Partners L.P., Entropic Communications, EPIQ Systems, Ethan Allen Interiors, Extreme Networks, Flextronics International Ltd., Franklin Electric Co., General Cable Corp., Hanger Orthopedic Group, Health Management Assoc, Heartland Financial USA, Hexcel Corp., Independent Bank Corp., Insulet Corp., Integra Bank Corp., Interactive Intelligence, j2 Global Communications, Ladish Co., Lakeland Financial Corp., Liberty Property Trust, Lorillard, Masco Corp., Merck KGaA, Meritage Homes Corp., Mindspeed Technologies, Monro Muffler Brake, Morgans Hotel Group Co., National Oilwell VarCo., Nidec Corp., NV Energy, Old National Bancorp, Olin Corp., Owens & Minor, PartnerRe Ltd., Pitney Bowes, Plum Creek Timber Co., Potlatch Corp., PrivateBancorp, Reinsurance Group of America, Rent-A-Center, Rockwood Holdings, Roper Industries, Scientific Games Corp., Seaspan Corp., Sohu.com, Solutia, Sunoco Logistics Partners L.P., Superior Bancorp, Tellabs, The Bancorp Bank, Triumph Group, Tv Azteca S.A. de C.V. Sponsored Adr, Veeco Instruments, Vertex Pharmaceuticals, VF Corp., Virtual Radiologic Corp., W.R. Berkley Corp., Waste Connections, Western Alliance Bancorp, Willis Group Holdings Ltd., Winn-Dixie Stores, WMS Industries and Zoran Corp.
Economic reports due: Chicago Fed National Activity Index, Dallas Fed Manufacturing Outlook Survey and Chicago Fed Midwest Manufacturing Index.
Late news: Corning (GLW) reported Q3 EPS of 41 cents versus a 39-cent estimate. Verizon (VZ) reported 60 cents versus a 59-cent estimate. McGraw-Hill (MHP) reported $1.07 versus an estimated $1.05. RadioShack (RSH) reported 30 cents versus a 31-cent estimate.
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