Thursday’s broad market advance, which appeared to show that investors had come to grips with a slow-but-steady economic recovery, reversed on Friday when the government reported lower-than-expected consumer spending in September.
Along with the government’s assessment, the Reuters/University of Michigan consumer confidence index fell in October. With consumer spending accounting for 70% of economic activity, the twin reports were greeted with fear that the economy was not growing as expected and, thus, may not support the current prices being paid for common stocks.
Friday was the biggest one-day decline since early July, and the sixth double-digit move in seven sessions. It also marked the Dow Jones Industrial Average’s (DJI) 10th triple-digit move in October. So the dreaded high volatility that plagued the markets earlier in the year also played on the minds of traders as they scrambled to cover losses before the weekend.
By Friday’s close, every one of the 30 Dow components was at a loss, and the index closed down 250 points to 9,713. The S&P 500 (SPX) fell 30 points to 1,036, and the Nasdaq (NASD) was down 52 points to 2,045.
The NYSE traded 1.7 billion shares with decliners showing a 5-to-1 advantage over advancers. On the Nasdaq it was much the same with 952 million shares traded and decliners ahead by 11-to-1.
For the week, the Dow lost 2.6%, the S&P 500 fell 4%, and the Nasdaq was down 5.1%.
The U.S. dollar and Treasury bonds rose as investors again sought a safer haven than stocks, and commodities fell across the board.
December crude oil fell $2.87 to $77 a barrel, and the Energy Select Sector SPDR (XLE) closed at $55.25, down $2.24.
Gold for November delivery fell $6.70 to $1,039.70. The PHLX Gold/Silver Index (XAU) fell $5.40 to $156.64. The next support for the XAU is at its 200-day moving average at about $142.
What the Markets Are Saying
Fear gripped the stock market on Friday as the S&P 500 fell for the seventh time in the past nine sessions, and the CBOE Volatility Index (VIX) rose 24% to its highest level since July 8. And no wonder. On Friday, I noted that, “If Thursday’s dramatic turn has legs, then we should see some follow-through today …”
Needless to say, we didn’t get that follow-through. Instead, the selling that started almost at the opening picked up steam throughout the day driving the major indices to the middle of their first support zones and completely erasing Thursday’s gains.
The Dow’s first support zone starts at 9,900, and Friday’s close not only drove through it, but well into the heart of the zone, which has a low of 9,380.
The same is true of the S&P 500, which not only fell close to the bottom of its first zone of support, but also cracked the intermediate support line and the 50-day moving average at 1,052. The close was at 1,036, and the S&P’s support zone is 1,020 to 1,070.
As for Nasdaq, the index appears to have double-topped at just under 2,200 with major support at 1,930 to 2,015, and another band of primary support at 1,770 to 1,880.
What all of this means is that we are now in a correction with the likelihood that selling will continue on and off for several weeks.
What is surprising is the panic that occurred even among professional traders at the prospect of a “normal correction,” despite the warnings of reversals from many stocks and the repeated concern that prices were too high above the 200-day moving average and, therefore, due to correct.
How far can this correction take the major indices?
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Consider these factors:
1. The end of Q3 earnings season is at hand and so the fuel from those mostly favorable reports will soon be extinguished.
2. The public is still not overly concerned about the health of the market. From the American Association of Individual Investors (AAII) readings we see that just over 33% are still bullish, while 42% are bearish, despite a rally of more than 65% in the S&P since March. And the Advisor Sentiment Survey is still bearish.
3. The internal indicators are oversold, but none has yet issued a buy signal.
With the majority of technical indicators and charts now pointing lower, it is possible that the major indices will continue to fall to their next support zone, especially if S&P 1,020 is violated.
For the Dow, that zone begins at 8,900, the S&P’s next support starts at 1,010, and the Nasdaq’s begins at 2,015.
Remember, however, that despite the likelihood of a further market correction, the bull market is still strong and a correction of the expected magnitude should be used by astute investors as an opportunity to buy stocks at better prices.
Today’s Trading Landscape
Earnings to be reported include: AAON, Administaff, Albany International Corp., Altra Holdings, American Physicians Service Group, Anadarko Petroleum Corp., Anglogold Ashanti Ltd., Argo Group International Holdings Ltd., Array BioPharma, Asset Acceptance Capital Corp., ATS Medical, Avis Budget Group, Axis Capital Holdings Ltd.
BRE Properties, Bridge Capital Holdings, Brookdale Senior Living, Buckeye Group Holdings LP, Buckeye Partners
CameCo, CapitalSource, Carmike Cinemas, Carrols Restaurant Group, Chelsea Therapeutics, Chesapeake Energy Corp., Cleco Corp., Clorox, CNA Financial Corp., Cognex, Comstock Resources, Consolidated Edison, Cooper Tire & Rubber, Corporate Executive Board Co., Cross Country Healthcare, Cutera, CVR Energy
Dean Foods, Diodes, Dollar Financial Corp., Dover Motorsports, Drew Industries, Ducommun, Energy XXI (Bermuda) Ltd.
Ensign Group, Entercom Communications, Extra Space Storage
First Merchants Corp., First Mercury Financial Corp., First State Bancorp, Five Star Quality Care, Flagstone Reinsurance Holdings Ltd., Flanders, Forest Oil Corp., Fundtech Corp.
Greenlight Capital Re Ltd., Guidance Software
Haemonetics Corp., Hawaiian Electric Industries, Hecla Mining, Herbalife Ltd., HFF, HIP International Ltd., Himax Technologies, Humana, Hutchinson Technology
iMergent, Innophos, Interbank, IPC the Hospitalist Co.
Kindred Healthcare, Kinross Gold, Kopin Corp., KT Corp.
LeapFrog Enterprises, Loews Corp., LookSmart Ltd.
Maguire Properties, MannKind, Meadowbrook Insurance, Mednax, Mercury General, Microfluidics International Corp., Multi-Color Corp.
Nam Tai Electronics, National Interstate Corp., Natus Medical, Newprobe, Netlist, Nice Systems, Northeast Utilities
On Assignment, Orbotech, OSG America LP, Overseas Shipholding Group
Parkway Properties, Peapack-Gladstone Financial Corp., Penson Worldwide, Perrigo, Philippine Long Distance Telephone Co., Post Properties, PRG-Schultz International, ProAssurance Corp., PS Business Parks
Questcor Pharmaceuticals
Regal-Beloit Corp., Republic Services, Rogers Corp., Rudolph Technologies
Satcon Technology Corp., Shinhan Financial Group Co Ltd., SRS Labs, St. Mary Land & Exploration, STAAR Surgical, Standard Parking, Sun Hydraulics, SWS Group, Sykes Enterprises, Synchronoss Technologies, Syniverse Technologies, Sysco Corp.
Tasty Baking Co., Technitrol, Texas Roadhouse, TGC, The GEO Group, The Hanover Insurance Group, The Principal Financial Group, Thomas Properties Group, TNS, Transact Technologies
Union Drilling, Unitrin, Uroplasty, USEC
Valeant Pharmaceuticals International, Vanda Pharmaceuticals, Virage Logic Corp., Vulcan Materials
Wonder Auto Technology
Economic reports due: motor vehicle sales (the consensus expects 7.3 million), ISM Manufacturing Index (the consensus expects 53), construction spending (the consensus expects -0.2%), and pending home sales.
Late news: Ford (F) swung to a third-quarter profit as lower vehicle discounts and government incentives drove car sales. The company reported Q3 earnings of 29 cents versus a 12-cent estimate.
Arch Coal (ACI) reported Q3 EPS of 16 cents versus a 4-cent estimate.
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