Despite Intel’s (INTC) knockout earnings following Thursday’s close, both Intel and the stock market closed lower on Friday. But much of the selling had little to do with Intel and more to do with what is perceived as an overvalued stock market coupled with several unfavorable economic reports.
December’s consumer price index (CPI) missed estimates by 0.1%. With food and energy excluded, the December CPI increased 0.1% as expected. Industrial production in December increased 0.6%, also as expected, and capacity utilization for December was slightly higher than forecasted at 72% versus 71.8%.
But the University of Michigan’s preliminary January consumer sentiment survey came in at 72.8 versus an expected 74. And since many economists have focused on the importance of a strong confidence number and strong retail sales, sellers bolted when the report was made public.
Another reason for Friday’s broad decline was heavy selling in bank stocks. JPMorgan Chase (JPM), off 2.2%, appeared to be the trigger for the selling in the bank sector. The dissatisfaction stemmed from JPM and the group’s cautious attitude toward consumer credit and persistent loss provisions. The public is under the impression that banks have the money to lend, but as long as they can make a no-risk profit in U.S. Treasuries and other low-risk investments, they will continue on that path.
A stronger U.S. dollar also accounted for some losses, bolstered by the continuing concern over the financial health of Greece. The flight to the dollar also led to selling in commodities, and the CRB Commodity Index fell by 1.1%.
At Friday’s close, the Dow Jones Industrial Average (DJI) was off 101 points to 10,610, the S&P 500 (SPX) fell 12 points to 1136, and the Nasdaq (NASD) was down 29 to 2,288.
Volume jumped to 1.4 billion shares on the NYSE, partly due to January options expiration, and decliners exceeded advancers by 9-to-4. The Nasdaq traded 860 million shares with decliners ahead by almost 3-to-1.
On Friday, February crude oil fell 35 cents to $77.65 a barrel, and the Energy Select Sector SPDR (XLE) fell 48 cents to $59.26. But on Monday in London, the February crude oil contract gained 49 cents to $78.49 a barrel. Also in London, January gold rose $2.10 to $1,134.50 an ounce. On Friday, the PHLX Gold/Silver Sector Index (XAU) fell $3.62 to $172.78.
What the Markets Are Saying
Despite Friday’s triple-digit hit, the Dow and the major indices have held their gains and last week even set new 12-month highs. And even though the market opened lower on Friday, much of the selling could have been the result of expiring options. From 2 p.m. to the closing bell, all indices rose on fairly heavy volume.
But the internal indicators are universally overbought and the sentiment indicators are steeply overbought.
Among the sentiment indicators that are of most concern is the measure of public sentiment, which is very bullish, and letter writers also have a bullish bias — both negatives for stocks. The AAII sentiment survey shows 47.77% bullish, which is almost exactly the number on Oct. 15 just before the 6% pullback in the S&P 500.
In addition, the public is buying calls while the “smart money” is buying puts — almost never a good sign.
The indicator to watch now is the momentum indicator, which had been holding steady since Dec. 22. But, on Friday, it slipped from positive to neutral, and if it turns negative, watch out below.
In my opinion, if the market heads higher today and holds its gains, the advance could continue for several more weeks, but if the market closes lower today and the major indices close below their respective 20-day moving averages, a 5%-10% correction could be triggered.
Today’s Trading Landscape
Earnings to be reported before the opening: Citigroup, Fastenal, First Horizon National Corp, Forest Labs, II-VI, McMoRan Exploration, New Oriental Education & Technology Group, Parker Hannifin Corp., PetMed Express and TD Ameritrade Holding Corp.
Earnings to be reported after the close: Adtran, Cree, CSX Corp., Fulton Financial, Hancock Holding Co., IBM, Pinnacle Financial Partners, Supertex and Wipro.
Economic reports due: Treasury International Capital (TIC), State Street Investor Confidence Index and housing market index.
3 Cheap, Must-Own Recovery Stocks to Double in 2010
Get the names of the best cheap stocks to rebuild your wealth in 2010. Each stock sells for less than $10 a share and is set to double (even triple!) in the next 12 months. Download your FREE report here.
