Friday started on a positive note with an upward revision of fourth-quarter GDP to an annualized quarter-over-quarter growth of 5.7% versus an expected growth rate 4.7%. The report went on to show that core personal consumption expenditures increased at an annualized quarterly rate of 1.4% and that, too, was stronger.
This is good news that could result in more jobs, but investors on Friday were thinking more about a possible round of inflation than jobs and stronger growth. So after a modest rally, stocks slid to the minus side and the U.S. dollar rallied carrying most commodities along with it. Then, before the close, commodities and materials stocks turned south and, by the close, ended with sharp losses.
Technology stocks were among the worst performers with Apple (AAPL) down and others following. Even though the leading technology company reported higher earnings than expected this week, their newest product–the iPad–is receiving a mixed review. And Amazon.com (AMZN) rolled over as well. After posting a strong quarter the stock closed lower on Friday.
At the close, the Dow Jones Industrial Average (DJI) fell 53 points to 10,067, the S&P 500 (SPX) fell 11 points to 1,074, and the Nasdaq (NASD) was off 32 points, closing at 2,147.
The NYSE traded just under 1.6 billion shares with decliners ahead of advancers by 2-to-1. The Nasdaq traded almost 1 billion shares with decliners ahead by just under 2-to-1.
What the Markets Are Saying
Even though the market managed to close higher in two of the last five sessions, each intraday low has been lower than the prior day’s low. That pattern eats into support and quickly exhausts available buyers leaving only sellers in the market with nothing remaining but lower prices.
This pattern of lower intraday lows crushed the first line of support at S&P 1,080 to 1,085, and with the low of Friday at 1,072, selling is about to enter the next zone of support at 1,020 to 1,070.
Looking back to Friday, Jan. 22, the S&P sliced through its 50-day moving average, setting it up for the challenge of the line at 1,080 to 1,085 and, as noted, quickly dispatched that support. So, in just two weeks, the stock market has confirmed that a correction is under way.
In January, the S&P 500 fell 3.7%, the Dow was off 3.5%, and the Nasdaq was down 5.4%.
Meanwhile, the U.S. dollar is breaking out from a reverse head-and-shoulders bottom while, as Michael Ashbaugh points out on MarketWatch, the Chinese markets have broken down from a head-and-shoulders bottom. These two developments are important since they signal that the global chase for stocks, especially “emerging market stocks,” has at least temporarily been stopped in its tracks. But this could add value to domestic stocks.
This month, the market enters a support zone at S&P 1,020 to 1,070 that took many months to develop, and it enters it with virtually every internal and sentiment indicator oversold.
So, with such a negative background and U.S. stocks cheap, my guess is that Friday’s higher downside volume signaled a near-term selling climax and a rally is about to begin. If it does, it does not signal the end of the correction, but merely a respite from the panic that many investors felt as they were long stocks at the top of a 10-month chase for bargains. The bargain counters of Wall Street are empty, so rallies must be used as opportunities to raise cash until the next “blue-light special” is announced.
Today’s Trading Landscape
Earnings to be reported before the opening include: Affiliated Managers, Alberto-Culver, Ceragon, Changyou.com, Duncan Energy, Enterprise Products, Exxon Mobil, Gannett, Haemonetics, Hewitt Associates, Humana, MDU Resources, Moog, NiSource, Old National Bancorp, Sohu.com and Sysco.
Earnings to be reported after the close: Advent Software, Anadarko Petroleum Corp., Array BioPharma, Crown Holdings, DST Systems, Extreme Networks, Hologic, ICU Medical, Local.com, Mannkind, North American Energy, Oclaro, PennyMac Mortgage, Plum Creek, Reinsurance Group of America, Rent-A-Center, Rudolph Technologies, Silicon Motion, Tupperware and Unica.
Economic reports due: existing home sales (the consensus expects 5.9 million).
Late earnings news: Humana (HUM) reported $1.48 versus a $1.48 estimate.
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