The most commonly repeated word yesterday was “fear”: Fear that the world’s economies would again be thrust into a new round of deflation, fear that the U.S. dollar would work against the country’s efforts for a turnaround, and fear that three European nations could default on bond payments.
And, to top it all off, U.S. initial jobless claims for the week ended Jan. 30, increased more than expected, sending a wave of fear that the unemployment situation is getting worse.
Amid Greece’s much publicized problems, the European Commission put more pressure on the country to cut its deficits, and that caused bond buyers to back off on Treasury issues of two other European nations: Spain and Portugal. The euro hit an eight-month low versus the dollar, which traded 0.7% higher.
The result of the turmoil in international markets resulted in a global sell-off, and U.S. markets were hit with another triple-digit down day. Broad selling hit the S&P 500 (SPX) especially hard, with 97% of its stocks closing at a loss. And it briefly sent the Dow Jones Industrial Average (DJI) under 10,000 for the first time since early November.
Natural resource stocks were among some of the biggest losers. Their performance is linked to the dollar in an inverse relationship. The commodity complex, as measured by the CRB Commodity Index, hit a new three-month low and was down 2.6%.
At the close, the Dow was down 268 points to 10,002.18, the S&P 500 fell 34 points to 1,063, and the Nasdaq (NASD) lost 65 points to 2,125.
Volume on the NYSE picked up on the heavy selling to trade just under 1.5 billion shares, with breadth at a negative 10-to-1 on the NYSE, and about 8-to-1 on Nasdaq.
Crude oil for March delivery plunged $3.84 to $72.14 a barrel, and the Energy Select Sector SPDR (XLE) fell $2.32 to $54.23.
Gold futures fell to three-month lows, with the April contract falling to $1,063, down $49. The PHLX Gold/Silver Sector Index (XAU) lost $8.34, closing at $146.42.
What the Markets Are Saying
In a convergence of “perfect storms,” the stock markets of the world reacted violently to possible economic problems in Europe and unemployment disappointments here. Yesterday our markets, following an all-too-brief rally, reversed and took back the gains of three days in one, driving the key indices through the lows of last week.
This emotional reaction to the international situation now presents us with a situation that demands a decision. The Dow is just 102 points from the bottom of the current support zone, while the S&P 500 has just entered its new support zone of 1,020 to 1,070 by closing at 1,063.
For owners of stocks and exchange-traded funds (ETFs) in these indices, it is prudent to cut back to a point where the investor is comfortable with his holdings. The stocks held should pay higher-than-normal dividends or be protected with options writing strategies.
As for the Nasdaq, which is loaded with high-tech stocks and lower quality issues, investors should look closely at their holdings and sell stocks that fail to meet earnings estimates, and especially those that pay low or no dividends.
They may wish to hedge by writing options or taking short-term positions in inverse funds — ETFs that rise when the market falls. But remember, buying inverse ETFs is a short-term strategy, since history has shown that these funds have failed to fully protect investors during extended downturns.
Finally, there is but one group of stocks and ETFs that should be immediately sold, and that is the emerging market securities. Those funds appear to have run their course and could be subject to higher risks than funds in other categories. We’ve had a great run in them, and now is the time to take profits.
The market could fall off even more, but this correction is reminiscent of the first correction in the last bear market, which followed a straight run from the lows of 2003 to the high of March 2004 — a gain of almost 50%. The market then consolidated for almost seven months, but fell by only 9% and spent a great deal of time trading back and forth.
Those who liquidated everything lost out on a move of another 40% over the next two-and-a-half years.
It is time to cull, not sell everything. Emotion is ruling the markets, and that is almost always the worst time to become part of the crowd. Gather cash and wait for some real bargains.
Today’s Trading Landscape
Earnings to be reported before the opening include: Aetna, Allegheny Energy, American Axle, Apartment Investment & Management, Beazer Homes, Brookfield Properties, Brooks Automation, CNA Surety, Imperial Sugar, K12, Kelly Services, Magnetek, MDC Holdings, Mednax, National Retail Properties, PPL Corp., Prestige Brands, Sensient Technologies, Simon Property Group, Spectra Energy LP, TECO Energy, Tyson Foods, Viad Corp., Weyerhaeuser and YRC Worldwide.
Earnings to be reported after the close: Buckeye Partners.
Economic reports due: employment situation (the consensus expects 10.1% for the unemployment rate), and consumer credit (the consensus expects -$8.4 billion).
Quarterly earnings news (earnings vs. estimates):
- Aetna (AET): 40 cents vs. 42 cents
- Beazer Homes (BZH): $1.09 vs. 90 cents
- Brooks Automation (BRKS): 2 cents vs. 0 cents
- MDC Holdings (MDC): $2.68 vs. 39 cents
- Mednax (MD): $1 vs. 98 cents
- Prestige Brands (PBH): 21 cents vs. 19 cents
- Viad Corp. (VVI): 43 cents vs. 43 cents
- Weyerhaeuser (WY): 52 cents vs. 38 cents
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