Stocks started off strong yesterday as a result of encouraging economic data and a strengthening U.S. economy. For several hours, the Dow Jones Industrial Average (DJI) showed a triple-digit gain. But when it became known that European leaders at a summit were discussing bilateral loans to Greece, the U.S. dollar rose sharply against the euro, and stocks began to sell off.
Financial stocks led the rally earlier in the day, and were up as much as 2.5%, but when the dollar gained strength, profit-taking drove down the bank stocks, and materials stocks — which also had been strong — faltered as well. By the close, profit-taking and the dollar’s turnaround resulted in a broad reversal of the stock market.
That’s not to say that all was sour. Several companies reported better-than-expected earnings.
Best Buy’s (BBY) strong earnings helped retailers close out the day with a 1.2% gain. Qualcomm (QCOM) increased its earnings outlook, but even though that helped the technology sector, the Nasdaq (NASD) still closed at a loss.
Initial jobless claims for the week ended March 20 totaled 442,000, which was less than the expected 450,000, and down 14,000 from the prior week. But continuing claims came in at 4.65 million, which was a bit more than expected, but still down from the week before.
At the close, the Dow was up five points to 10,841, the S&P 500 (SPX) was down 2 points to 1,166, and the Nasdaq ended the session down 1 point to 2,397.
The NYSE traded under 1.2 billion shares with decliners over advancers by 4-to-3. The Nasdaq crossed 687 million shares with decliners ahead by 8-to-5.
Crude oil for May delivery closed at $80.40, down $.21, and the Energy Select Sector SPDR (XLE) closed at $56.06, down 96 cents.
June gold was fixed at $1,094.10 an ounce, up $4.20. However, in after-hours trading, gold gave up its gain when the president of the European Central Bank commented negatively on the intervention by the International Monetary Fund (IMF) in Greece”s financial affairs. The PHLX Gold/Silver Sector Index (XAU) closed at $158.31, down $2.79.
What the Markets Are Saying
On Wednesday, my message was that in a non-conventional and unpredictable technical market, the only meaningful indicator is the chart itself, and so with new highs each day, the trader had no recourse but to be long stocks.
Yesterday, the market expressed its unpredictability again when just after traders had established new positions, in only one hour, it reversed down. This new signal is probably the most significant technical event since the reversal down in mid-January and will no doubt be analyzed by every pundit.
As a result of opening higher, making new annual highs, then closing at the lows of the day, the most visible indices established a “key reversal day” — an important message that near term the rally is over.
For traders, that means that the positions taken just two days ago must be immediately covered (sold). All the broad-based indices, including the S&P 500, NYSE Composite, Nasdaq, and the Russell 2000 (RUT) have triggered our own internal proprietary indicator — the Collins-Bollinger-Reversal (CBR).
I know that many of our readers will accuse me of poor timing in that, on Wednesday, it appeared that I turned bullish. You will note, however, that Wednesday’s opinion was based solely on momentum and that I warned of high risk. This is the negative of short-term trading, but it need not turn into a disaster unless the signal is ignored. Traders should always use stop-loss orders to protect against sudden reversals.
At first glance, yesterday’s turn down on low volume does not appear to be a major market signal. Unless prices fall below the 50-day moving average of each index, yesterday’s break should result in no more than a minor correction of 4% to 5%.
The initial supports for the major indices were noted in Tuesday’s report, and they are still in force. We will monitor the situation closely since a penetration of the 50-day moving averages could result in a double-top and a major turn down.
Traders on the long side of the market should cover all positions. Long-term investors have already accumulated cash based on prior recommendations and are nicely positioned to take advantage of a sudden correction.
Today’s Trading Landscape
There are no significant earnings to be reported.
Economic reports due today: GDP (the consensus expects 5.9%), corporate profits and consumer sentiment (the consensus expects 73).
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- Solutia Issues Strong Buy Signal
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- How to Stay One Step Ahead of a Major Reversal
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