The Dow Jones Industrial Average’s (DJI) eight-day winning streak ended Friday when profit-taking and a quadruple witching expiration day converged to set the most-watched index off 0.4% for the day. But it was up 0.86% for the week and 5% for the month.
There was little in the way of news Friday to account for the selling, except that the U.S. dollar rose 0.6% and was up 0.7% Thursday. The dollar’s strength is attributed to continued problems in Greece and, thus, more difficulties for Europe and the euro.
The health care group saw gains as the vote on a health care bill neared and the prospect of ending the uncertainty surrounding the bill was in view. Aetna (AET) rose 3.7% Friday, UnitedHealth Group (UNH) was up 2.4%, WellPoint (WLP) gained 2%, and Health Net (HNT) was up 1.6%. The health care billed passed last night in a vote of 219-212.
There was just one significant earnings report Friday, and that was for smartphone maker Palm (PALM). PALM plunged almost 25% onworse-than-expected earnings and lower revenue forecasts. Some analysts even cut their price target to zero in response to the report. The small-cap Russell 2000 Index (RUT) fell 1.1% in reaction to Palm’s problems.
The dollar’s strength had a negative impact on commodities and the stocks associated with them. Small-cap energy was hard hit, as was the materials sector, which fell 1%. The energy sector was off 0.9%.
At the close, the Dow was down 37 points to 10,742, the S&P 500 (SPX) fell 6 points to 1,160, and the Nasdaq (NASD) was down 17 points to 2,374.
The NYSE traded just under 2 billion shares with decliners ahead of advancers by over 2-to-1. The Nasdaq had one of its heaviest volume days of the year, trading 1.1 billion shares with decliners ahead by 8-to-5.
Crude oil for May delivery fell $1.57 to $80.97 a barrel, and the Energy Select Sector SPDR (XLE) fell 90 cents to $57.28.
April gold fell $19.90 to $1,107.40 in response to the strong dollar and an interest rate increase from the Bank of India. The PHLX Gold/Silver Sector Index (XAU) lost 2.61 points and closed at 165.99, which put it on its 20-day moving average, but with a sell signal from its stochastic indicator. Support for the XAU is now at the 200-day moving average at 161.45.
What the Markets Are Saying
Friday’s flat market with high volume may at first seem like just another odd witching day close. Volume and volatility are the hallmark of the conjunction of four classes of options all expiring on the same day. But Friday was different in at least one respect, and that was the sharp downturn of the small- and mid-cap stock indices and their subsequent impact on the Nasdaq.
The leading indices of the recent rally from early February — the Russell 2000 and the S&P 400 MidCap Index (MID) — were sharply lower on Friday.
Even though they haven’t penetrated their respective near-term trendlines, the impact of the pullback in the stocks of those indices did affect the Nasdaq. And the Nasdaq executed a minor reversal down. Furthermore, another lower close under Friday’s final number for the Russell and the S&P would break their near-term trendlines and no doubt force a further retreat on the Nasdaq back to its first line of support at the conjunction of its 20-day moving average and its near-term support line at 2,314.
It would be wise for investors to be very cautious with regard to the immediate outlook for the market. With momentum, sentiment and all other internal market readings now very overbought, a path downward is much more probable than a continuation of daily highs.
It is time to be defensive, and that means investors should do three things:
1. Take short-term profits.
2. Sell those stocks that have not participated in the recent advance.
3. Raise cash.
Stocks are probably not due for a major reversal like the 9% correction in February, but could easily fall to the S&P 500’s 50-day moving average now at 1,113. A pullback of 4% to 5% would provide us with an excellent opportunity to put cash back to work prior to the next major advance.
Today’s Trading Landscape
Earnings to be reported before the opening include: China TransInfo Technology, Stealthgas, Tiffany & Co. and Williams-Sonoma.
Earnings to be reported after the close include: DXP Enterprises and Phillips-Van Heusen.
There are no significant economic reports due today.
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