For the bulls, last week was a bitter disappointment. By Tuesday, the Dow had enjoyed a six-day cumulative gain of 6.4%, and with better-than-expected earnings from Alcoa Inc. (NYSE: AA) and CSX Corporation (NYSE: CSX), there was even talk of surprises from the banks and key Dow stocks that could turn the week into one of the best in memory. But instead of a gain, the week ended with a cumulative loss of 1% for the Dow and 1.2% for the S&P 500. And the Dow loss on Friday of 2.5% was its biggest daily drop in a month.
An earnings miss by Google Inc. (NASDAQ: GOOG) and a sharp decrease in the University of Michigan Consumer Sentiment Index were cited as main causes of Friday’s sell-off. But all of the Dow’s 30 components fell, led by Bank of America Corporation (NYSE: BAC), which earlier reported falling profits and an estimate that the newly passed financial overhaul bill could cost the big bank more than $10 billion by the end of next year, according to the Wall Street Journal.
And for the week a disturbing pattern emerged from the Q2 reports. While most earnings estimates were met or exceeded, revenues in report after report failed to meet expectations. General Electric Company (NYSE: GE), Citigroup Inc. (NYSE: C), and Gannett Co., Inc. (NYSE: GCI) all reported lower-than-expected revenues.
The only favorable piece of news at week’s end was Goldman Sachs Group, Inc.’s (NYSE: GS) settlement with the SEC for $550 million on its fraud claims. Although it is the biggest penalty ever assessed a financial services firm, the stock rose 5.9% for the week.
On Friday, the Dow Jones Industrial Average was off 261 points, closing at 10,098, the S&P 500 fell 32 points to 1,065, and the Nasdaq lost 70 points, at 2,179.
The NYSE traded 1.5 billion shares with decliners ahead of advancers by almost 4-to-1. The Nasdaq crossed 750 million shares with decliners ahead by over 7-to-1.
Crude oil for August delivery fell 61 cents to $76.01 a barrel, and the Energy Select Sector SPDR (NYSE: XLE) fell $1.26 to $51.73. August gold lost $20.10, falling to $1,188.20 an ounce. The PHLX Gold/Silver Sector Index (NASDAQ: XAU) was down $5.67 to $167.39.
What the Markets Are Saying
From a technical viewpoint, last week was a disaster for the bulls. Following a five-day advance for the S&P 500 and a gain of 6.5% (the strongest in a year), stocks hit a wall, which consisted of the bearish resistance line, the conjunction of the 50- and 200-day moving averages, and a death cross. And Friday’s selling confirmed a pattern of lower highs and lower lows.
As the week developed, volume decreased on the up days and increased on the down days—a distinctly negative pattern. For example, on Friday, July 9, the Dow gained 59 points with NYSE reporting its lowest volume of the year at 882 million shares only to be followed by another up day on Monday with even lower volume at 855 million shares. On Thursday, a down day, volume increased to over 1.1 billion, and on Friday with the Dow off sharply, volume picked up to 1.5 billion shares.
There is some support at the 1,050 to 1,070 area, and the S&P is there now. But as a result of Friday’s sharp sell-off, each of our internal indicators has issued a short-term sell signal. That means that the prior low made on July 1, at 1011, will most likely be tested. If it fails, the head-and-shoulders formation will be confirmed, indicating that the target of a possible decline is 860 to 883.
What should an investor do?
By now investors, and especially our readers, should have sold underperforming stocks and moved to fully defensive positions. Cash should be held in income-bearing assets, option writing could provide income with some limited capital protection, and puts could be bought to hedge major holdings. Traders will want to short into rallies. But shorting is a tricky business, so many will be better off with inverse ETFs that appreciate when the corresponding index declines.
The bear is on the prowl. Take action now.
Today’s Trading Landscape
Earnings to be reported before the opening include: Delta Air Lines, Halliburton, Hasbro, McMoRan Exploration, New Oriental Education & Technology and PetMed Express.
Earnings to be reported after the close include: Atheros Communications, Brown & Brown, Crown Holdings, Equity Lifestyle Properties, IBM, ICU Medical, IDEX Corp., Ladish, Lincare, Noble Corp., Packaging Corp., Renaissance Learning, RLI Corp., Steel Dynamics, Texas Instruments, Tupperware Brands and Zions Bancorp.
Economic report due: housing market index.
If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.
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