On Friday, stocks ground to a close with small loss for the day despite a slight gain in consumer sentiment and U.S. retail sales. The major question that drove stocks down from Tuesday to Friday was the uncertainty expressed by no less than the Chairman of the Federal Reserve, Ben Bernanke, two weeks ago. And then again this past week when the FOMC’s statement confirmed that Bernanke was not speaking off-the-cuff, but was expressing the assessment of the state of the economy by the entire FOMC. That statement was on Tuesday, and on Wednesday the S&P 500 fell 2.8%.
Even though Friday’s loss was small and activity was light, it was a microcosm of the week. Tech stocks and consumer discretionary stocks were the worst performers as they were throughout the week. J.C. Penney Company, Inc. (NYSE: JCP) fell 4.7% following a forecast of less-than-expected earnings for the remainder of the year. Nordstrom, Inc. (NYSE: JWN) and Urban Outfitters Inc. (NASDAQ: URBN) lost 7.2% and 2.3%, respectively.
As a result of the steady pressure on stocks, investors headed to the safety of U.S. Treasury bonds and the greenback. The yield on the 10-year Treasury note fell to 2.681%, and the U.S. dollar rose 0.3% versus a basket of six other currencies.
At the final bell, the Dow Jones Industrial Average was off 16.8 points to 10,303, the S&P 500 fell 4 points to 1,079, and the Nasdaq dropped 17 points to 2,173.
The NYSE traded 871 million shares with decliners slightly ahead of advancers by 1.14-to-1. The Nasdaq exchanged 485 million shares with decliners ahead by 2.25-to-1.
Crude oil for September delivery fell 35 cents to $75.39 a barrel, paralleling the performance of stocks. The Energy Select Sector SPDR (NYSE: XLE) lost 9 cents at $53.35.
December gold fell 10 cents to $1,216.60 an ounce, and the PHLX Gold/Silver Sector Index (NASDAQ: XAU) fell 1.74 points to 172.42.
What the Markets Are Saying
In just one week, the major averages have suffered very serious technical damage. Not only did the S&P 500 fall 3.4% and the Dow 3.1%, but the Nasdaq fell 4.2%. The Nasdaq’s clobbering was important because it is composed of the highest proportion of technology stocks of all the indices. And according to many economists, it is technology that is going to pull the world out of this recession.
But before I get ahead of myself with a discussion of the technology debacle, let’s review what happened last week that had real technical significance. First, each major index violated its important moving averages, and so the brief rally in July, which challenged the January highs, has been rejected, confirming that the long-term trend is still down.
Despite the low volume, which, admittedly, can provide for some unusually volatile trading, there were some signals that can’t be explained by “extreme volatility.”
First, last week the Nasdaq broke lower on two successive breakaway gaps — an almost unheard of circumstance in anything but a wild, emotionally charged bear market.
Second, and even more shocking, was Thursday’s small “gap down” by the broad-based S&P 500.
Finally, the blue-chip laden Dow Jones Industrial Average sliced through its 200-day moving average with hardly a hesitation, and closed just above its 50-day.
What we are left with is a stock market that has failed a major test: the opportunity to break through its December highs and make a run at the market’s late April high. This tells us for certain that stocks are at the very least stuck in a trading range bounded by the May lows and the August highs. But more than that, the vigor of selling last week shifted the balance of power to the bears.
Now the suspicious looking pattern forming on the chart of every index — that of an enormous head-and-shoulders formation — must be taken more seriously. Those who have followed the Daily Market Outlook know I am very cautious about heralding any potential signal and will always wait for total confirmation. But the bull’s challenge has been rejected, and we are left with an ominous pattern.
It is for these reasons that investors and traders should exercise extreme caution. The trends are now against the bulls, and our strategy should be three-pronged:
1. Sell into rallies.
2. Short-sell the extremes.
3. Accumulate a strong cash balance.
Today’s Trading Landscape
Earnings to be reported before the opening include: JinkoSolar Holding, Lowe’s, Sysco, Valspar and Yuhe International.
Earnings to be reported after the close include: Abraxas Petroleum Corp., Agilent, Cumberland Pharmaceuticals, ICX Technologies, InterOil, Perfect World, Rick’s Cabaret, RINO International, Urban Outfitters and Vitacost.com.
Economic reports due: Empire State Manufacturing Survey (the consensus expects 8), Treasury International Capital (TIC) and housing market index.
If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.
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