On Monday, with the Dow and its companion indices up over 8% for the month and little in the way of news to bring in new buyers, modest profit-taking seemed to be the order of the day.
The leading decliner yesterday was the financial sector, following the selling of bank stocks in Europe after Moody’s Investors Service downgraded the debt of Anglo Irish Bank. That, along with the new Basel regulations earlier in the month, put pressure on the sector for the entire session. In the United States, financials were off 1.2% with Bank of America Corporation (NYSE: BAC) down 2.7%, The Travelers Companies, Inc. (NYSE: TRV) off 1.8%, and JPMorgan Chase & Co. (NYSE: JPM) down 1.7%.
Mergers and acquisitions continued to make headlines. Alberto-Culver Company (NYSE: ACV) will be acquired by Unilever for $37 per share. And Southwest Airlines Co. (NYSE: LUV) will acquire AirTran Holdings, Inc. (NYSE: AAI) for $7.69, which is a 69% premium over AAI’s closing price on Friday. LUV rose 8.7% following the news.
Treasuries were higher following rumors of another Federal Reserve bond buying program. The 10-year note rose, pushing its yield down to 2.51%.
At the close, the Dow Jones Industrial Average was down 48 points to 10,812, the S&P 500 fell 7 points to 1,142, and the Nasdaq was down 11 points at 2,370.
The NYSE traded 920 million shares with decliners ahead of advancers by 1.4-to-1. The Nasdaq traded 521 million shares, and decliners there outpaced advancers by more than 1.5-to-1.
November delivery crude oil closed at $76.52 a barrel, up 3 cents, and the Energy Select Sector SPDR (NYSE: XLE) fell 21 cents to $5.06 after turning away from its 200-day moving average following two Collins-Bollinger Reversals (CBR) reversals (down).
December gold rose 70 cents to $1,196.70 an ounce. The PHLX Gold/Silver Sector Index (NASDAQ: XAU) fell 1.56 points, closing at 195.52.
What the Markets Are Saying
It’s no wonder that investors are confused over the direction of the stock market since many of the recognized “experts” have differing opinions, and some are in total disagreement.
Yesterday’s guest analysts on CNBC illustrate my point. Bob Auer of Auer Growth Fund likes quality blue chips. Patrick Becker of Becker Capital Management says stick with China and other overseas companies, as well as large-cap stocks. Rod Smyth of Riverfront Investment Group says that stocks are yielding more than bonds and likes international high-yield stocks.
Paul Schatz of Heritage Capital disagrees with Smyth and with David Tepper, who got the market going on Friday with his bullish comments by saying within the next six months “everything will go up.” Schatz says, “How many times we’ve heard that before? It is so easy — clearly there is something wrong.”
Then there is Bob Prechter, president of Elliott Wave International, who is bearish on stocks and says that the Dow will fall below 1,000 within the next six years, and that the current run gives investors an “opportunity to sell in late September/October.” He says, “Don’t buy the breakout — sell it.”
What you hear and see on TV should be digested as background filler. Even though the analysts and fund managers are generally good at what they do, interviews are not their strong suit. The emotion of the moment brings out the worst in them, and the hosts focus on that emotion for a good sound bite.
For example, yesterday morning, the “talking heads” were bullish, so they had a stable of bullish managers on. But in the afternoon when the market turned down, they brought in the bearish side — enter Bob Prechter. In other words, they were playing to the crowd’s emotions.
The most important feature of technical analysis is that when applied correctly it takes most of the emotion out of investing. The charts may not always point you in the right direction, but they can’t lie because the chart is emotionless.
On Sept. 3, I introduced our readers to the “Elements of a Trading Strategy” so that those who are new to trading would have a guide to help them take the emotion out of their investment decisions. A good trading program can even provide a trader who is wrong in 6 of 10 trades with gains if a disciplined strategy is applied.
Following the twin Collins-Bollinger Reversal (CBR) buy signals in late August, when most of the analysts were saying “sell,” I told our readers to buy on the support line at S&P 500 1,040. Now with the resistance at just above 1,130, and our CBR again flashing — but now with a sell signal — it is prudent to sell.
As a rule you should buy on support, and sell on resistance (buy low, sell high). It sounds simple, but it takes an enormous amount of discipline to consistently apply the rule, especially if you are listening to cross-currents of opinion. Whether you’re a bull or a bear, if you follow your trading rules, you will be a winner.
For one example of an emotion-free trade, see today’s Trade of the Day.
Today’s Trading Landscape
Earnings to be reported before the opening include: Walgreen Company.
Earnings to be reported after the close: Landec, Sealy and SMSC.
Economic reports due: ICSC-Goldman Sachs store sales, Redbook, S&P Case-Shiller HPI, consumer confidence (the consensus expects 52), and State Street Investor Confidence Index.
If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.
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