Stocks opened with a spectacular rush of buyers who were encouraged by a preliminary agreement between the White House and Republican leaders on a tax package that would extend the current Bush cuts for two years. A reduction in payroll taxes for a year, an extension of jobless benefits, and a reinstatement of the estate tax at 35% are also part of the plan.
But as the day wore on, it became apparent that the deal between the White House and Congress was preliminary, as politicians from both sides expressed criticism. Stocks quickly sold off as uncertainty again reared its ugly head, and by noon, over half of the market’s early gains had vanished. Then Ireland’s financial problems surfaced again, the euro fell, and stock sellers overwhelmed the trading floors. By the final bell, stocks closed with a small loss.
Total consumer credit surprised analysts as it rose by $3.4 billion versus consensus expectations of a decline of $2.5 billion. And consumer credit for September was revised downward to an increase of $1.2 billion.
Heavy selling of Treasurys drove the 10-year note to a yield of 3.13%, the highest since July. And long-term tax-exempt bonds fell when an extension of the Build America Bonds (BAB) was not included in the proposed tax bill. If the BAB program expires, local governments will have to offer higher interests rates in order to offset the guarantees provided by the federal government.
At the close, the Dow Jones Industrial Average was off 3 points at 11,359, the S&P 500 was unchanged at 1,224, and the Nasdaq rose 4 points to 2,598. The NYSE traded 1.6 billion shares with advancers and decliners even. The Nasdaq crossed 536 million shares with advancers ahead of decliners by 1.3-to-1.
Crude oil for January delivery fell 69 cents to $88.69 a barrel, after rising to an intraday high of $90.76 — the highest in over three years. The Energy Select Sector SPDR (NYSE: XLE) fell 25 cents to $65.79 following a new annual high at $67. February gold settled at $1,409 an ounce, down $7.10, following a new record high of $1,432.50. The PHLX Gold/Silver Sector Index (NASDAQ: XAU) fell 3.58 points, closing at 225.18.
What the Markets Are Saying
Yesterday, enthusiastic buyers flooded the markets with pre-opening orders, and the Dow Industrials opened just shy of 100 points higher. But the headlines of the day again forced reality on the early buyers, and by noon, over half of the gains had vanished. Then, an hour before the bell, another wave of selling smashed into a mid-afternoon recovery, and by the closing bell, the bulls had been lucky to escape with their hide intact.
Yesterday’s late selling resulted in a “key reversal day” for the Dow Industrials and the broad-based NYSE Composite. The pattern is recognized by most technicians as signaling a pending market decline. Key reversals were also triggered on precious metals and crude oil.
But before we all head for a leap from the nearest bridge, let’s consider the current technical condition of the market. Following an 18% rise from late August to early November, the S&P 500 had a “correction” of 4.2%. That round of profit taking dropped the index to its 50-day moving average where it consolidated for several weeks before launching the four-day rally that turned out to be “the best start of December ever,” according to Jeff Staut of Raymond James.
Consider this: Our stock markets rallied in the face of Europe in economic crisis, Korea close to war, China clamping down on inflation, and our own government wrestling with an internal budget crisis. So, despite the hourly twists and turns that mirror the daily headlines, the overall market drove to new highs.
My point is this: In a market in which large trading blocks are controlled by a few hedge funds and institutional traders, who are prone to dump stock or buy on the strength of the latest headline, I’m not at all confident that a single day’s reversal will amount to anything more than a normal pullback. “Normal” is a 4% to 8% retracement, which could take the S&P 500 first to the 1,174, and then perhaps to the mid-summer breakout double-top at 1,130.
Conclusion: Yesterday’s key reversals will likely result in a correction of 4% to 8%, thus turning the near-term trend down. The intermediate- and long-term trends are still bullish, and there is an enormous amount of cash on the sidelines. Thus, a limited retracement of this nature should be viewed as a buying opportunity by medium- and long-term investors. But traders should liquidate long positions and take to the sell side until the correction has run its course.
For a way to profit from a correction, see the Trade of the Day.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.
