In a volatile day with violent swings of almost 300 points, the Dow Jones Industrial Average closed just 12 points lower. The day started with a sharp rally of a full percent, which took back a significant portion of Friday’s fall.
But when the ISM Index, which was expected to be at about 54 came in at 50.9, the market turned sharply lower. This was a great disappointment that confirmed that U.S.manufacturing has not yet recovered, and by noon the index was off by about 145 points.
Then, even as rumors flew that S&P was about to lower the U.S.debt rating to AA, a rally took hold and continued throughout the afternoon.
With the NYSE trading 1.1 billion shares and advancers almost equal to decliners, it was a classic case of bad news being ignored as investors focused on the likely passage of the debt deal while ignoring all other negative input. Despite the heavy selling on Friday, the Dow industrials’ 200-day moving average has not been violated and is now at an even 12,000.
The Dow Jones Transportation Index closed slightly below its 200-day moving average at 5,156, but has further support at 5,010. But the failure of the index to hold such a significant line presents investors with another of those “non-confirmation” issues. Instead of the transports showing strength, as in early July, it is now the industrials that are holding the line. Despite not breaking down under grim news, the fact that the transports, a forward economic indicator, are weak is not a positive. We will watch this situation closely since a further breakdown would no doubt also pull down the industrials, as well.
Despite the afternoon rally, some key groups showed pronounced weakness: Health care, drugs, insurance and retail stocks closed lower. The retail sector, however, appears to be approaching an important support zone, which is roughly marked by its 50-day moving average (blue line) at $53 on its Retail Select Sector SPDR (NYSE:XRT). On Friday, our internal indicator, the Collins-Bollinger Reversal (CBR), flashed a buy signal, and yesterday, the stochastic did the same. With two positive developments and its ability to hold above its 50-day moving average, the outlook appears to be brighter for this sector.
- See Serge Berger’s Daily Market Outlook: How High Could a Rally Take Us?
- See Sam Collins’ Trade of the Day: DDS Stock Priced Right
- See Serge Berger’s Trade of the Day: Short XLI on a Relief Rally
