Stocks opened higher on Monday, but within 30 minutes, the top of the day had been reached. By noon, a round of heavy selling had driven the Dow Jones Industrial Average down 100 points to its low of the day.
U.S. stocks spent the remainder of the day clawing their way back to breakeven. Europe was again a cause of uncertainty, but optimism that Greece may avoid a default caused a sharp rally in the euro and a decline in the U.S. dollar; however, events in Europe appeared to have little influence on U.S. stocks.
A lack of momentum and leadership produced a mixed close with blue-chip stocks in the red for the first time in five sessions.
At the close, the Dow was off 12 points at 12,709, the S&P 500 rose less than a point to 1,316, and the Nasdaq fell 3 points to 2,784. The Big Board traded 722 million shares and the Nasdaq crossed 416 million. Advancers led decliners on the Big Board by 1.4-to-1, but on the Nasdaq decliners were ahead by 1.2-to-1.
The dollar as evidenced by the PowerShares DB US Dollar Index Bullish Fund (NYSE:UUP) was so weak yesterday that it violated the lower support line of a bull channel that began in November. Yesterday’s weakness in the face of a strong euro is not so surprising as the U.S. markets’ mixed response to the dollar’s weakness.
Traders wonder if this is an indication that the relationship between stocks, commodities and the dollar has changed, or is it simply that stocks have run too far, too fast. One thing is certain: Europe’s problems are far from being over and a flight back to the dollar is likely.
The S&P 500 briefly popped above its bearish resistance line at 1,320 yesterday, but couldn’t hold at that level. Not only that, but the index came very close to a minus day, which would have been scored as a reversal. Only a last-minute rush to buy saved it from a strong sell signal.
Conclusion: In Monday’s Daily Market Outlook, I noted the enormous negative posture of both the internal and sentiment indicators, and today a drop in momentum confirmed that the air is very thin at this extended level of trading. Following the December/January rally the market is due for a rest.
The S&P 500’s first level of support is its last breakout point — the double-top at 1,285. That line is not nearly as important as its 200-day moving average at 1,257. A pullback to that line would represent a 5% correction, which is a light correction, and since the trend is strong, I see that as the likely area for the next consolidation.
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.
