After three days of modest gains, stocks closed lower on the complex implementation of the Greek bond deal and cautious estimates on Europe’s economy. Adding to the uncertainty, January U.S. existing homes sales topped expectations, but December’s report was revised sharply lower.
Energy, utility and health care stocks — all defensive groups — closed higher. But banks, technology and telecom were lower.
At the close, the Dow Jones Industrial Average was off 27 points to 12,939, the S&P 500 fell 5 points to 1,358, and the Nasdaq was off 15 points at 2,933. Volume on the NYSE fell to 728 million shares, while the Nasdaq traded 442 million shares. Decliners were ahead of advancers on the NYSE by 1.7-to-1, and on the Nasdaq by over 2-to-1.
Over 85% of the S&P 500’s stocks are trading above their 50-day moving average. Fewer stocks are making new highs, even during last week’s advance, and the Dow transports are lagging, having not confirmed a Dow bull market. Also, stocks are advancing on lower volume.
All of this is according to Doug Kass, President of Seabreeze Partners Management, who also talks of other negatives. These include higher oil prices and their impact on the economy, broadening geopolitical risk in the Middle East, a slowdown in India and China, and continued reliance on monetary policy. He is looking for a 3% to 5% correction.
A 3% to 5% correction is no big deal, and we’ve been talking about many of these issues, like low volume on advances, the number of stocks trading over their 50-day moving averages, and others, for a week or so.
The fact is that the market has “climbed a wall of worry” for a month. In spite of all of the fear factors, the stock market jumped 8% in January to challenge 24-month highs and will probably continue its move north again once the market adjusts, by way of a correction, to the simple matter of being somewhat overpriced in the near term.
There appears to be more interest and concern among technicians regarding the Dow Jones Transportation Average since we discussed it on Tuesday. One reason for concern is that the performance of the transportation industry, chiefly railroads and trucking, often provides a clue as to the future performance of the economy. The other is chiefly the technical Dow Theory that both the Dow industrials and transports must confirm each other’s new high before a “Dow bull market” has occurred.
The Dow Jones Transportation Average rallied to the bottom of the major support zone at 6,425, reversed, and yesterday plunged through its first line of support, the 50-day moving average. The next line of support is at the conjunction of the support line at 5,025 and the intermediate uptrend line (green) at about the same level. Below that is the all-important 200-day moving average at 4,962.
Conclusion: Thus far, of the major indices there has only been a correction in the Dow Jones Transportation Average — down 5.5% from its high at 5,425. Its MACD indicator is now grossly oversold, and so the likelihood of the transports holding between 5,025 and the 200-day moving average at 4,962 is high. Assuming that the lines hold, then the chances are equally high that a correction in the other indices will turn out to be mild and the indices could even trade sideways until the transports resume the upward major trend.
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.
