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Investors Should Welcome a Correction

All of the major indices are now overbought on a near-term basis


Both the Dow Jones Industrial Average and the S&P 500 gained 0.5% Tuesday, but the Nasdaq fell 0.64% as profit-taking hit the more overpriced sectors. And sector rotation had much to do with mixed results as energy, health care, telecoms and utilities led — all of which are defensive sectors.

Technology was weak with VMware (NYSE:VMW) off 21.5% after announcing a cut of 7% of its workforce. But Apple (NASDAQ:AAPL) gained 1.9% after announcing a 128 GB version of its iPad.

At Tuesday’s close, the Dow was up 72 points to 13,954, the S&P 500 gained 8 points to 1,508, and the Nasdaq fell a point to 3,154. The NYSE traded 721 million shares and the Nasdaq crossed 438 million. Advancers led decliners on the Big Board by 1.5-to-1, and on the Nasdaq, advancers were ahead by 1.2-to-1.

Russell 2000 Chart
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Trade of the Day Chart Key

Note that the small-cap Russell 2000 and S&P Midcap 400 index (not shown) have blasted to new all-time high territory.

SPX Moving Average Chart
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However, the S&P 500 and the Dow Jones Industrial Average (not shown) have yet to break to all-time highs. But the S&P 500 is just 68 points from a new all-time high and 44 points from its 2000 high.

SPX Chart
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The daily chart of the S&P 500 indicates that the former resistance line at 1,474 is now a very significant support line. MACD is still bullish but overbought, as are all of the major indices.

Conclusion: The small-cap and midcap indices have led the way higher while the more conservative indices have lagged. All of the major indices are now overbought on a near-term basis, but longer term, momentum indicates that virtually all will ultimately move into new high ground. A correction would be welcome since it would provide an opportunity to jump aboard at prices that are not so extended.

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.

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