High-P/E Stocks May Continue to Take a Beating

by Sam Collins | December 4, 2013 2:00 am

On Tuesday, the Dow industrials and S&P 500 fell for the third consecutive day. Profit-taking and disappointing retail sales, along with rumors of the Federal Reserve cutting its QE purchases, were blamed for the decline.

The year has so far produced a gain of 26% for the broad-based S&P 500, but much of that has been in the highly volatile technology sector. And with the release of the November unemployment report on Friday, some traders were quoted as saying that they felt cashing in now protects them against a strong report and a resulting move by the Fed to taper.

The latest retail numbers from “Cyber Monday” indicate that retailers were discounting many items to prices that would provide little in the way of profits. Thus, reports of online sales hitting a record of $2 billion had little impact on retail stocks.

At the close, the Dow Jones Industrial Average was off 94 points at 15,915, the S&P 500 fell 6 points to 1,795, and the Nasdaq dropped 8 points to 4,037. The NYSE traded primary volume of 770 million shares with total volume of 3.4 billion, and the Nasdaq crossed 1.8 billion shares. Decliners outnumbered advancers on the Big Board by 3-to-2, and on the Nasdaq, decliners were ahead by 8-to-5.

SPX Chart
Click to Enlarge

Chart Key[1]

The S&P 500 fell away from the top of a bull channel that was seven months in the making but found intraday support at its 20-day moving average (green line). Although the third day of selling (since making a new high last week) didn’t threaten the overall trend, it is bound to shake the confidence of near-term traders.

The next support is the November breakout line at 1,775, which may not seem like a deep decline, but to high-P/E traders, that could mean declines of 5% to 10% in current positions. After that is the 50-day moving average at 1,746.

RUT Chart
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The Russell 2000 small-cap index closed exactly on its November breakout line at 1,123. Its MACD indicator is turning down but is still bullish, and the next support is its 20-day moving average at 1,114, followed by the 50-day at 1,100.

Conclusion: The near-term trend, with three days of lower highs and lower lows, has turned down. Fear of Friday’s employment numbers and their impact on Fed policy has led to a round of profit-taking — and the high-P/E stocks are prime targets. Many of these stocks have more than doubled this year, and so profit-taking is understandable.

But traders’ fear was compounded by the lack of activity in the bond markets as prices fell, and the yield on the 10-year U.S. Treasury note rose by a slim 2 basis points. This may tell us that the Fed isn’t going buy bonds until Friday’s numbers are released, and if that is the case, look for further near-term weakness — and an opportunity to buy volatile stocks on a shallow pullback.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[2].

For a list of this week’s economic reports due out, click here[3].

  1. [Image]: https://investorplace.com/wp-content/uploads/2013/05/chart-key.gif
  2. click here: http://www.bloomberg.com/apps/ecal?c=US
  3. click here: http://www.bloomberg.com/markets/economic-calendar/

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