Cautiously Pick the Low-Hanging Fruit

by Sam Collins | March 28, 2014 2:19 am

Stocks ended slightly lower Thursday following a volatile session that saw the Dow swing from down as much as 77 points to up almost 32 points during the day. But the real underperformer continued to be the Nasdaq, which fell to its lowest level since Feb. 10.

The iShares Nasdaq Biotechnology (IBB[1]) gained 0.5%, but it is down 11% so far in March. Much of its losses may be attributed to profit-taking since the fund gained 65% in 2013.

The Federal Reserve denied Citigroup’s (C[2]) plan to reward investors with dividends and stock buybacks, and that sent the stock 5.4% lower. The banking group as a whole was not impacted by the Fed’s decision.

At Thursday’s close, the Dow Jones Industrial Average fell 5 points to 16,264, the S&P 500 was off 4 points at 1,849, and the Nasdaq was down 22 points to 4,151. The NYSE traded a total of 3.4 billion shares and the Nasdaq crossed 2.4 billion. Decliners outpaced advancers on the Big Board by a factor of 2-to-1, but on the Nasdaq, decliners outnumbered advancers by 3.8-to-1.

Nasdaq Chart
Click to Enlarge

Chart Key[3]

Of all the major indices, only the Nasdaq and Russell 2000 (not shown) have broken their 50-day moving averages. The next support line for the Nasdaq is at the 4,000 level.

Nasdaq Chart
Click to Enlarge

However, as bad as the first chart looks, the longer-term chart shows that the Nasdaq’s intermediate support line at 4,100 has not been penetrated. Also note that its RSI is the lowest since October 2012, indicating that the index may be grossly oversold.

Conclusion: The major indices — the Dow industrials and the S&P 500 — are holding above their 50-day moving averages and major support lines. Only the Nasdaq and the Russell 2000, the representatives of mid- and small-cap stocks, have broken their 50-day moving averages. And high volume has not accompanied the breaks that have driven these indices to grossly oversold numbers on RSI and MACD.

As we approach the end of the first quarter, it is my appraisal that the weakness in the most volatile stocks is due to institutional profit-taking coupled with mild buying of lower P/E, higher-quality stocks. In the face of uncertainty, this may be the safest approach for the institutional investor. But it may not provide the highest long-term returns.

Our internal indicators are grossly oversold, and so it is time for those of us who, at year’s end, answer only to our own appraisal, to take a modest risk and dip into some of the most oversold sectors. Some stocks, like our Trade of the Day[4], have been driven to close to 25% declines in just three months. It is time to cautiously pick some of the low-hanging fruit, and as always, use stop-loss orders to protect against a further decline.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[5].

For a list of this week’s economic reports due out, click here[6].

  1. IBB:
  2. C:
  3. [Image]:
  4. Trade of the Day:
  5. click here:
  6. click here:

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