Market’s Weakness Not a Cause for Concern

by Sam Collins | March 24, 2014 2:15 am

U.S. stocks finished a stellar week with a mild round of profit-taking, led by an assault on biotech stocks. The S&P 500 opened on a new high, but as the day wore on, the broad-based index slipped lower and lower, until finally closing with a loss of 0.3%.

The biotech sector was hard hit at midday following a letter of complaint from three members of Congress about the high prices of Gilead Sciences’ (GILD[1]) hepatitis C drug. GILD fell 4.6%, while the iShares Nasdaq Biotechnology (IBB[2]) fell 4.7% on the heaviest volume in almost eight years.

Financial stocks, which had been strong throughout the week, were flat on Friday. But consumer staples, energy, industrials, materials and utilities all gained, and together offset the losses in other sectors.

On Thursday, the Federal Reserve announced that 29 of the nation’s 30 biggest banks passed its “stress test,” which is designed to test their ability to withstand a financial downturn. The Wall Street Journal pointed out that the approvals could lead the way for many of the banks to reward investors with higher dividends and share repurchases.

At Friday’s close, the Dow Jones Industrial Average was down 28 points to 16,303, the S&P 500 fell 5 points to 1,867, and the Nasdaq dropped 43 points at 4,277. The NYSE’s primary market traded 1.9 billion shares with total volume of 4.9 billion shares. The Nasdaq crossed 3 billion shares. The high volume was due to the expiration of futures and futures options, as well as options on indices and individual stocks, commonly referred to as quadruple witching day.

For the week, the Dow rose 1.5%, the S&P 500 gained 1.4%, and the Nasdaq was up 0.7%.

Nasdaq Chart
Click to Enlarge

Chart Key[3]

Even though the Nasdaq’s support appears strong at the March low of 4,243, Friday’s slice through the 20-day moving average at 4,203 on a minor reversal doesn’t comply with bullish price action. Just below the March low is the 50-day moving average at 4,220, and that must hold if the index is to avoid intermediate sideways price action.

RUT Chart
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The Russell 2000’s chart is slightly more bullish. Friday’s close landed just above its immediate support at the 20-day moving average at 1,191. Just below that is the support line at 1,182 and the 50-day moving average at 1,163. A bullish “V” is still in force, but a close below 1,191 would negate its value as a bullish indicator.

Conclusion: The S&P’s new high, by a fraction, and failure to hold on to it is a sign of weakness. And the minor reversal of the Nasdaq, coupled with the loss in the Russell 2000, are also signs of near-term weakness.

However, for now, I believe them to be minor annoyances since they occurred on the most unpredictable day of the month — quadruple witching — and the international uncertainties have had little impact on stocks with every major index closing higher for the week.

As always, patience is the key to success. If you have been waiting for an opportunity to buy on a dip, keep your eye on biotechs and other volatile groups that have sudden shifts due to fear and profit-taking.

Another down thrust in IBB to the $225 area could be an ideal place to begin averaging a long-term position. Remember, we are in a bull market, thus every pullback will be more shallow than expected, and every run up will go higher than anticipated. It takes timing and courage to make these wild fluctuations work for you, and that is why planning ahead and establishing firm buy points usually results in success.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[4].

For a list of this week’s economic reports due out, click here[5].

  1. GILD:
  2. IBB:
  3. [Image]:
  4. click here:
  5. click here:

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