Technology stocks hit the skids for the third day, but the decline was more broad-based. In addition to losses of 1.5% for the Russell 2000 and 1.2% for the Nasdaq, the Dow fell 1% and the S&P 500 lost 1.1%.
The biggest losses in the S&P 500 were sustained by the financials and consumer discretionary stocks. But the beaten-down biotech group, as represented by the iShares Nasdaq Biotechnology (IBB), was up 0.7% versus a decline of 4% on Friday. Biogen Idec (BIIB) rose 2.1%, Celgene (CELG) gained 1.3%, and Alexion Pharmaceuticals (ALXN) rose 2.2%.
The overall decline was blamed on analysts “gradually chipping away at their expectations for many companies’ performance during the first three months of the year after a harsh winter that curbed economic activity,” according to The Wall Street Journal. Earnings for companies in the S&P 500 are expected to decline 1.4% for Q1, according to FactSet.
At the close, the Dow Jones Industrial Average fell 167 points to 16,246, the S&P 50 fell 20 points to 1,845, and the Nasdaq lost 48 points at 4,080. The NYSE primary market traded 836 million shares with total volume of 3.7 billion shares. The Nasdaq crossed 2.5 billion shares. On the Big Board, decliners outpaced advancers by almost 4-to-1, and on the Nasdaq, there were more decliners than advancers by 3.2-to-1.
A “key reversal day” occurred on Friday, and on Monday, the S&P 500 closed below its initial support line at 1,850, while its internal MACD indicator issued a sell signal.
Friday’s failed breakout could also fit the definition of a Dow Theory non-confirmation in that the Dow transports broke to new highs but the industrials failed. This is generally considered to be a negative indicator.
The sell-off continued Monday, and the index is approaching its first line of support at 16,175, followed by the important 50-day moving average at 16,143. Like the S&P 500, the Dow’s MACD issued a sell signal.
Conclusion: Although a breakdown from the current levels may not “feel right” to me as a technician, I must disregard emotion and go with the facts: The S&P 500 and Dow Jones Industrial Average have both issued significant short-term/intermediate-term sell signals.
The leaders of the fall — techs and biotechs — rallied Monday, and perhaps this is an indication that a decline could be shallow. Nevertheless, there are enough negative technical signals to issue a yellow flag, meaning stand aside. Only long-term investors should stick with quality positions. All others should exit and wait for the market to settle down and provide evidence that the sell-off has ended.
On the surface, both indices have strong underlying support bands established over many months. They could have enough depth to contain further selling. But if a true trend reversal occurs, these zones will quickly fail.
Again, patience always pays off, and solid technical analysis takes precedence over hunches, guesses and even logic. My current advice is to hold cash. That’s an easy investment decision.
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.
