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Increase Your Cash Position in This Fatigued Market

Stocks have become more volatile and a short-term correction is possible


An extremely volatile day ended with a late rally in the large-cap stocks Monday and a positive close for the Dow industrials but another loss for the Nasdaq.

Biotech and social media stocks took it on the chin again. (AMZN), Facebook (FB), LinkedIn (LNKD) and Yelp (YELP) all declined, with losses ranging from 2.4% and 6.4%. The iShares Nasdaq Biotechnology (IBB) lost 0.4%. Small caps fell, as well, as illustrated by a 0.5% loss in the Russell 2000.

Big caps led with Pfizer (PFE) up 4.2% following a bid to buy U.K.-based AstraZeneca (AZN).

But not all large caps participated. The banking sector was lower after Bank of America (BAC) announced that it was suspending its plan to raise its dividend and buy back stock. It said that it discovered miscalculations and there would be “adjustments” to its estimated regulatory capital ratios. The Wall Street Journal reported that the bank discovered a mistake related to the 2009 acquisition of Merrill Lynch.

In economic news, pending home sales for March rose 3.4% where a 1% increase was expected.

At Monday’s close, the Dow Jones Industrial Average rose 87 points to 16,449, the S&P 500 gained 6 points at 1,869, and the Nasdaq fell a point to 4,074. The NYSE’s primary market traded 821 million shares and total volume of 4 billion shares. The Nasdaq crossed 2.4 billion. On the Big Board, advancers outpaced decliners by 1.1-to-1, but on the Nasdaq, decliners were ahead by 1.7-to-1.

Dow Chart
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Even though the Dow industrials held above their 50-day moving average at 16,311, Monday’s volatility tested the nerves of the most experienced traders. After gapping open and running to what turned out to be the high of the day at 16,500, stocks plummeted to the low of the day at 16,313 by early afternoon, and then regained most of the losses by the close.

DJU Chart
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Chart Key

We don’t often consider the Dow Jones Utility Average as a trading vehicle, since it is often referred to as a “bond substitute.” However, this chart graphically illustrates the break to safety and stability provided by the many growth-oriented, high-income utility stocks. It is the equity buyer’s choice for a “risk-off” investment.

Conclusion: Monday’s market was influenced by international news rather than by corporate earnings or economic reports. Namely, new U.S. sanctions against Russia and reports that Russian military units were pulling back from the border. Overhanging that was news that the mayor of Ukraine’s second-largest city had been shot. And then there was a report of trouble with China and a beefing up of its military options. The market swung with each new development. 

It is no wonder that the market has become more volatile and that money is flowing to “risk-off” investments and out of high P/E stocks, even though they may appear to be “oversold.”

As Jeff Saut put it, buyers are “temporarily fatigued, at the same time that sellers are reluctant to part with their stocks.” He concluded that this situation often leads to a short-term correction. I’m inclined to agree and suggest that we should resume the practice of increasing our cash position until our short-term indicators tell us that stocks in general are oversold.

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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