The stock market’s apparent invulnerability came to an end on Friday — ending an 11-day winning streak for the Dow Jones Industrial Average closing higher at the end of the week. That’s representative of just how complacent investors had become, since bidding stocks up ahead of the weekend is a vote of confidence. That’s especially true in the context of all the geopolitical tension in Ukraine, Gaza and elsewhere.
As a result, the Dow index of blue-chip stocks closed below its 20-day moving average in a meaningful way for the first time since May, dropping below the 17,000 level in the process. Small caps suffered more, testing back down to their 200-day moving average.
But it’s the drop in the Dow that will be nagging investors this week as the euphoria that’s held the market up this summer looks set to fade.
Buying demand is narrowing. You can see this in the way measures of market breadth have been compressing: The percentage of NYSE stocks above their 50-day moving average has dropped to around 60% from a peak of more than 83% at the start of July.
Just focusing on the 30 components of the Dow Jones Industrial Average tells the story. A growing number of blue-chip stocks on the list are rolling over. Here’s a look at five that are in trouble:
Blue-Chip Stocks to Sell – General Electric (GE)
Click to EnlargeGeneral Electric (GE) stock on Friday closed below its 200-day moving average for the first time since February, ending a six-month uptrend that has helped boost the overall market. The company reported in-line earnings results back on July 18 and is moving forward with the planned IPO of its North American retail financing business (Synchrony Financial) at the end of the month.
However, revenue was light and analysts were cool in their response to the results, with JPMorgan reportedly lowering estimates in response.
I recommended the Sep $27 puts to my clients back on July 2. The contracts are now carrying a gain of nearly 50%.
Blue-Chip Stocks to Sell – American Express (AXP)
Click to Enlarge American Express (AXP) stock has sliced below its 50-day moving average for the first time since May, breaking out of a tight two-month trading range. The company will report results after the close on July 29, but it looks like investors are preparing for disappointment as recent retail sales data shows U.S. consumers have been holding back on spending lately.
Analysts at Macquarie initiated coverage on AXP stock on July 10 with an “underperform” rating.
Blue-Chip Stocks to Sell – Boeing (BA)
Click to Enlarge Boeing (BA) stock lost a lot of altitude last week, dropping back to levels not seen since April as it collapses below its 200-day moving average. Backing out a little, Boeing has lost its 50-week moving average — a level it was struggling to stay above since mid-June — for the first time since late 2012.
That’s a big deal for a stock that had more than doubled over that time on enthusiasm over the turnaround in the airline sector.
It didn’t help that Boeing stock was downgraded by Bank of America analysts back on July 24 to “neutral” to “buy.”
Blue-Chip Stocks to Sell – Caterpillar (CAT)
Click to Enlarge Like Boeing, Caterpillar (CAT) has been another consistent performer for the Dow Jones recently, rising in a near-perfect 45-degree angle from late 2013 to test what is now triple-top resistance near $110 a share. The selloff was prompted by weaker-than-expected Q2 revenues and weak fiscal 2014 earnings guidance (on a slowdown in Chinese construction).
Not even the announcement that CAT plans on buying back $2.5 billion worth of shares — part of a financial engineering strategy that’s been like catnip to investors lately — could offset the disappointment.
Blue-Chip Stocks to Sell – United Technologies (UTX)
Click to Enlarge United Technologies (UTX) stock, a industrial sector stalwart, acted like someone clubbed it over the head last week as it collapsed through its 200-day moving average for the first time since November 2012. That’s a massive trend break in a sober, mature, heavy-hitting stock.
The last time UTX suffered a breakdown like this after a period of low volatility was in July 2011 — ahead of what’s been the worst broad-market selloff of the bull market to date.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm. As of this writing, he had recommended put options against GE to his clients.