Sell-off Raises Concerns, but Outlook Remains Bullish

On Friday, stocks fell sharply following disappointing earnings from (AMZN) and lowered guidance from Visa (V). Visa fell 3.6%, which had an unusually large impact on the Dow industrials, accounting for 51 points of the Dow’s 123-point decline.

The Wall Street Journal attributed part of the decline to nervous traders, concerned about the timing of a possible rise in interest rates by the Federal Reserve. But several Fed officials indicated that any rate increase would probably not occur until late 2015. More likely, escalating fighting in Ukraine and Gaza had more to do with investors staying away from stocks than any other factor. The losses were also attributed to profit-taking.

Of the 230 S&P companies that have reported Q2 results, 76% have topped analysts’ forecasts, according to FactSet, compared with a four-year average of 74%.

Durable goods rose 0.7% in June compared with an expected increase of 0.5%.

At Friday’s close, the Dow Jones Industrial Average fell 123 points to 16,961, the S&P 500 was off 10 points at 1,978, the Nasdaq dropped 23 points to 4,450, and the Russell 2000 lost 12 points at 1,145. The NYSE’s primary market traded 568 million shares with total volume of 2.6 billion shares. The Nasdaq crossed a total of 1.7 billion shares. On both major exchanges decliners outpaced advancers by 2-to-1.

For the week, the Dow fell 0.8%, the S&P 500 broke even, the Nasdaq gained 0.4%, and the Russell 2000 fell 0.6%.

Dow Chart
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Chart Key

Despite Friday’s triple-digit hit, the industrials are holding above the important 50-day moving average, currently at 16,847. The break into the support zone at 16,715 to 16,970 is not serious, especially since one stock, Visa, accounted for more than one-third of the decline.

SPX Chart
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The S&P 500 is a much more important index for technical analysis than the Dow, which is composed of a weighted average of just 30 stocks. The S&P 500 broke to a new high last week, and on Friday, held at its 20-day moving average.

The support line at 1,951 and the 50-day moving average at 1,946 are the two most important technical features of this chart. Even the MACD indicator, which sagged on Friday, doesn’t hold the significance of the price action itself.


Looking at the big picture, the most important technical development of last week was the new high made by the S&P 500. But Friday’s action does raise some concerns, especially if we have a continuation of selling early this week that puts the index’s 50-day moving average at risk of being penetrated.

Even though price action has precedence over all other indicators, the sentiment indicators, and chiefly the AAII Sentiment Survey, provide useful data. Last week, the AAII’s survey of public investors showed that the bulls declined for the third straight week to 29.63%. Bears increased to 29.94%. This survey is a contrary indicator, and with slightly more bears than bulls, this is usually a sign of a mounting bullish outcome driven by the smart money.

My outlook remains bullish. Buying into pullbacks should produce both trading and long-term investment opportunities.

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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