Did We Get Our Selling Climax?

Stocks fell sharply on Wednesday with every major index taking a big hit except the defensive Dow Jones Utility Average, which was up 0.4%. The Dow industrials fell 1.4%, the S&P 500 gave up 1.3%, and the Nasdaq was down 1.6%.

Global stocks and small caps were among the worst performers. The Russell 2000 fell 1.5% and is now off more than 10% since July, thus entering what technicians would qualify as correction territory.

The catalyst for the day’s selling was a surprise decline in German manufacturing activity. The country’s Purchasing Managers Index (PMI) contracted to 49.9 versus an expected 50.3. And U.S. manufacturing and construction spending also fell short of forecasts. The Institute for Supply Management reported that its index for September was 56.6, below forecasts of 58.2.

Speculative technology and small caps took the biggest hits. Intel (INTC) fell 2.4% and was the worst performer of the Dow 30. Pandora Media (P) fell 3.9%, Facebook (FB) lost 3.2%, and Twitter (TWTR) declined 3%. Alibaba (BABA) fell 3.1, and airlines stocks also saw sharp losses.

At Wednesday’s close, the Dow Jones Industrial Average was down 238 points to 16,805, the S&P 500 fell 26 points to 1,946, the Nasdaq lost 71 points at 4,422, and the Russell 2000 fell 16 points to 1,085.

The NYSE traded total volume of 4.2 billion shares, and the Nasdaq crossed 2.3 billion shares. Decliners outpaced advancers on both exchanges — by 3-to-1 on the Big Board and by 3.5-to-1 on the Nasdaq.

DJT Chart
Click to Enlarge

Chart Key

The Dow Jones Transportation Average is regarded by many as a key economic indicator, and this is confirmed by its chart.

Despite breaking its 50-day moving average on three previous occasions, the index reversed sharply each time and established a new high. On Wednesday, it broke this important average again, this time at 8,390, by plunging over 211 points.

Russell 2000 Chart
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The Russell 2000 left a trading gap at 1,105 to 1,101. Curiously, its low of the day was at the exact lows made in February and May.

Conclusion

As noted, the Dow transports, are a key indicator for many economists. Jeremy Siegel, professor of finance at the Wharton School of the University of Pennsylvania, mentioned this index on CNBC on Monday. He said he expected Q4 earnings to grow about 4.5% and that the S&P 500’s current 2014 P/E is only at 16.5.

This is the fourth time this year that the Dow Jones Transportation Average has pierced its 50-day moving average, and in each of the prior three violations, the index quickly bounced back to a new high.

As for the Russell 2000, it is curious that Wednesday’s intraday low exactly matched the lows of February and May. Could it be that the sell-off following Tuesday’s strange close was the second action of an institutional initiative to get the public out of the market so that the sheep could be shorn?

I’ll go out on a limb and say that Wednesday’s selling, especially in the Russell 2000, with higher volume than usual, met the qualification of a selling climax. Death cross aside, which is usually just a near-term indicator, traders may want to go on the long side today with a stop-loss below the opening low. And investors are encouraged to buy stocks that they have missed earlier in the year, like my Trade of the Day.

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.


Article printed from InvestorPlace Media, https://investorplace.com/2014/10/daily-stock-market-news-selling-climax/.

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