The Best Offense in This Market is Still a Good Defense

Thursday's big rally was not enough to turn the downward trend in stocks

Stocks and oil rose Thursday, sending the big-cap Dow industrials to a gain of 1.3% and crude futures up 0.2%. The Energy Select Sector SPDR (ETF) (NYSEARCA:XLE) reversed during the day from a loss of 1.9% to close up 0.3%.

Recently investors have been focusing on the price of oil as a predictor of future industrial growth, or lack thereof. Any favorable price action has been greeted as a signal to buy stocks, especially those that depend on higher oil prices for earnings income.

With 195 companies in the S&P 500 reporting Q4 earnings so far, FactSet estimates growth of just 1.1% from last year. Without Apple Inc. (NASDAQ:AAPL) and Gilead Sciences, Inc. (NASDAQ:GILD), analysts predict earnings would be down almost 2%.

Dow Chemical Co (NYSE:DOW) jumped 4.6% due to better-than-expected earnings., Inc. (NASDAQ:AMZN) rose 2.6% on the day and was up big in after-hours trading after it reported a bigger profit than the Street expected. Boeing Co (NYSE:BA) jumped 5.8% after a 5.4% gain on Wednesday following a reported surge in cash flow.

Coach Inc (NYSE:COH), Ford Motor Company (NYSE:F) and McDonald’s Corporation (NYSE:MCD) all jumped on strong quarterly reports. But Google Inc (NASDAQ:GOOG, NASDAQ:GOOGL) missed earnings and revenue estimates after the bell.

Gold futures fell 2.4% to $1,254.60 an ounce. The 10-year Treasury note’s yield rose to 1.75% from 1.72% on Wednesday.

At Thursday’s close, the Dow Jones Industrial Average rose 225 points to 17,417, the S&P 500 gained 19 points at 2,021, the Nasdaq added 45 points at 4,683, and the Russell 2000 gained 15 points at 1,190.

The NYSE’s primary market traded 863 million shares with total volume of 4.1 billion shares, and the Nasdaq crossed 2.1 billion shares. On both major exchanges, advancers outpaced decliners by 2.1-to-1.

NYSE Chart
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Chart Key

The NYSE Composite Index, as our readers know, represents the broad base of all stocks traded on the New York Stock Exchange. Thus, it offers a unique view of how the overall market is performing.

The NYSE Composite is currently weak. A failure in January to hold above the crucial 50-day and 200-day moving averages at around 10,800, along with a declining MACD indicator, tell us that the market is having a difficult time holding up to broad selling.

Dow Jones Transportation Average Chart
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The Dow Jones Transportation Average is widely viewed as an accurate predictor of future economic conditions. Though stronger than the NYSE Composite, it is at best in a sideways trend. It too is falling from its 50-day moving average, and its MACD indicator is turning into the bear zone.


A 225-point rally in the Dow is not enough to turn the downward trend of stocks. Wednesday was an especially nasty day for the market. A “volume down day” is defined as a day in which down volume surpasses up volume by 9-to-1, and Wednesday came within a fraction of that negative signal. As MarketWatch’s Michael Ashbaugh pointed out, two such days within a seven-day period would trigger what many technicians would interpret as a “meaningful trend shift.”

As noted in recent Daily Market Outlooks, I recommend a defensive approach to investing until the current negative technical picture changes.

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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