On Tuesday, an enormous swing in stock prices rattled investors and traders alike. The Dow Jones Industrial Average started the day by rising 282 points, but by 2:15 p.m., it was off 143 points and closed down by 27 points.
The S&P 500 put on a similar performance, closing down 0.3% after being up 1.4% in the morning. It was the biggest daily price swing for the index since Oct. 15.
Alcoa Inc (AA) kicked off earnings season with a better-than-expected report after Monday’s close, but the stock fell 2.3% Tuesday.
KB Home (KBH) initially rose in response to a revenue beat, but shares then plunged 16.3% after management said it did not expect to meet its margin goal for the remainder of the year. The iShares Dow Jones US Home Const. ETF (ITB) was down 2.6%.
The general decline was blamed on a combination of lower oil prices, a faltering housing market, and a negative outlook for European Central Bank (ECB) policy. The ECB’s proposed stimulus plan is subject to judicial review, and a decision is expected early this morning. The market seems to be anticipating a negative review from the court.
The technology sector was only off 0.1%. It was led by Apple Inc. (AAPL), which rose 0.9% after the stock was upgraded by Credit Suisse to “outperform” from “neutral.”
Gold hit a two-and-a-half-month high, up 0.1% at $1,234.40 an ounce. The yield on the 10-year Treasury note ended below 1.9% for the first time in 20 months.
At Tuesday’s close, the Dow Jones Industrial Average was off 27 points at 17,614, the S&P 500 fell 5 points to 2,023, the Nasdaq lost 3 points at 4,662, and the Russell 2000 rose a point to 1,181.
The NYSE’s primary market traded 876 million shares with total volume of 4 billion, and the Nasdaq crossed a total of 2.1 billion shares. On the Big Board, decliners outpaced advancers by 1.1-to-1, and on the Nasdaq, decliners led by the same margin.
An unusual technical feature occurred Tuesday on the Dow industrials, S&P 500, Nasdaq and NYSE Composite. It is called an “outside reversal” and usually occurs at market tops and bottoms. It is often accompanied by high volume and a wide market swing. At tops it most often runs to a new high and closes lower.
It is differentiated from the “key reversal day” in that the KRD usually closes outside the daily range, while the outside reversal closes within the prior day’s range but sustains a wide swing.
Conclusion
We experienced an almost perfect outside reversal Tuesday. I say “almost” because the signal has high impact when it occurs exactly at a top or bottom. Tuesday’s swing was more than wide enough to qualify. In fact, as mentioned above, it was the widest since Oct. 15 — the bottom of the previous correction.
In a prior Daily Market Outlook, I referred to wide swings being an indication of a top forming. So Tuesday’s outside reversal was not only emotionally rattling for traders and investors, it could be a signal that an intermediate top is forming.
Again, patience is the key to discernment, so we must wait until this unusual market reaction to world events results in a clear direction before we make broad commitments. For most investors, it is best to stand aside until we can judge whether this bucking beast is a bull or a bear.
Meanwhile, if you are a nimble trader, you have probably already been swing trading these wild days. But protect yourself by mental stops or you could become a trading casualty.
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.
