The first trading day of the new year produced mixed results. After a higher opening, stocks sagged until early afternoon when a weak rally failed to overcome all of the morning’s losses. The Dow closed higher by less than 0.1%, while the S&P 500 lost less than 0.1% and the Nasdaq fell 0.2%.
The decline was blamed on worse-than-expected construction spending and ISM purchasing managers’ reports, just after the opening. PMI fell to 55.5 where a reading of 57.4 was expected.
Global manufacturing reports were weak, as well. China’s manufacturing purchasing managers’ index fell to its lowest reading in over 18 months. And comments from European Central Bank (ECB) President Mario Draghi indicated that a generally soft European economy will force the ECB to keep interest rates low for longer than previously anticipated. Thus, the ECB is expected to increase stimulus efforts sooner rather than later.
Defensive sectors gained on Friday, with utilities up 0.5% and health care gaining 0.4%. The iShares NASDAQ Biotechnology Index ETF (IBB) rose 1%. And U.S. Treasuries gained with the 10-year yield falling 5 basis points to 2.12%.
Energy stocks rebounded, rising 0.5% after a 10%-plus decline in 2014. Crude oil futures fell to $52.69 a barrel, down 1.1%.
At Friday’s close, the Dow Jones Industrial Average was up 10 points at 17,833, the S&P 500 fell a point to 2,058, the Nasdaq lost 9 points at 4,727, and the Russell 2000 dropped 6 points to 1,199.
The NYSE’s primary market traded 646 million shares with total volume of 2.7 billion shares. The Nasdaq crossed 1.4 billion shares. On the Big Board, advancers outpaced decliners by 1.2-to-1, but on the Nasdaq, decliners were ahead by 1.3-to-1.
For the week, the Dow fell 1.2%, the S&P 500 was down 1.5%, the Nasdaq lost 1.7%, and the Russell 2000 was off 1.4%.
This chart of the NYSE Composite, an index of all stocks traded on the NYSE, shows a failure to penetrate a triple-top at just over 11,000. Additionally, although it is hard to see, is the slippage of the 20-day moving average, which closed below the 50-day moving average on Friday, a near-term sell signal. The stochastic indicator also flashed a near-term sell signal.
Friday’s low of 10,771 almost touched the 200-day moving average at 10,621, and a close under that support line would likely lead to a further decline.
The Russell 2000 small-cap index had serious slippage last week. Wednesday’s key reversal day was followed by a drop on Friday and a test of its 20-day moving average at 1,185. The stochastic indicator issued a short-term sell signal. The next support is at the 20-day moving average, and then the 50-day at 1,172 and the 200-day at 1,150.
A Santa Claus Rally tends to occur each year and is defined as a rally spanning the last five days of the year and the first two days in January. The Stock Trader’s Almanac reports that since 1969, this rally has averaged a gain of 1.5% and usually precedes a positive year for stocks.
However, if Santa fails to appear, the Grinch usually takes his place, which should make us pause and reflect before making further commitments. For example, in 1999, this period was hit with a 4% loss that began a 33-month decline of nearly 40%. There are other equally rattling examples of annual losses when the Santa Claus Rally failed to occur.
The current cycle’s time period in question began with the Dec. 24 S&P 500 close at 2,081.88. So far, we are down 23.68 points (1.1%) since then. And today is the second day of trading in January, ending the cycle under study. Unless we have a strong rally today, it looks like we are going to have a negative reading.
To be clear, I am not forecasting a decline for the entire year. But there are now enough warnings to encourage us to hesitate before making further commitments. At the very least, it is likely that we will be able to make purchases later at somewhat lower prices.
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.