On Monday, investors were unnerved by a sell-off in European markets due to Greece’s reluctance to follow through with austerity measures demanded by the euro zone. Greece’s refusal to comply with debt-reduction measures could result in an ouster from the single-currency union.
Nine of the S&P’s 10 sectors closed lower, led by health care, off 1.2%, and utilities, down 0.9%. The iShares NASDAQ Biotechnology Index (ETF) (NASDAQ:IBB) fell 0.7%. Surprisingly, defensive sectors were the worst performers while energy stocks, a “risk-on” group, rose as oil prices jumped 2.3% to $52.86 a barrel.
Treasury bond prices fell, and the yield on the 10-year note rose to 1.95% from 1.94% on Friday. Gold rose 0.6% to $1,240.80 an ounce.
McDonald’s Corporation (NYSE:MCD) fell 1.4% following an announcement that global same-store sales fell 1.8% in January, largely due to weakness in Asia. American Airlines Group Inc (NASDAQ:AAL) lost 3.4% after reporting lower traffic for January and raising its fuel-cost estimates for Q1.
At Monday’s close, the Dow Jones Industrial Average fell 95 points to 17,729, the S&P 500 lost 9 points at 2,047, the Nasdaq fell 18 points to 4,726, and the Russell 2000 was down 10 points at 1,196.
The NYSE’s primary market traded 775 million shares with total volume of 3.5 billion shares. The Nasdaq crossed 1.6 billion shares. Decliners outpaced advancers by about 1.5-to-1 on both major exchanges.
Monday’s reaction to the European markets dropped the Nasdaq below its resistance line at 4,765 and set it up for a test of its 50-day moving average at 4,711. The index is trading within a broad zone of 4,580 to 4,765, but a break under 4,711 could restrict its range for another month.
Its intermediate internal indicator, the MACD, while still bullish is beginning to curl down. This is not a favorable sign for the bulls.
The chart of the Russell 2000 is more bullish than that of the Nasdaq, but not by much. A close below the support line at 1,190 would set it up for a challenge to its 50-day moving average at 1,183. Its MACD is also curling down.
Conclusion
As President Ronald Reagan was fond of saying, “Well, there they go again.” But now he would be referring to the Greeks. This small country with such a wealth of history has again turned the world markets down with their petty politics.
However, I am concerned that a market that can be negatively influenced by such a relatively minor event must be lacking in internal strength. As noted, high volatility following a major move, either up or down, is often a signal that a change of trend may be at hand. If a change occurs, it would confirm that a bull trap has been sprung and, at the very least, we could expect the first genuine correction (15%-20% decline) in several years.
Let me make it clear that I’m not forecasting a bear market. However, it is so unusual for stocks to run in almost a straight line up for such a long time without a correction that I am certain we will experience a major sell-off within the next three months. And that is why I have been reluctant to jump on the bulls’ bandwagon.
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.
