Sell All but the Highest-Quality Income Investments

On Tuesday, stocks had a midday rally, sandwiched between a lower opening and profit-taking that resulted in a slightly lower close. The loss was attributed to Greece’s debt negotiations and the clear possibility of a withdrawal of one of the smallest contributors to the European Union.

Stocks fluctuated throughout the day depending on the nature of negotiations over Greece’s payments to the IMF. The close, however, did not reflect the day’s volatility. For example, the Dow industrials whipsawed, bouncing from a loss of over 115 points before closing down by less than 30 points.

European stocks and bonds fell sharply with Germany’s DAX off 0.9% and the Stoxx Europe 600 giving up 1%. Lower bond and stock prices in Europe had a negative impact on the bond market and higher-yielding stocks in the United States. The Utilities SPDR (ETF) (NYSEARCA:XLU) fell 1.3%, and the 10-year Treasury note’s yield rose to 2.27% from 2.19% on Monday.

The top-performing sector on Tuesday was energy, up 0.7%, followed by materials, up 0.3%, with discretionary, industrials and financials each gaining 0.2%.

Crude oil rose 1.8%, closing at $61.26 a barrel. Gold gained 0.5% at $1,194.10 an ounce.

Factory orders for April fell 0.4%, the eighth monthly decline in the past nine months. It was the only economic report of note for the day.

At Tuesday’s close, the Dow Jones Industrial Average fell 28 points to 18,012, the S&P 500 was off 2 points at 2,110, the Nasdaq dropped 6 points to 5,077, and the Russell 2000 was up 2 points at 1,252.

The NYSE’s primary exchange traded 728 million shares with total volume of 3 billion. The Nasdaq crossed 1.7 billion shares. On the Big Board, advancers led decliners by 1.2-to-1, and on the Nasdaq, advancers led by 1.4-to-1.

NYSE Composite Chart
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Chart Key

The NYSE Composite index is being squeezed between its support line drawn from the November high at 11,068 and the 50-day moving average at 11,093.

The intermediate trend is still up, and it appears to be confirming an upside break. However, the other internal indicators, chiefly MACD, momentum and stochastics are still negative.

The NYSE Composite is a good representation of the broader market. Thus, even though I don’t print it as often as other indices, it is one I look at daily. It appears to be turning more bullish, but appearances can be deceiving.

Dow Jones Utility Average Chart
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With a rate increase this year becoming more likely, I hope that readers have already sold all but their highest-quality utility stocks. You should also review your fixed-income holdings and consider culling the list of all that are of medium quality. REITs and other income-dependent stocks should be considered vulnerable to a sell-off as well.


Despite Tuesday’s volatility, the past three months have recorded the “slowest, range-bound period in the last 15 years,” according to CNBC. This comment is borne out by the squeeze being put on almost every index except for the Russell 2000, which is range-bound but fluctuates enough to provide reasonable trading opportunities for speculation.

The Dow transports rallied again Tuesday and even flashed a buy signal from the “short stochastic.” This indicator has been good at predicting short-term advances and declines. The last signal was a “sell” on April 24 at 8,880.

Another indicator, the AAII Sentiment Survey for the week ending May 27 is as neutral as I’ve ever seen it. It shows a neutral reading of 47.9%, with the bulls at 27% and the bears at 25.1%.

It doesn’t get much duller than this. But opportunities are available for those who are willing to study the markets. On Monday, I noted the basic value in the sold-off Dow Jones Transportation Average. My Trade of the Day is an excellent value, and I’ll be searching for other quality stocks that are oversold.

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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