Stocks suffered a broad-based decline Wednesday when Tuesday’s optimism over a deal with Greece turned into disappointment. The European finance ministers rejected a proposal from Greece’s prime minister that was expected to end the crisis. U.S. and European markets fell in concert.
U.S. markets also reacted unfavorably to comments from billionaire activist investor Carl Icahn on CNBC, who called the market “extremely overheated.”
The trailing P/E ratio of the Dow Jones Industrial Average is 16.35 versus 16.5 one year ago, while the forward yield is 16.17. The Russell 2000 is trading at 82.68 times trailing earnings compared with 85.47 a year ago, and 19.25 times forward earnings.
However, the slowdown in Q1 was not as severe as first thought. According to the Commerce Department, GDP fell at an annual rate of 0.2%, revised up from a previous -0.7%. Corporate earnings did not keep pace with estimates due to a strong U.S. dollar, lower oil prices and bad weather — all factors that are expected to change for the remainder of the year.
The Dow Jones Transportation Average fell 1.9%. The financial sector lost 0.8%, energy fell 0.6% and technology stocks were down 0.5%.
Homebuilder Lennar Corporation (LEN) beat earnings estimates, with management saying quarterly profits rose 33%, and shares jumped 4.2%. Monsanto Company (MON) topped estimates, but management said it would only breakeven in the upcoming quarter, and shares fell 5.7%. Netflix, Inc. (NFLX) announced a 7-for-1 stock split, but Carl Icahn said he sold his remaining shares and the stock fell 0.4%.
Gold futures were down 0.2% to $1,173.90 an ounce. Crude oil futures lost 1.3% at $60.22 a barrel. And the benchmark 10-year Treasury note’s yield fell to 2.38% from 2.42% on Tuesday.
At Wednesday’s close, the Dow lost 178 points at 17,966, the S&P 500 fell 16 points to 2,109, the Nasdaq was down 38 points at 5,122, and the Russell 2000 was off 12 points at 1,284.
The NYSE’s primary market traded over 720 million shares with total volume of 3.1 billion. The Nasdaq crossed 1.6 billion shares.
Despite Wednesday’s triple-digit fall and a close below its 50-day moving average, the Dow Jones Industrial Average is tenaciously holding in a trading range of 17,666 to 18,288.
Supported by a bullish MACD and solid support at the lower end of the range, it is likely that this range will be with us for some time — perhaps even until October.
Wednesday’s 158-point decline in the Dow Jones Transportation Average held above the triple-bottom at 8,257. That bottom, however, is fragile (unlike the support for the industrials), and it was preceded by a death cross in early May.
MACD is still in the bull zone, and as long as there is no further weakening of economic data we may see a bottom form around the current levels. Resistance to rallies begins at the 50-day moving average at 8,567. Support is at 8,257.
Conclusion
The cloud of Greece continues to hang over the market, stifling another major advance. And the market’s strength is still the result of the Federal Reserve’s easy money policy and not corporate earnings. With these facts in mind, consider the following:
There are three phases to a bull market that are generally accepted as part of the “Dow Theory.” Remember these are phases and each phase may include several bull channels as well as corrections.
Phase 1: Accumulation
The first stage of a bull market is characterized by disbelief on the part of the public and accumulation by institutional investors. This phase usually starts following a high-volume sell-off that takes stock prices to levels that destroy the public’s confidence. Average investors are pessimistic and look for another leg down.
Phase 2: Consolidation
The market consolidates its gains made during the accumulation phase. Prices may go nowhere for an extended period, whipsaws are common and public participation is low. This phase usually ends when old highs are broken, and prices begin to move higher against a chorus of skepticism.
I believe this is where the market is now and that sometime during Q3 we will end this phase. The recent new highs in the Nasdaq and Russell 2000 are superficial evidence of this winding down of this phase. New highs in the Dow Jones Industrial Average and S&P 500 would be convincing proof that the next phase is soon to begin.
Phase 3: Public Participation
Prices break the sideways consolidation and the public finally realizes that stocks are headed higher. P/E multiples expand rapidly and strong economic numbers and higher earnings are reported. This phase usually is the longest of the three and can double the price of highly leveraged stocks. This phase usually ends with excessively high prices and very high public participation. I’ve often said (with some criticism) that when your barber and cab driver give you stocks tips, watch out — the end of the final buying phase is near.
As noted, I believe we are nearing the end of Phase 2 (consolidation) and that stocks have another two to three years of a bull market ahead. We have not yet entered the overvalued phase described by Alan Greenspan as “irrational exuberance,” which was spoken over two years prior to that bull market’s final blow-off.
Thus, buy into any dips and corrections since this bull is likely going to romp to much higher priced pastures.
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.
