Play it Safe for Now

Mid- and small-cap stocks led the broader market lower Wednesday following another decline in health care stocks.

The sales practices of Canadian drugmaker Valeant Pharmaceuticals Intl Inc (VRX) were questioned as unethical by a research firm, and shares plummeted 40% intraday. VRX regained some of the early losses as the company’s management called the allegations “erroneous” and activist investor Bill Ackman announced he bought $2 million worth of shares. VRX closed down 19.2%.

The iShares NASDAQ Biotechnology Index (ETF) (IBB) fell 0.5%, but there were some bright spots in the sector. Biogen Inc (BIIB) jumped 4% after the company beat earnings estimates, raised its guidance and announced a restructuring program.

The aerospace sector was up 1.3%, bolstered by key names. Boeing Co (BA) reported better-than-expected sales and earnings and raised its outlook, and the stock gained 1.7%. United Technologies Corporation (UTX) increased its stock repurchase plan by $12 billion and shares rose 2.5%.

In M&A news, Western Digital Corp (WDC) offered to buy SanDisk Corporation (SNDK) for $86.50 per share. SNDK gained 2.1% while WDC lost 4.6%. KLA-Tencor Corp (KLAC) jumped 18.8% after agreeing to be taken over by Lam Research Corporation (LRCX) for $67.02 per share. LRCX advanced 1.1%

Crude oil fell 2.4% to $45.20 a barrel. Gold closed at $1,167.60, down 0.9%.

The yield on the benchmark 10-year Treasury note fell to 2.03% from 2.07% on Tuesday. The euro dropped slightly against the U.S. dollar to $ 1.134.

The Shanghai Composite index fell more than 3%, its biggest daily loss in five weeks.

At Wednesday’s close, the Dow Jones Industrial Average fell 49 points to 17,169, the S&P 500 lost 12 points at 2,019, the Nasdaq dropped 41 points to 4,840, and the Russell 2000 was down 18 points at 1,145.

The NYSE Composite’s primary exchange traded over 830 million shares with total volume of 3.7 billion. The Nasdaq crossed 1.9 billion shares.

On the Big Board, decliners outpaced advancers by 2.4-to-1, and on the Nasdaq, decliners led by 2.8-to-1.

NYSE Composite Chart
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Chart Key

I’ve been focusing on the former market leaders, i.e., the small and mid caps. But the NYSE Composite, which tracks all stocks on the Big Board, appears to have faltered.

Its recovery following the August sell-off has taken on a bearish horn pattern. The combination of the horn and a very overbought MACD is usually not a successful recovery pattern.

But if the NYSE can hold above its 50-day moving average at 10,167 and reverse up from it, a successful attack on the 200-day moving average at 10,757 would turn the tide. But, based on this chart, I wouldn’t count on that.

IWM Chart
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Getting back to the small caps, iShares Russell 2000 Index (ETF) (IWM) closed below the intermediate trendline and the 50-day moving average on relatively high volume, which is not bullish. Like other indices, the MACD indicator is arching down, showing a loss of momentum.

Conclusion

IWM’s failure at the intermediate trendline and 50-day moving average are not supportive of a successful attack on the broad band of overhead.

Despite the more positive trends in oil and other commodities like gold and silver, a broad turn has not yet occurred. And the biggest gains have been from sectors and stocks that were grossly oversold in August.

Weakness in biotech continues to have a negative impact on the health care sector, which is normally considered defensive. Some defense.

For now, I recommend more safety and less aggressive buying until the market resolves a test of the late-September lows.

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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