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Don’t Trust a Rally

After falling 114 points (-0.7%), the Dow Jones Industrial Average rallied on Monday, closing up 0.3%. The broader market ended pretty much where it started the day with the S&P 500 up 0.1%. The Nasdaq fell 0.1% due to continued selling pressure in the technology sector, and the Russell 2000 fell 0.4%.

The early losses were due in part to a report that China’s CPI increased 0.5% in December. A continued decline in the price of oil also put a lid on the market with crude falling 5.3% to $31.41 a barrel, its lowest price in 12 years.

Earnings season unofficially kicked off after Monday’s close with a report from Alcoa Inc (AA). A focus on earnings could take a toll on the market, as fourth-quarter profits at S&P 500 companies are expected to show a 5.5% decline year over year, according to FactSet.

For its part, the aluminum maker beat analysts’ forecast by 1 cent, reporting a profit of 4 cents, but missed revenue forecasts of $5.28 billion, reporting $5.25 billion.

Mining stocks were hit hard following a filing for chapter 11 bankruptcy protection by Arch Coal Inc (ACI). Freeport-McMoRan Inc (FCX) and Peabody Energy Corporation (BTU) each lost over 20%, and CONSOL Energy Inc. (CNX) fell 9%.

The euro slipped 0.5% against the U.S. dollar to $1.0878. Gold dropped 0.1% to $1,096.50 an ounce. And the price of the 10-year Treasury note fell, with its yield rising to 2.17% from 2.13% at the end of last week.

At Monday’s close, the Dow Jones Industrial Average rose 52 points to 16,399, the S&P 500 gained 2 points at 1,924, the Nasdaq fell 6 points to 4,638, and the Russell 2000 was down 4 points at 1,042.

The NYSE Composite traded over 1 billion shares with total volume of 4.6 billion. The Nasdaq crossed 2.4 billion shares. On the Big Board, decliners outpaced advancers by 1.9-to-1, and on the Nasdaq, decliners led by 1.6-to-1. Block trades on the NYSE fell to 5,955 from 6,098 on Friday.

MDY Chart
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IWM Chart
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Chart Key

The charts of the mid and small caps look very similar. Both SPDR S&P MidCap 400 ETF (MDY) and iShares Russell 2000 Index (ETF) (IWM) show a broad channel down band and are at the bottom of their support channels. Volume is much higher than normal, and the MACD for each is oversold.


The Russell 2000 and SPDR S&P 400 Mid Cap indices are probably going to rally due to much higher-than-normal selling and an oversold MACD. A 50% Fibonacci retracement from the December highs would put the rally targets at $109 for the IWM and $247 for MDY.

But don’t be fooled by what may be a strong, high-volume bounce. If will likely be of the dead cat variety. So we should sell into it, but give it a day or two to exhaust itself.

In my opinion, the overall decline is not over, and the future direction of the market trend will be established by earnings and revenue reports. China, etc., will fade unless something unusual happens.

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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