Small Caps Stall Out

The major indices retreated Monday after setting new highs for the year last week.

The pullback was blamed on several factors including a slide in crude oil prices, an uncertain global economic future, hawkish comments from Boston Federal Reserve President Eric Rosengren and the underperformance of several key sectors.

WTI oil dropped 3% to $35.70 a barrel as investors worried the major oil-producing nations will not reach an agreement on output levels.

And the International Monetary Fund warned that problems in emerging markets like China could spur a decline in stocks here and abroad. But that is somewhat countered by Friday’s upbeat March jobs report and increase in U.S. manufacturing activity.

Defensive sectors were the only ones to advance Monday, with consumer staples eking out a gain and telecom up 0.7%. Health care was the best-performing sector, gaining 1.2%, and the iShares NASDAQ Biotechnology Index (ETF) (IBB) rose 0.9%.

Demand for safer assets was shown by an increase in bond prices and a drop in yields. The yield on the 10-year Treasury note fell to 1.78% from 1.79% on Friday. But gold, another traditional safe haven, declined 0.3% to $1,218 an ounce.

At Monday’s close, the Dow Jones Industrial Average fell 56 points to 17,737, the S&P 500 lost 7 points at 2,066, the Nasdaq dropped 23 points to 4,892 and the Russell 2000 fell 9 points to 1,109.

The NYSE Composite’s primary exchange traded 823 million shares with total volume of 3.5 billion. The Nasdaq crossed 1.7 billion shares. On the Big Board, decliners outpaced advancers by 2.7-to-1, and on the Nasdaq, decliners led by 1.5-to-1. Block trades on the NYSE declined slightly to 5,214 from 5,434 on Friday.

IWM Chart
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Chart Key

Following a strong run from the double-bottom of January and February, it appears the iShares Russell 2000 Index (ETF) (IWM) has stalled due to a lack of buyers.

Its advance flattened in the middle of the resistance zone from $107 to $114, while a gap at $113 to $111 from December remains open. Downside gaps are usually trading targets on rebounds, but a stall at this point is not favorable, especially when the recovery is still faced with the intermediate resistance line at $113.


In a discussion of “The philosophy of tops,” Jeff Saut of Raymond James cited Sentiment Trader’s Jason Goepfert, who said the public has not been buying into the rally but has been loading up on put options. And as Goepfert points out, this is not the way tops are usually formed. But because of Fed interference there has been little that has been “usual” about this rally.

If readers feel that they must buy stocks, my advice remains to stick with high-quality equities with strong balance sheets and a history of consistent earnings and dividends. See the Trade of the Day for an example of the type of stocks that I prefer.

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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