On Thursday, nasty economic news from Europe, followed by a homegrown negative in the form of higher-than-expected jobless claims, led to a lower opening. But the downdraft, which initially amounted to about 70 points, was short-lived as buyers reacted to a favorable home sales report and a better number from the leading indicators.
The European news that initially set up the opening sell-off came in the form of lower-than-expected PMI readings from Germany and a contraction in Ireland’s GDP. And the bad news from our shores was that initial jobless claims for the week ended Sept. 18 was 15,000 higher than expected.
The better news from this side of the pond was that home sales for August climbed 7.6% month-over-month to an annualized rate of 4.13 million units, where analysts had expected 4.1 million. And the leading indicators for August increased by 0.3%, where only 0.1% was expected.
By 11:30 a.m., stocks had overcome the initial selling, and the Dow was ahead by about 40 points. The bulls seemed to be in charge, but a midday double-top at Dow 10,760 broke the mood, and stocks sagged to just under Wednesday’s close until a final sell-off drove stocks sharply lower.
A late sell-off of the euro no doubt contributed to the final plunge. But there was no other news to account for the late-day decline other than the technically overbought situation following two and a half weeks of higher stock prices.
Financial stocks led the decline, off 2%, which was the sector’s fifth decline in six sessions. These stocks have fallen 3.5% since Sept. 16.
Treasury bonds were flat yesterday with the 10-year note at 2.55%. The greenback rose against the euro, which closed at $1.3319, down from $1.3393 on Wednesday.
At the close, the Dow Jones Industrial Average was down 77 points to 10,662, the S&P 500 was off 9 points at 1,125, and the Nasdaq was down over 7 points to 2,327.
The NYSE traded 950 million shares with decliners ahead of advancers by 2.4-to-1. The Nasdaq exchanged 543 million shares and decliners there were ahead by almost 2-to-1.
Crude oil for November delivery rose 47 cents to $75.18 a barrel following the shutdown of a key refinery. The Energy Select Sector SPDR (NYSE: XLE) fell 34 cents to $54.10.
Gold continued its record run with the December contract up $4.20 to $1,296.30 an ounce due to new uncertainties in the U.S. and European economies and the chance of further easing by the Fed. The PHLX Gold/Silver Sector Index (NASDAQ: XAU) fell 1.47 points to 196.42.
What the Markets Are Saying
Tuesday’s dramatic Collins-Bollinger Reversal (CBR) sell signal has been followed by two days of sharp declines. This is a disaster for the bulls as they have given up the strong momentum that drove stocks above the resistance at the S&P 500’s 1,130 line, and now will have to fight for every inch of ground just to maintain a position above the key support at the 200-day moving average at 1,116.
Along with the disappointment of failing to hold the first line of support at 1,130, the bulls now also have to face the fact that both the internal indicators and the sentiment numbers are strongly against them.
In addition to the CBR sell on Tuesday, the stochastic issued a sell signal, and yesterday, our momentum indicator tumbled. Only the Moving Average Convergence/Divergence (MACD) is still in the hold zone, but it is very overbought, and with a day or two of more selling will issue its own message to “head for the exits.”
The sentiment numbers, chiefly from Investors Intelligence (II) and the American Association of Individual Investors (AAII), are now telling us to take profits. II’s bulls have jumped to 41.4% from 36.7% last week, and 29.4% three weeks ago.
AAII reported that last week their bullish sentiment fell 5.9% from 50% the week before, but it is the third consecutive week that sentiment has been above 40%, and that is not good for the longs. They went on to say, “The last time we saw such a streak was April 15, 2010. The historical average for bullish sentiment is 39%.” I might add that the streak was just prior to the major top at 1,220 on April 26, which pummeled the S&P 500 to 1,066 by May 6.
It is clearly time to respond to the signals that the market is flashing. Tuesday’s reversal has been followed by sell signals from our key indicators. Investors who are holding stocks that have either not participated in the current rally or have been driven beyond their expectations should immediately sell or embark on defensive strategies. Any rallies are opportunities to sell, and traders should consider aggressive bearish trading strategies.
The next area of major support is the 200-day moving average at S&P 500 1,116, and then the 50-day moving average at 1,097. It is very likely that we will again see a test of the major market support at 1,040.
Get one way to short the market here.
Today’s Trading Landscape
Earnings to be reported before the opening include: KB Home.
Economic reports due: durable goods orders (the consensus expects -1%) and new home sales (the consensus expects 290,000).
If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.
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