Another sell-off in energy stocks, a renewed threat to the Big Three auto makers and a warning of a possible downgrade of General Electric (GE) sent stocks tumbling yesterday. High volatility returned to the markets as investors’ angst over the above news items and a pending quadruple-witching day of expiring options led to a day of steady selling, despite a higher opening.
However, at 3:15 p.m. Eastern, the Dow Industrials (DJI) were off more than 300 points, yet they did recover a third of that by the close. The recovery may have been due to a misunderstanding of the nature of the GE credit quality alert by Standard & Poor’s.
S&P lowered the company’s credit outlook to “Negative” from “Stable.” This amounts to a warning that S&P is considering an actual rating downgrade from its coveted AAA status, but it’s not a firm decision to downgrade.
The stock, which was off 8.2%, was a drag on the Dow 30, as was General Motors (GM) which was down 16.2% as a result of a WSJ report that GM and Chrysler have reopened merger talks. All three auto makers will close some or all of their North American assembly plants for all or at least part of January.
FedEx Corp. (FDX) fell 2.1% on news that it would freeze hiring and cut salaries. The shipping company is generally considered to be an indicator of financial health. It warned of “very difficult” economic conditions through 2009.
Even though first-time unemployment benefit claims dropped in the week ended Dec. 13, they were still at a 26-year high.
At the close the Dow Jones Industrial Average (DJI) was off 219 points to 8,605, the S&P 500 (SPX) fell 19 points to 885, and Nasdaq (NASD) was down 27 points, closing at 1,552.
The New York Stock Exchange raded 1.4 billion shares with decliners ahead of advancers by 3-to-2. Volume on the Nasdaq totaled 854 million shares and there decliners were ahead by about 9 to 5.
Crude oil (January contract) was crushed again, this time for $3.84 — closing at $36.22 a barrel. The Amex Energy SPDR (XLE) fell to $46.31, down $2.86, and issued a new sell signal from its stochastic indicator. The next support for the XLE is at the Nov. 20 closing low of $39.96.
Gold for February delivery fell $7.90 to $860.60 an ounce and the PHLX Gold/Silver Index (XAU) fell $8.81 to close at $110.86. The next support for the XAU is at the 20-day moving average at $99.
What the Markets Are Saying
Just when it looked like the S&P 500 (SPX) and its brothers were going to break out, the market’s recent positive reaction to bad news turned sour. The selling caused the stochastic on each of the leading indices to issue a sell signal — the second in two weeks.
One of my favorite sentiment reports, the weekly American Association of Individual Investors (AAII) Sentiment Survey, reported its third increase in bullish sentiment in as many weeks and even turned bullish on balance. This week’s reading is 39.73% bullish, 24.77% neutral, and 35.62% bearish. For those not familiar with the survey it is a contra-indicator, i.e., the more bullish the reading the greater the potential for a sell-off.
Needless to say, I remain a bear but recognize the significance of the power of the trading range of S&P 810 to 1,010 to hold back a sell-off. It could be that Thursday’s high of 918.85 will be the most significant high of the last four months. If exceeded, it will not only mean that the 50-day moving average has also been breached but that an intermediate resistance line has been broken and an important indicator, the stochastic which has issued successive sell signals, will have been wrong.
The chances are very high against these events occurring, and so I remain a bear and expect that we will shortly have another test of the major support line at 810.
Today’s Trading Landscape
Earnings to be reported include: CarMax Inc. (KMX
), Cintas Corp (CTAS), Darden Restaurants (DRI), Jabil Circuit (JBL) and Stewart Enterprises (STEI).
There are no economic reports scheduled for today.
Get Sam Collins’ Daily Trader’s Alert e-mailed straight to your inbox each morning before the opening bell absolutely FREE!
In addition to getting instant access to his Daily Market Outlook, you’ll also receive, in the same e-mail, his Trade of the Day so you can start your day off right by positioning yourself for profits!
Click here today to sign up today for Sam’s FREE Daily Trader’s Alert!
Sam Collins is a registered, fee-based portfolio manager who may be contacted at samailc@cox.net. You can also check out an archive of some of his most recent market outlooks by clicking here.
