After the big sell-off on Monday, it was expected that buyers would emerge Tuesday — and stocks did open higher, but only to spend the remainder of the day bouncing off of Dow (DJI) 6,700. The major indices closed lower for the fifth-straight session and ended at new 12-year lows.
In testimony before the Senate Budget Committee, Chairman of the Federal Reserve Ben Bernanke said that the near-term outlook for the economy is weak and will likely be worse than most economists predicted.
He said, “The recent near-term indicators show little sign of improvement,” and “Although the near-term outlook for the economy is weak, over time, a number of factors should promote the return of solid gains in economic activity in the context of low and stable inflation.”
Economists at Goldman Sachs backed (GS) much of the chairman’s statistics, confirming that their forecast says that the U.S. economy will fall 7.0% in Q1.
The auto industry continued to post horrible sales with General Motors (GM), reporting sales for February that were off 53% and Ford (F) said its numbers fell 48%. Toyota (TM) said it would seek help from the Japanese government.
At the close, the Dow Jones Industrial Average (DJI) was off 37 points to 6,726, the S&P 500 (SPX) fell four points to 696, and the Nasdaq (NASD) was off two points, closing at 1,321.
The New York Stock Exchange traded 1.9 billion shares, with decliners ahead of advancers by 2-to-1, which was mirrored by the Nasdaq as it traded 985 million shares.
Crude oil (April contract) rose $1.50 to $41.65, and the Amex Energy SPDR (XLE) closed at $38.31, up 19 cents.
Gold (April contract) was lower for the seventh-straight session, closing at $913.60, off $26.40. The April contract has fallen more than 9% since closing above $1,000 on Feb. 20. The PHLX Gold/Silver Index (XAU) gained $3.43, closing at $113.46.
What the Markets Are Saying
After five days down, many are saying that the market is bound to get a rally since it is so “oversold.”
But the current break is much like the October drop that took the Dow (DJI) from just above 10,500 to 7,774 in seven-straight sessions, ending with the selling climax of Oct. 10. And that last day of selling ended the decline when a key reversal finally marked the bottom of a trading range that would last for more than four months.
The point is that the market doesn’t “have to do” anything. The current sell-off could end today or extend for any length of time, but it will likely end on a climax similar to the one on Oct. 10.
Bottom line: The market doesn’t have to follow anyone’s notion of when to buy. Looking back to our Trade of the Day from Feb. 26, which was the ProShares Ultra S&P ETF (SSO), the chart clearly shows a very neat double-bottom at $17.70 to $18.
I thought it a reasonably good place to buy the S&P 500 (SPX) for a bounce. But Mr. Market had other plans, and my idea was crushed, with SSO closing yesterday at $15.43.
And that brings me to something else: stop-loss orders.
The SSO Trade of the Day ended with this: “This a high-risk speculation and so a stop-loss order should be entered at just under the closing low of $17.70.”
Whenever investing short-term in any high-risk trade, it is always wise to use a stop, and, in this situation, you would have lost a fraction of a point instead of now holding an Ultra fund, which is down more than $2.30 in a declining market with no bottom in sight.
While there are few absolutes with investing, here is one of mine: Traders, always use stops.
Today’s Trading Landscape
Earnings of note to be reported today: Alesco Financial, Allion Healthcare, Allis-Chalmers Energy, Altra Holdings, American Commercial Lines, American Railcar Industries, American Safety Insurance, Big Lots, BJ’s Wholesale Club and Brown Shoe Company.
Churchill Downs, Cox Radio, Cross Country Healthcare, Darling Int’l, Dynamex, Edgewater Technology, EMS Technologies, Exelixis, Foot Locker, FPIC Insurance Group, France Telecom and Frozen Food Express Industries.
Genesis Lease Ltd, Giant Interactive Group, Global Ship Lease, InSite Vision, Jackson Hewitt Tax Service, Joy Global, Kadant, Legacy Reserves LP, Liz Claiborne, Maidenform Brands and Mindray Medical Int’l Ltd.
Natural Gas Services Group, Northgate Minerals Corp, Osteotech, PetSmart, RehabCare Group, Semtech, Sigma Designs, Spartech, Toll Brothers, URS Corp, Weight Watchers Int’l, and Yamana Gold.
The following economic reports are due: Mortgage Application Refinance Index for Feb. 27, February Automatic Data Processing (ADP) Employment Survey (the consensus expects a 680,000 drop), February Non-Manufacturing Index (the consensus expects 41), U.S. Energy Dept. Oil Inventories for Feb. 27, and the Federal Reserve Beige Book.
This morning, strong manufacturing data from China resulted in gains in Europe and Asia.
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