Stocks opened strong Monday, and buying continued until early afternoon when the surge for financials ended and profit-taking overtook the banks and manufacturing sectors.
The early strength was a reaction to overnight news from British banker Barclays (BCS) that said it had a strong start for the year and was shopping its iShares business, which could bring in additional new capital. And giant HSBC (HBC) announced that it, too, was stronger and not in need of new capital.
By mid-afternoon heavy profit-taking focused on the financials, but by the close, the group reversed course finishing with a 1.9% loss. The other group that led last week’s rally was the technology sector, so it also became a target of selling and closed the day off 1.7%.
There was only one significant economic report on Monday — the February industrial production report. Consensus for industrial production was for a decline of 1.3%, so the report of 1.4% was a disappointment.
That figure, along with a dip in capacity utilization of 70.9% versus an expected 71.9%, confirmed that the economy has not yet responded to stimulus and the drag on GDP is expected to continue.
At the close, the Dow Jones Industrial Average (DJI) fell seven points to 7,217, the S&P 500 (SPX) lost three points to 754, and the Nasdaq (NASD) fell 27 points and closed at 1,404.
The New York Stock Exchange traded 1.9 billion shares, with advancers ahead of decliners by 8-to-5. The Nasdaq traded 770 million shares with decliners ahead by 7-to-5.
The April crude oil contract rose $1.10 to $47.35 and the Amex Energy SPDR (XLE) rose 53 cents to $42.03.
The April gold contract fell $8.10, closing at $922 an ounce, and the PHLX Gold/Silver Index (XAU) closed at $120.97, down $1.25.
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What the Markets Are Saying
Monday, the stock market stumbled, breaking a four-day winning streak at the first shallow resistance zone bounded by S&P 500 (SPX) 742 to 780. Yesterday’s high for the index was 774.53.
It is clear that the reversal for the S&P resulted from afternoon profit-taking, so the index could spring back as early as today.
More ominous, however, was the Nasdaq’s (NASD) tape action. Within 30 minutes of the opening, fairly heavy and consistent selling entered the market and, after a mid-morning rally, resumed in full force — driving Nasdaq to the worst performance of the major averages, off 1.92%.
This must be a disappointment to the bulls, since many have been touting the technology sector as the backbone of a recovery. It was large-cap techs that failed yesterday, shifting momentum back to the bears with a pick-up in volume and negative breadth on the Nasdaq.
This week should prove to be a test for the bulls for at least three reasons:
• The major averages have entered the first zone of resistance — a minor one that if not overcome will be interpreted as a sign of weakness.
• Second, this week is loaded with important economic reports that will no doubt show that the economy has not yet turned the corner. But if the market can rally in the face of poor economics, this would be a positive.
• Finally, the internal indicators, including the Moving Average Convergence/Divergence (MACD) and stochastic, are approaching overbought levels and with reversals recorded yesterday for both the Dow (DJI) and the S&P (SPX), the bulls must move quickly to break the reversals and get back on course.
Traders should stand aside until the market tells us whether it can overcome selling and continue last week’s rally — or head lower. And heading lower means going for a full test of the March low at S&P 667.
Today’s Trading Landscape
Earnings to be reported include: A.D.A.M., AAR Corp, Adobe Systems, Anthracite Capital, Astro-Med, Canadian Solar, Consolidated Water, Environmental Power, FactSet Research Systems, Federal Agricultural Mortgage Corp, Guess and Intelli-Check.
National Bank of Greece SA, New Gold, Pomeroy IT Solutions, Retalix Ltd, Schiff Nutrition Int’l, Stillwater Mining Co, Tecumseh Products Co, Ultrapetrol Bahamas Ltd, Vaalco Energy, and WPCS Int’l.
Several economic reports are due including: International Council of Shopping Centers (ICSC) Chain Store Sales Index for March 14, the February Housing Starts (the consensus expects a 1.9% increase), the February Producer Price Index (the consensus expects a 0.3% increase), the February Producer Price Index excluding food and energy (the consensus expects a 0.1% increase), Redbook Retail Sales Index for March 14, API Oil Industry Report for March 13, and ABC/Washington Post Consumer Confidence for March 14.
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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.
