With the Q1 earnings season starting at the market close Tuesday and talk that many key companies and industries are overpriced, along with possible negative surprises, investors were taking few chances. It was the second day of selling, with stocks down a total of 3.2% lower for the two days.
Financial and bank stocks performed worse than others after a late-day sell-off. That sector closed with a loss of 3.2% and Real Estate Investment Trusts (REITs) were the worst of the group, down more than 12%.
There was little in the way of news but much in the way of anticipation with Alcoa (AA) the first of the Dow Industrials (DJI) to report.
And there was a lot of talk about the SEC’s study on short-selling restrictions with most of it centering on reinstating the “uptick-rule,” which serves to thwart bearish runs on a stock by forcing shorts to only be able to execute a short sale on an uptick from the last trade.
After the close, Alcoa did report earnings and it was not good. Where analysts had been anticipating a loss of 56 cents a share, the company reported a loss of 61 cents.
By the close, the Dow Jones Industrial Average (DJI) was down 186 points to 7,790, the S&P 500 (SPX) fell 20 points to 816, and the Nasdaq (NASD) was off 45 points, closing at 1,562.
On the New York Stock Exchange, decliners were ahead of advancers by almost 3-to-1 on volume of 1.3 billion shares. The Nasdaq traded 635 million shares with decliners ahead by 7-to-3.
The May crude oil contract fell $1.90 to $49.15 a barrel on reports of higher inventories and an anticipation of a slower economy. The Amex Energy SPDR (XLE) closed at $43.74, off $1.35.
Gold for April delivery rose $10.70, ending the day at $882.20 an ounce after falling for three straight sessions. The PHLX Gold/Silver Index (XAU) gained 66 cents, closing at $123.93.
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What the Markets Are Saying
As the three-day Easter weekend approaches, volume is declining as both traders and investors shy away from a market that is fraught with uncertainty.
Not only are the Q1 earnings in doubt but longer-term economic analysis by our own ChangeWave Research team indicates that we can expect to see a trading range of 700 to 900 on the S&P 500 (SPX) for at least several months. Readers of the Daily Trader’s Alert will recognize that this is supported by my own technical analysis.
After a discussion of many of the risks peculiar to this economic cycle, the ChangeWave team appraises the big economic forces that “simply have to play out over time.”
We conclude, “Most important of all are the declines in home prices, the crash in commercial real-estate values, and the soaring unemployment. As long as this chilling trio continue to be the leading negatives, any hopes for a sustainable and meaningful economic growth — and a rebound — are out of the question. That’s why you can expect to see a second whopper stimulus package either in late 2009 or early 2010.”
The major indices have been drawn into the massive overhead at S&P 800 to 920 and now appear to be turning back.
And one of the most overvalued sectors, the one that led the rally from the market’s low at 667, is the financial sector. This group of stocks is also referred to in our recent ChangeWave weekly update, “While the bank stocks have run up, as if investors think all of their problems are behind them, the fact remains that the banks are fundamentally broken and the pain is far from over.”
From a technical standpoint, as a group, their charts hang at the top of all of the internal indicators as excessively overbought.
For investors who have ridden the bank recovery to the current level, it is time to take profits or lighten up on longer-term positions in the financial sector. For traders, it is time to jump on the most undervalued financial Exchange-Traded Funds (ETFs).
Today’s Trading Landscape
Earnings to be reported include: Constellation Brands, Excel Maritime Carriers Ltd, Family Dollar, Global Crossing, PriceSmart, Richardson Electronics, RPM Int’l, Shaw Communications, Shaw Group, SMSC, The Greenbrier Companies, Tortoise Capital Resources Corp, and WD-40 Company.
The sole economic report due is the January Wholesale Trade figures.
Late news: Homebuilder Pulte (PHM) to buy competitor Centex (CTX) in a $1.3 billion deal. The Treasury Department will extend TARP to the insurance industry.
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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.
