Broader-based selling hit the markets on Monday, and when it was over the Dow Industrials (DJI) showed a loss of 3.6%. It was the worst day for stocks in more than a month. The financials les, as investors headed for the door, driving the sector down 11.4%.
The Dow was hit hard and most of the impact of the decline came from Bank of America (BAC), off 24%. Before the opening, the big bank reported Q1 earnings that far exceeded estimates, but it also said that its Q1 credit-loss provisions were almost $5 billion more than the Q4 provision.
Furthermore, according to a Wall Street Journal analysis of Treasury Department data, “Major bank stocks had rallied over the last month but fundamental questions linger for the sector. The industry’s ability to extend credit is still constrained.”
Adding to investors’ distress was a comment from an administration official that the government may convert some of the preferred shares that they obtained from the bank bailouts into common shares. This would give the government more control of the banks and dilute shareholder equity.
Oracle (ORCL) announced the acquisition of Sun Microsystems (JAVA) at a 40% premium. IBM‘s talks with Sun reportedly failed, which led to Oracle’s stepping into the vacuum. IBM reportedly said that it has no further interest in pursuing Oracle. IBM reported Q1 of $1.70 versus estimates of $1.66 but the loss of Sun Micro to Oracle could hurt future growth.
The Conference Board said that the recession may continue though the summer, though its intensity could ease. The index of leading economic indicators fell 0.3% in March.
At the close, all 10 major sectors of the S&P 500 (SPX) were lower and the Dow Jones Industrial Average (DJI) was down 290 points to 7,842. The S&P 500 (SPX) fell 37 points to 832, and the Nasdaq (NASD) was down 65 points to 1,608.
On the New York Stock Exchange, decliners outpaced advancers by more than 9-to-1 on volume of 1.8 billion shares, and on the Nasdaq sellers were ahead by almost 5-to-1 on volume of 960 million shares.
Oil prices fell sharply with the May contract closing at $45.88 a barrel, down $4.45, on a stronger dollar and fears that the financial crisis is worsening. The Amex Energy SPDR (XLE) fell $2.22 to $43.56.
After a decline of several sessions, gold attracted bargain hunters and the June contract rose $19.60 to $887.50 an ounce. The PHLX Gold/Silver Index (XAU) rose $2.80 to $117.79.
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What the Markets Are Saying
For the first time since March 30, the major indices broke the lowest point of their last flag formation. These flags have characterized the advance from the early-March market low. Along with that, yesterday’s breadth was broad enough to engulf all of the S&P 500’s (SPX) 10 sectors in a negative day.
The stochastic on each index has issued a sell signal and the CBOE Volatility Index (VIX) had its biggest advance (up 5.24) since early April. And even though it is still under 40, closing at 39.18, the VIX is telling us that sellers are beginning to take charge of the market.
Last week, we had the first hint that a pullback was coming when bad news began to be treated as bad — and good news was being ignored. Then, yesterday morning, Bank of America (BAC) announced that its earnings beat estimates by many multiples only to see a sell-off in the stock, shifting the market to selling on good news.
And then, last week, there was the push by some of the major financials to force the shorts into a panic of covering, which should have left them open to even more selling.
The Q1 earnings season has just begun and there may be some positive surprises that could temporarily reverse stocks up. But the Dow (DJI) and the New York Stock Exchange Index penetrated and closed under their 20-day moving averages for a trading sell signal. And the S&P 500 (SPX) closed at 832.39, just a few points away from its 20-day at 830.87.
Further weakness should trigger stronger profit-taking and drive stocks to the last area of resistance, now also support, which for the Dow is at around 7,450 and for the S&P 500 is at 800.
It is time again to get very defensive.
Today’s Trading Landscape
Earnings to be reported include: Advanced Micro Devices, AK Steel Holding Corp, Altera Corp, Ameriprise Financial, Ametek, Arbitron, Astec Industries, Autoliv, Bank of New York Mellon Corp, BJ Services Co, BlackRock, Boston Private Financial Holdings, Brinker Int’l and Broadcom.
C.H. Robinson Worldwide, Cadence Financial Corp, Capital One Financial Corp, Carlisle Companies, Cascade Financial, Caterpillar, Century Aluminum, Coach, Comerica, Conceptus, CPI Corp, Cree, Cubist Pharmaceuticals, Cymer, Delta Air Lines and DuPont.
Equity LifeStyle Properties, First Cash, First Place Financial, Flagstar Bancorp, Flexsteel Industries, Forest Laboratories, Fulton Financial, Gilead Sciences, Hancock Holding Co, Harleysville Group, Hudson City Bancorp, Huntington Bancshares, Iberiabank, II-VI, Illumina, Infinera Corp and Intertape Polymer Group.
Jefferies, Johnson Controls, KeyCorp, Kinetic Concepts, LaBranche & Co, Lexmark Int’l, Lockheed Martin, M&T Bank Corp, Manhattan Associates, Manpower, Marten Transport, Medical Nutrition USA, Merck & Co, Millicom Int’l Cellular S.A., Molex, Nabors Industries, New Oriental Education & Technology Group, Norfolk Southern Corp and Northern Trust.
Pentair, Pervasive Software, Pharmaceutical Product Development, Pulaski Financial, Quest Diagnostics, RC2 Corp, Regions Financial Corp, Renasant Corp, RLI Corp, SanDisk Corp, Sandy Spring Bancorp, Schering-Plough, Seagate Technology, Southwest Georgia Financial, StanCorp Financial Group, State Street Corp and Stepan Co.
TD Ameritrade Holding Corp, Terex Corp, Terra Industries, Terra Nitrogen, The Coca-Cola Co, The New York Times Co, Tupperware Brands, Twin Disc, U.S. Bancorp, UAL Corp, United Technologies, UnitedHealth Group, USG, Vocus, Washington Banking Co, Waste Connections, Webster Financial Corp, Western Union Co, Westwood Holdings Group, Wilshire Bancorp, WMS Industries, and Yahoo.
The following economic reports are due: International Council on Shopping Centers Chain Store Sales Index for April 18, Redbook Retail Sales Index for April 18, API Oil Industry Report for April 17, and ABC/Washington Post Consumer Confidence for April 18.
Late news: Texas Instruments (TXN) reported better-than-expected earnings, as did DuPont (DD). Earnings from some major companies are due today — Coca-Cola (KO), Caterpillar (CAT), Delta Airlines (DAL) and Merck (MRK) — which could have a significant impact on today’s broader market.
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