With no economic reports to offset profit taking, stocks pulled back Monday on a broad front. But since the financials had the biggest sector move last week and many of the banks announced selling stock to raise capital to pay off the government’s TARP loans, the group was hit with a 6.8% decline.
Common equity offerings were announced by Wells Fargo (WFC), BB&T (BBT), Capital One (COF), KeyCorp (KEY), and U.S. Bancorp (USB). Of the banks, the regionals took the biggest hit, down 8.5%, as several in addition to BB&T announced plans to raise capital.
In the financial sector insurance companies took it on the chin with life and health insurers down 10.5% and this due to the impending debate on healthcare reform and the possibility of some form of government-sponsored national healthcare plan.
Telecom stocks were the only sector to show a broad advance. AT&T (T), up 0.44%, and Verizon (VZ) agreed on a deal to sell each other various wireless assets in the billions of dollars.
At the close, the Dow Industrials (DJI) were off 156 points, closing at 8,419. The S&P 500 (SPX) fell 20 points to 909, and the Nasdaq (NASD) was off eight points to 1,731.
Volume fell sharply on the decline: The New York Stock Exchange traded just 1.5 billion shares and the Nasdaq traded 789 million shares. Decliners were ahead of advancers by 2.5-to-1 on the Big Board and by 1.5-to-1 on Nasdaq.
The June crude oil contract closed at $58.50 a barrel, off 13 cents, and the Amex Energy SPDR (XLE) fell $1.58 to $50.26.
The June gold contract fell $1.40 to $913.50 an ounce, and the PHLX Gold/Silver Index (XAU) lost $1.42, closing at $136.87.
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What the Markets Are Saying
Yesterday, as the markets tumbled in a cascade of profit-taking, the financial talking heads suddenly turned bearish. But on Friday, few were warning of impending doom and most were parading a line of analysts and fund managers who were touting the new bull market.
The market is overbought; where it has been led by three groups, the retail, financial, and technology, now most of them have run too far and are due for a pullback — we’ve been saying that for weeks. And yet momentum has been carrying stocks higher and higher until yesterday when the slow stochastic gave a short-term sell signal.
On Friday, as pointed out in yesterday’s Daily Trader’s Alert, the Nasdaq (NASD) turned down chiefly as a result of profit-taking in the overbought technology sector, flashing a tentative sell signal from its Moving Average Convergence/Divergence (MACD).
While the market decides on its next leaders, and it will need new leadership if a bull is to emerge, expect at least a mild pullback. Initial support for the Dow Industrials (DJI) is at the 20-day moving average and near-term trend line at 8,160 and then 7,800. For the S&P 500 (SPX), initial support is 875 and then 825, and for the Nasdaq (NASD) it is at 1,650 and then 1,600.
It is time again to be defensive and that means taking profits on winners, selling losers that have little hope of gain, and writing options on long-term positions. For everyone, it means raising cash while we await the next buying opportunity and the identity of the next powerhouses.
Today’s Trading Landscape
Earnings to be reported include: American Italian Pasta Co, Anthracite Capital, Applied Materials, Aracruz Celulose S.A., Baytex EnergyTrust, BluePhoenix Solutions Ltd, BMC Software, Celsion Corp, China Automotive Systems, China Digital TV Holding Co Ltd, China Transinfo Technology Corp, Companhia Brasileira de Distribuicao, Consolidated Water, Corpbanca and CPI Aerostructures.
Electro Scientific Industries, FirstCity Financial, Fossil, Geoeye, Great Atlantic & Pacific Tea, HearUsa, Hitachi Ltd, Insight Enterprises, Lannett Co, Learning Tree Int’l, Lime Energy Co, MBIA, National Cinemedia, Nortech Systems, Optelecom-NKF, Pan American Silver, Perceptron, Raser Technologies, Rentech, Rick’s Cabaret Int’l and Russ Berrie.
ShengdaTech, Sport Supply Group, Systemax, Ticketmaster Entertainment, Trailer Bridge, tw telecom, Ultrapetrol Bahamas Ltd, Vaalco Energy, Vector Group Ltd, Warnaco Group, and Western Gas Partners LP.
The following economic reports are due: the International Council on Shopping Centers (ICSC) Chain Store Sales Index for May 9, March Trade Balance (the consensus expects negative $29.4 billion), Redbook Retail Sales Index for May 9, March Federal Budget Balance (the consensus expects a deficit of $20 billion), and ABC/Washington Post Consumer Confidence for May 9.
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