Yesterday’s broad-based sell-off was prompted by profit-taking after hearing about slower-than-expected economic growth in Japan. The selling, which began in Tokyo, spread to the United States on the heels of lower consumer numbers on Friday.
Japan’s Nikkei fell 3.1%, and China’s Shanghai Composite Index fell 5.8% — its worst day since November. Europe opened lower and then regained about half of its losses, and the Dow Jones World Index fell 2.9% — its worst loss since April.
The S&P 500 (SPX) opened lower and then traded in a narrow range for the remainder of the day. It finally closed off 2.43%, with the Dow Jones Industrial Average (DJI) down 2% and the Nasdaq (NASD) off 2.75%.
All of the S&P’s 10 major sectors closed lower, with banks being the worst performers, off 5.1%. Basic materials stocks were big losers as commodities hit the skids. And health care stocks were the best performers with the sector down slightly.
Many analysts were looking for a correction, noting that August is usually a rough month for stocks.
Retail numbers on Friday shook confidence. Then, on Monday, Lowe’s (LOW) reported a 19% decline in Q2 earnings, missing analysts’ estimates, and the stock fell 10%. Home Depot (HD) fell 3.8% in sympathy with the LOW numbers. HD reports earnings today.
>
At the close, the Dow fell 186 points to 9,135, the S&P 500 lost 24 points to 980, and the Nasdaq was hit with a 55-point smack, closing at 1,931.
The NYSE traded 1.2 billion shares with decliners smashing advancers by a margin of 9-to-1. On the Nasdaq, the margin was not quite so bad at 5-to-1, and the volume was 635 million shares.
Crude oil for September delivery fell 76 cents to $66.75 a barrel, and the Energy Select Sector SPDR (XLE) lost $1.64, closing at $49.07.
December gold fell $12.90 to $935.80 an ounce as the sell-off in Chinese stocks led to a rally in the U.S. dollar and subsequent profit-taking in metals. The PHLX Gold/Silver Index (XAU) fell $6.76 to $139.13. Support for the XAU is at the bottom of its current bull channel at $130. The 200-day moving average is at $125.
What the Markets Are Saying
With the sentiment and internal indicators primed for a lower opening, it is no wonder that the market fell sharply on the news from Tokyo.
The CBOE Volatility Index (VIX) was up 3.62 to 27.89, its biggest move since early June. The VIX often has spasmodic hops and then settles down again, but it has been forming a more sideways pattern (from downward since July), and that could mean that the broad markets are going to trade sideways-to-down for a few weeks.
Dorsey, Wright & Associates are masters of pulling apart data and evaluating the markets from a risk-reward standpoint. They commented that although various indicators have been screaming “overbought,” they conclude that this is the beginning of a normal correction.
>
They said they “see no major changes with respect to the longer-term indicators like NYSE Bullish Percent or the relationship of Cash to Stocks.” And they note that “you are getting the pullback that investors have been waiting for to put money back to work.”
They also opined that the panic calls that they are getting are just symptomatic as the “Wall of Worry” builds.
Today’s Trading Landscape
Earnings to be included: Analog Devices, Cardinal Health, Dick’s Sporting Goods, Giant Interactive Group, Harris Stratex Networks, Hewlett-Packard, Home Depot, Jack Henry & Associates, La-Z-Boy, Longtop Financial Technologies Ltd., Medtronic, Perrigo Co., Saks, Solarfun Power Holdings Co. Ltd., Target Corp., TJX Companies, Vestas Wind Systems A/S.
Economic reports due: ICSC-Goldman Store Sales, housing starts (the consensus expects 0.605 million), producer price index (the consensus expects -0.3%), PPI less food and energy (the consensus expects 0.1%), and Redbook.
Late news: Q2 Home Depot (HD) reported earnings per share of 66 cents versus a 59-cent estimate, and the company raised its estimate for the full fiscal year. Cardinal Health (CAH) reported Q4 EPS of 86 cents versus an 86-cent estimate.
The old ways of investing don’t work anymore. But trading options founded on scientific principle can and does work in volatile times like these. Learn how to leverage the power of technical analysis to identify the short window when a trade is set to go straight up or down. Get your FREE copy here!
