A speech yesterday by Federal Reserve Chairman Bernanke warned of more struggles in the economy, including high unemployment, cautious consumers and tight credit. But the good news, he said, is that those economic factors “seem likely to keep the pace of expansion moderate.” And since inflation is under control, the Fed seems willing to keep interest rates low.
A Fed study released last month predicted that the jobless rate would remain high (9.3% to 9.7%). And the Fed warned that it could take five or six years for the job market to recover.
This led to selling of the U.S. dollar, which reversed Friday’s course when the dollar rallied on the lower unemployment number. The U.S. Dollar Index, a measure of the dollar against six other currencies, was off 0.2%.
The market opened higher Monday, and by noon was ahead by about 50 points. But by the close, investors had headed back to the more defensive issues as they sold financials and techs in a reversal of Friday’s activity.
Telecommunication stocks were strong, up 1.8%, pushed along by Sprint Nextel (S) after Barron’s said that the company was in a favorable position to meet the rising demand for prepaid calling services.
At the close, the Dow Jones Industrial Average (DJI) was up just over a point to 10,390, the S&P 500 (SPX) fell 3 points to 1,103, and the Nasdaq (NASD) fell 5 points to 2,190.
The NYSE traded just over 1 billion shares, and on the Nasdaq, 557 million shares traded. On both exchanges, decliners were just slightly ahead of advancers.
Crude oil (January contract) fell $1.54 to $73.93 a barrel — an eight-week low — and the Energy Select Sector SPDR (XLE) fell 13 cents to $55.77.
December gold fell sharply in early trading, recovered some, but still closed down $5.40 at $1,163.40 an ounce. The PHLX Gold/Silver Sector Index (XAU) closed at $178.97, off $2.99.
What the Markets Are Saying
Stocks are finding it hard going. On Friday, an early rally drove the S&P 500 to 1,119.13, again just shy of our intermediate target of 1,120. Yesterday, the very broad index failed to make it much further than breakeven before succumbing to late-afternoon selling. And despite a weak rally in the last 25 minutes, it couldn’t make it to the plus side.
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At the current level, the major indices are faced with some very stiff overhead resistance, and their struggle is beginning to take its toll.
The internal indicators are now either negative (stochastic, MACD) or pointing lower (momentum). A key Fibonacci number, 50% retracement of the bear market, sticks out like a sore thumb at S&P 1,121, and I can now reveal that, four months ago, that is the reason I picked the round number of 1,120 as the intermediate target for the “500.”
And even the Nasdaq, despite its heavy tech makeup, is struggling with the 2,200 area.
Yesterday, it failed to hold above that key round number for the fifth time, and now it, as well as the higher risk indices — Russell 2000 (RUT) and S&P SmallCap 600 (SML) — are all finding it rough going.
However, as we close in on mid-December, it is more likely that the small- and mid-cap stocks will begin to see more buyers than the big, broad indices.
Tomorrow we’ll take a specific look at the support zones again and review our indicators to get a feel for just how low the major indices could go before running into major support.
For now, hold onto your greenbacks for the next buying opportunity. The bull is no longer a calf, but neither is he ready to head for the stockyards.
Today’s Trading Landscape
Earnings to be reported before the opening include: AutoZone, Brown-Forman, GigaMedia, H&R Block, Imperial Sugar, Kroger, Sanderson Farms, Talbots, Toro and Vail Resorts.
Earnings to be reported after the close include: AeroVironment, C&D Technologies, CKE Restaurants, Comtech Telecommunications, Cooper Companies, Men’s Wearhouse, Mitcham Industries, NCI Building Systems and SAIC.
Economic reports due: ICSC-Goldman Sachs chain store sales and Redbook.
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