Investors’ nervousness over China’s moves to tighten credit resulted in a dip in stocks on Wednesday. Then yesterday, President Obama signaled that he felt the need to curb the size of banks and move back to a division between commercial banks and investment firms that existed under the Glass-Steagall Act.
The Wall Street Journal quoted one stock trader at Cowen & Co. as saying, “Obama scared everybody. That is what really pushed us up, the stimulus and cheap money. When it stops, people will be nervous.”
Financial stocks fell 3% on the news as more details emerged indicating that the president would move to limit the size of banks and, as he said, “ensure that no bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.”
Even though the details of such a move would take months or even longer to work out, the market panicked on the news. Even stalwarts like Goldman Sachs (GS), which had just announced an enormous earnings gain, was hit for a loss of $6.92. And the losses were not limited just to stocks. In addition to financials, commodities felt the brunt of the announcement.
Economic reports didn’t help matters, either, with initial claims for the week ended Jan. 16, coming in at 42,000 more than expected. And continuing claims came in at 4.6 million, matching estimates.
At the close, the Dow Jones Industrial Average (DJI) had fallen 214 points to 10,390, off more than 2%. The S&P 500 (SPX) fell 22 points, closing at 1,116, and the Nasdaq (NASD) was hit for 22 points, closing at 2,266.
The NYSE traded 1.5 billion shares with decliners ahead of advancers by 4-to-1. The Nasdaq traded 862 million shares with decliners there ahead by just over 3-to-1.
Crude oil futures sank to a one-month low with the March contract falling $1.66 to $76.08 a barrel, and the Energy Select Sector SPDR (XLE) closed at $57.67, down $1.20.
January gold fell $9.60 to $1,102.70 an ounce, and the PHLX Gold/Silver Sector Index (XAU) closed at $159.49, off $7.80, breaking its intermediate uptrend line and closing just $3.52 above its 200-day moving average.
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What the Markets Are Saying
Yesterday, the Dow plummeted triple digits for the third time in a week. And the S&P 500 closed under the support line at 1,120, as it fell more than 20 points. Just as important, volume is picking up on the selling, with 1.4 billion shares trading on Friday — a triple-digit down day — and 1.5 billion shares traded yesterday.
Yesterday’s decline also triggered a trading sell signal by closing under the 20- and 50-day moving averages of the Dow, and below the 20-day moving average of the S&P 500, and placed the momentum indicator below the zero line for the first time since early December.
Even the Nasdaq fell under the 20-day moving average, and the near-term triple-bottom support at 2,270. This triggers a short-term trading sell signal for Nasdaq with a target of 2,220. But the 50-day moving average is at 2,225, and that could provide support for a quick sell-off.
Back to the Dow and S&P 500: With near-term support broken, the next support for the Dow is the twin reversal day bottoms at 10,236. The S&P’s next support is at 1,070. But bear in mind that these numbers represent very broad support bottoms, and selling could be halted before reaching the extreme low.
For example, the support zone for the S&P is 1,070 to 1,120, and so we are already within the zone of support. However, a close under 1,070 must be taken seriously, since it would call into question the direction of the intermediate trend of the market.
With a yellow flag flying, it is time to reassess current positions. Modest amounts of cash should be raised, but only to use for a better buying opportunity. This could be a quick and shallow correction, so let’s not run with the crowd in panic since a quick stampede could end in an even faster round of bullish opportunities.
Today’s Trading Landscape
Earnings to be reported before the opening include: Air Products, Amcol, AVX Corp., BB&T Corp., Exelon, General Electric, Harley-Davidson, Huntington Bancshares, Johnson Controls, Kimberly-Clark, MB Financial, McDonald’s, Prosperity Bancshares, Schlumberger, SunTrust Banks and Webster Financial.
There are no significant economic reports due today.
Late news: BB&T (BBT) reported EPS of 27 cents vs. a 21-cent est. General Electric (GE) reported 28 cents vs. a 26-cent est. Schlumberger (SLB) reported 67 cents vs. a 64-cent est.
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