Stocks opened higher on Wednesday, as momentum from Tuesday’s late buying spree carried over to the financial and technology stocks. After just an hour of trading, the Dow Industrials had gained more than 125 points, with a 50-point gap up on the opening, and the S&P 500 was up almost 5%. 

But, as the day wore on, it became apparent that enthusiasm from Tuesday’s bargain hunting could not replace the fear of a chaotic European debt situation. After several retreats and then rallies, stocks finally gave way to broad selling that took the Dow Jones Industrial Average to a break-even at 3:30 p.m., and a minus by the close. 

The weakness was blamed primarily on a collapsing euro, which settled under 1.22 versus the U.S. dollar, which is just above its four-year low. The euro’s decline was blamed on European leaders’ failure to take strong, decisive steps to control a spread of the debt crisis. 

Financial stocks initially led the broad market lower, but by the close, it was the telecom group that had the biggest loss, off 1.2%, which resulted from a 1.7% slide in Verizon Communications Inc. (NYSE: VZ) after its CEO said that the FCC’s proposal to more heavily regulate the Internet could “be dangerous to the overall health of the industry.”

But late selling could also have resulted from the S&P’s inability to hold above 1,090 — a benchmark that some technicians have referred to as a major support line. So, when it became obvious that the line was about to be penetrated, additional sellers accelerated the decline until the closing bell halted trading.

Despite relatively high volume and broad selling, some large-cap stocks made gains. The Boeing Company (NYSE: BA) rose 0.8%, Caterpillar Inc. (NYSE: CAT) gained 0.9%, The Walt Disney Company (NYSE: DIS) rose 0.75%, and 3M Company (NYSE: MMM) was up 0.55%.

Treasury prices fell raising the yield of the 10-year note to 3.22%.

At the close, the Dow was down 69 points to 9,974, the S&P 500 was off 6 points to 1,068, and the Nasdaq fell 15 points to 2,196. 

The NYSE traded 1.9 billion shares with decliners ahead of advancers by 3-to-2. The Nasdaq traded 1.1 billion shares, but advancers were ahead there by 5-to-4.

July crude oil rose $2.76 to $71.51 a barrel on a more optimistic view of the world’s economic outlook by futures traders. The Energy Select Sector SPDR (NYSE: XLE) fell 11 cents, closing at $51.87. 

June gold settled at $1,213.40 an ounce, up $15.40, and the PHLX Gold/Silver Sector Index (NASDAQ: XAU) fell 46 cents to $170.74.

What the Markets Are Saying

The last half hour of selling was attributed to a “failure of the S&P 500’s inability to sustain a break above the 1,090 level,” according to the Wall Street Journal. That’s really reaching for it since, on Tuesday, the S&P closed at 1,074. What is more likely is that the news from Europe triggered selling that put the February closing lows of the Dow Industrials under the psychologically important 10,000 line, with the next support at 9,908, just 66 points to the south.

So, even with the disappointing failure of the key indices to hold onto the early morning’s gains, none of them has broken the crucial February closing lows. And there is another very important number that many have ignored, and that is the S&P 500’s bottom at 1,044. The 1,044 support line matches the October 14, 2008, intraday high, and as Michael Ashbaugh correctly pointed out, this line, along with other important support zones, has yet to be broken.  

Here is his analysis: “The S&P 500 held major support at 1,044. The Russell 2000 survived a test of its 200-day moving average … The S&P MidCap 400 has also rallied from its 200-day moving average … For as long as these areas hold, the corrective-bounce, market-recovery advocates have a legitimate case.”

However, the “correction” is now reaching a critical point where the bulls must take a stand or be faced with a massive liquidation. The CBOE Volatility Index (VIX) swung from under 25 to almost 35 yesterday, closing at 34.59, giving us an indication that no matter how strongly we feel about the bull or bear case, the markets will continue to gyrate, giving traders one of their best opportunities in over a year to capitalize on the swings while long-term investors keep popping their purple pills.

Tomorrow we’ll consider the condition of the sentiment indicators.

Today’s Trading Landscape

Earnings to be reported before the opening include: Big Lots, Bio-Reference Labs, Columbus McKinnon, Concord Medical Services, Conns, Costco, Genesco, HH Gregg, HJ Heinz, Monro Muffler, Movado Group and Tiffany & Co.

Earnings to be reported after the close include: Adaptec, Blue Coat, Diamond Foods, Esterline Techs, Guess, J. Crew, Novell, OmniVision, SeaChange and Terremark Worldwide.

Economic reports due: GDP (the consensus expects 3.5%), jobless claims (the consensus expects 450,000), corporate profits, EIA natural gas report, Fed balance sheet and money supply.

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