Market Analysis – Dangerous Territory for the Bulls

 

On Friday, selling into financial and technology stocks drove the Dow Jones Industrial Average (DJI) to its worst single-day loss since January. The financials lost 2.5% and techs were down 2.2%, despite a Q1 GDP rate of 3.3%.

A mildly positive GDP number was expected and normally would have resulted in an uptick, but the Goldman Sachs (GS) news overshadowed all else. Even though April ended with a gain of 1.4%, the ferocity of Friday’s decline and the pickup in volatility was a shock to many.

The selling began shortly after the opening and continued throughout the day. Rumors spread early that more charges were about to be levied against Goldman Sachs. By noon it was clear that the rumors had some foundation, and by afternoon it was clear that Goldman would be the subject of a new federal criminal probe. By the final bell, Goldman’s stock had fallen 9.4%.

Utility stocks gained 0.5%, and gold gained 1% — both as a result of investors fleeing the most volatile sectors and seeking safety. And although it was down a fraction on Friday, the U.S. dollar rose 0.6% for the week.

At the close, the Dow was off 159 points at 11,009, the S&P 500 (SPX) fell 20 points to close at 1,187, and the Nasdaq (NASD) lost 51 points (off 2.1%) to 2,461. 

The NYSE traded 1.6 billion shares with decliners ahead of advancers by 3-to-1. The Nasdaq crossed 821 million shares and decliners there were ahead by more than 3-to-1.

What the Markets Are Saying

With Goldman now under a federal criminal investigation and the financial sector very hard hit as a result, this could be the trigger that could take stocks lower. Volatility in the major indices has picked up after months of stability. And the recent pickup reminds me of the sharp spike in the CBOE Volatility Index (VIX) that we saw on Jan. 21, which led to a 9% sell-off in stocks.

And volume picked up sharply last week — especially on the down days. On Tuesday, the first of the big days down occurred with the S&P 500 taking out both its 20-day moving average and its near-term support line. Thursday’s rally was heralded by the bulls as a major reversal, but the reversal was eliminated from that assessment by Friday’s massacre.

The pickup in downside volume is no doubt from institutionally based sellers, and that’s bad news for the bulls. But with all of the selling and a revived volatility index, the S&P still has not broken the low of April 1, at 1,171, and has even held the lows at 1,175.

However, a break of 1,175 could prove to be a buyer’s undoing since support for the S&P 500 then drops to the March band of 1,153 to 1,170. And 1,150 is an interesting number for Fibonacci followers, since it represents a 38.2% retracement of the advance since February.

Believe me, the bulls will not want to go there since the next band of support is from 1,120 to 1,150, and that’s not good pasture land for bulls.

Today’s Trading Landscape

Earnings to be reported before the opening include: Administaff, Armstrong World Industries, Arrow Electronics, Auxilium Pharmaceuticals, Belo, Bridgepoint Education, CapitalSource, Clorox, CNA Financial, Drew Industries, Ducommun, EMC Insurance Group, Inspire Pharmaceuticals, Integra LifeSciences, IPG Photonics, Kaydon, Loews Corp, Magnetek, MEDNAX, Mercury General, Nicor, Penwest Pharmaceutical, SAVVIS Communications, Sysco and Valeant Pharmaceuticals.

Earnings to be reported after the close include: Actuate, AirMedia, AllianceBernstein, Amerisafe, Anadarko Petroleum, Andersons, AsiaInfo Holdings, Assisted Living Concepts, Avis Budget, BioMed Realty Trust, Brookdale Senior Living, Carmike Cinemas, Chimera Investment, Cognex, Comstock, Concur Technologies, Corporate Executive Board, Cutera, DXP Enterprises, eHealth, Emeritus Corp, EOG Resources, Extra Space Storage, Five Star Quality Care, FMC Corp., Forest Oil, Genco Shipping & Trading, Granite Construction, Health Care REIT, Herbalife, Hologic, Innophos Holdings, Intevac, LeapFrog, Max Capital Group, McKesson, Meadowbrook Ins, NetSuite, NIC, Ntelos Holdings, NutriSystem, Orthovita, Otter Tail Power, Parkway Properties, Pericom Semiconductor, Pitney Bowes, Post Properties, Powerwave Technologies, Principal Financial, PS Business Parks, Qiagen, Rackspace, Regal-Beloit, Sangamo BioSciences, Skilled Healthcare, St. Mary Land and Exploration, SuccessFactors, Sykes Enterprises, Synchronoss Technologies, Texas Roadhouse, TNS, UDR, Unica, Universal Technical Institute, Vivus, Volcano, Vulcan Materials and Yamana Gold.

Economic reports due: motor vehicle sales (the consensus expects 8.8 million), personal income and outlays (the consensus expects 0.4% for income, 0.6% for spending), ISM manufacturing index (the consensus expects 61), and construction spending (the consensus expects -0.3%).

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