The bulls ran out of pegs to hang their hats on yesterday, as stocks broke down out of the 150-point, seven-day trading range in the DJIA.
Stock prices had run up sharply since early September in anticipation of the Fed opting for stimulus via QE3 after getting assurance from the European Central Bank (ECB) that the euro would be “saved.”
Failure of the SPFR S&P 500 ETF (SPY) to bounce in line with the major market averages Monday gave an early warning of yesterday’s breakdown.
Weakness yesterday was across the board as only 4 of the 30 Dow industrials, 2 of the S&P 500’s leading 18 stocks, and 7 of 40 Nasdaq leaders were able to post gains. None of the 12 major banks tracked here were up.
Investor’s first read – an edge before the market opens
DJIA: 13,457.55
S&P 500: 1441.59
Nasdaq Comp.: 3117.72
Russell 2000: 839.12
It was inevitable, since the long anticipated news of euro-support by the ECB and of QE3 are now out, and there is little left for investors to look forward to.
POSITIVES:
The biggest positive for the market near-term is money managers have no other place to put their clients’ cash, so they will be buyers, especially on pullbacks.
NEGATIVES:
The November 6 elections will create uncertainty as we get closer to the date. The press will hype the horrors of the fiscal cliff, as candidates are pressed for answers. As noted before, Congress has wiggle room here and can delay action for months. One option would be to let the deadline hit on January 1, then negotiate spending and tax issues afterward.
THE ECONOMY:
The rate of deterioration in our economy and potential impact of economic slumps abroad. A reverse to the upside, or simply stability would temper any meaningful correction in stock prices. An acceleration on the downside in the economy, would suggest QE3 can’t do much to help. Consumer Confidence, the Richmond Fed Manufacturing Index and S&P Case Shiller Home Price Index were reported yesterday and mad good reading.
Consumer Confidence rose to a seven month high with a jump in its index to 70.3 from 61.3. Business firmed a bit in the central Atlantic region, September’s Richmond Fed Manufacturing Index gained 13 points to a plus 4 from a minus 9, new orders jumped 27 points to a plus 7.
Average home prices increased 1.5% in July according to Case-Shiller’s 10-city composite. All told, single family housing starts are ahead of a year ago, home sales up and the inventory of houses for sale is down.
Obviously, it will take more than a few reports to signal an economic recovery. Today we get New Home Sales (10a.m.). Tomorrow we get Durable Goods GDP and Jobless Claims, all at 8:30 a.m. Pending Home Sales comes at 10 a.m. and the Kansas City Fed Manufacturing Index at 11 a.m. Friday is the Chicago PMI at 9:45 a.m. and Consumer Sentiment at 9:55 a.m.
CONCLUSION:
Initially, the DJIA should find some support in the 13,375 area (S&P 500: 1433), but DJIA 13,210 (S&P 500: 1415) are good bets this time down. Any rally here is suspect! Resistance to the upside starts between DJIA 13,500 and 13,518 (S&P 500: 1446 and 1448). A rally to these levels would be brief and followed by a slide lower.
FACEBOOK (FB) – $20.28:
Last Thursday, I indicated I planned to discontinue coverage of FB, since I felt I had achieved the goal that I set in May, of offering daily guidance for followers of FB starting at $34 on May 21 with my warning about a drop to the $24 – $26 area, which it did shortly thereafter. Following a rally back into the 30s FB dropped into the low-20s where on August 2, I forecast a low for the stock at $16.88. On September 4, it hit $17.55.
However, I did indicate I would post comments on occasion if I felt it would be helpful, but opt out of daily technical coverage. The current plunge is a test of its September low of $17.55. Initially, it should try to hold above $19.25, though I wouldn’t rule out a new low, since my original target was $16.88 on a selling climax reversal. The fact the tech sector is weak along with the market is not helping.
I don’t own, nor have I ever owned FB. Generally, I don’t recommend or comment on individual stocks. I started covering FB technically after its IPO because I felt at $34 it was very vulnerable in face of all the misunderstanding and hype.
George Brooks
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The writer of Investor’s first read, George Brooks, is not registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.
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