Stocks started the day off very flat off the back of a bunch of economic data. Consumer spending rose .3% in the month of March which was the slowest since October and below forecast of a .5% increase. Personal income, however, beat estimates for a .5% gain, coming in at .7%. The core personal consumption index came in unchanged from the previous month dropping the YOY change from 2.4% to 2.1%. This is still above the comfort zone of the Fed, but it is much better than it could have been.
This news, however, did absolutely nothing for stocks and that was the them all day long until 2pm. What started at 2pm, after reviewing the daily action, can be called nothing but pure selling by institutional investors. A nasty selloff in the afternoon quickly sent stocks to their respective LOD. A boring day quickly changed into a disturbing one.
When it was finally over, the SP 600 led the way lower with a 1.7% swoon, the SP 400 followed with a 1.4% haircut, the Nasdaq lost 1.3%, the SP 500 and NYSE dropped .8%, and the DJIA held firm losing only .4%. This snapped the DJIA incredible record of 19 positive closes in the past 21 sessions (first time since 1929) and four day win streak. The Nasdaq gave back all the gains from the previous three days, also. The worst news, however, comes in the form of leading stocks. The IBD 100 and IBD 85-85 both lost 2%. To top it off, my portfolio, full of strong stocks lost 2.5%.
The bad news behind the selling was volume and breadth. Volume came in higher by about 9% on the NYSE and just slightly higher on the Nasdaq. Don’t let the “slight” volume increase in the Nasdaq fool you to the severity of the selling. The NYSE and the Nasdaq’s volume was way below Friday’s level, until the selling started. Before the selling started NYSE’s volume was running 66 million shares lower. By the end of the day it was 285 million higher. On the Nasdaq it was running 207 million shares lower. After the selling was finished it was six million higher. This gave both indexes another distribution day.
This now gives the NYSE and the Nasdaq four distribution days in the past four weeks. One more and we have to start getting worried about the rally. One more distribution day would be a good reason to stop buying stocks and cutting losses on stocks that have not gone anywhere the past couple of weeks. However, a positive sign is that the DJIA and the SP 500 have only two distribution days. Until these indexes catch up, it is not necessary to start selling everything left and right.
Breadth was negative on both the NYSE and the Nasdaq, with decliners beating advancers on the NYSE by an 8-to-3 margin and on the Nasdaq by a 7-to-3 margin. The selloff on poor breadth was preceded the past couple of week with stock gains on negative breadth. This negative breadth despite the gains has now caught up with the market, after Monday’s move.
Speaking of negative divergences. The fact that new highs kept on narrowing and narrowing and the new lows kept growing and growing really shows up in the 52 NH and 52 NL today. There were 391 new 52-week highs and a very very high 117 new 52-week lows. The fact that there are so many new 52-week lows when the indexes were hitting all-time and six year highs intraday is very disturbing.
The final two hours of selling made this selloff much worse as volume exploded as the indexes sold off. The fact that there was low volume all day before this happened was very disturbing. The other disturbing aspect of the high volume selling is the fact it came on no news. The huge swoon on no news is, imo, the worse news possible. This means that big institutions (the smart money) has decided that stocks are too expensive to own here and it is time to sell more. This repeats the pattern since December of lower volume rallies followed by higher volume selloffs. This kind of heavy selling is much worse than panic selling. This was pure distribution with no fear involved. Want proof? The put/call is only at .88 at the close.
It was about time for a selloff as this had to be expected and was expected for quite some time. This sort of dumping happens when markets run-up non-stop without ever taking the time to rest properly. Just like a marathon runner who decides to start the race sprinting, stocks can not keep going up without pulling back and creating bases (starting blocks) to make large significant gains in short periods of time. Stocks that don’t pullback may make you a lot of money but usually in one or two days the gains are gone as momentum leaves at the same time.
There are many climax runs going on out there and I have listed them in the forums. These charts on an arithmetic scale clearly show how nutty it is getting in the old leaders. The old leaders that today got crushed. Chemicals-Fertilizers, Energy-Other(SOLF, JASO), Trucks-Parts, and Steel-Specialty Alloy which are all old leaders and current leaders got smacked hard with many top stocks getting a good whack. Besides these old leaders, other small-cap and low priced stocks suffered good damage today. They hit all the momentum stocks today pretty hard.
Is this the start of a real selloff? I really doubt it. But the complacency is there for a market to fall. The truth is that nobody really knows what is going to happen tomorrow. The best plan is to expect a rally and a selloff. Prepare to sell your stocks if they crack important moving averages or key support and be prepared to keep holding those stocks that show no signs of selling and keep bouncing off those important moving averages. How has panic selling worked for the weak bulls since November?
The market is still in an uptrend, except on a very short-term basis, and if your longs are acting perfectly (pulling back on lower volume or rising and holding key support) there is nothing to do but to keep riding the trend. Today was a big crack and taking some gains and some losses on stocks that acted funny today is the right play. Also if any new long has not moved higher already, consider getting rid of some. Many new buys have not done well and selling some of them now is the proper play. New buys are supposed to move up immediately. In bull markets you can let them pullback but in choppy or weak markets it is best to take some off immediately if they don’t work out.
Earnings season is winding down and for the first time in almost a full four years earnings are below YOY gains of 10%. Right now the final tally is 6.9%. The trend is clearly slowing in earnings growth, just like the trend in the GDP. If the market has been rising on the fact that earnings came in higher than the 3.6% Thomson financial expected, what is the market going to do when the earnings dry up? Are we setting ourselves up for the famous axiom: Sell in May and go away? It sure looks like it with all the negative divergences out there. But until it happens it is just speculation.
Aloha and I will see you in the chat room!!!!
