Stocks headed downward Monday on fears that fourth-quarter earnings will be lower than even the most pessimistic forecasts.
Traditionally, the first of the blue chips to report earnings is Alcoa (AA). But yesterday, even before the market opened, Deutsche Bank (DB) downgraded Alcoa to sell from hold because of the company’s cuts in production, employees, and anticipated lower earnings than previously forecasted. And, in fact, Alcoa reported a Q4 loss of 28 cents a share versus an expected loss of 10 cents a share.
Financial stocks took the brunt of the selling again yesterday, and Citigroup (C), off 17.3%, led the way lower following the report of a deal to combine its brokerage arm with Morgan Stanley (MS). Other financials had a tough time of it, as well: Bank of America (BAC) fell 12%, JPMorgan (JPM) was off more than 4%, and Wells Fargo (WFC) lost better than 5%.
The Dow Jones Industrial Average (DJI) was down 125 points to 8,475, the S&P 500 (SPX) fell 20 points to 870 and the Nasdaq (NASD) lost 33 points to close at 1,539.
The New York Stock Exchange traded more than 1.3 billion shares, with decliners ahead of advancers by 3-to-1. The Nasdaq (NASD) traded 688 million shares and there decliners were ahead by 4-to-1.
The February crude oil contract ended lower by $3.24 at $37.59 a barrel and the Amex Energy SPDR (XLE) fell $1.92, closing at $46.72.
Gold for February delivery closed at $821 per troy ounce, off $34, and the PHLX Gold/Silver Index (XAU) lost $7.61, closing at $106.92.
What the Markets Are Saying
Monday’s decline drove all of the key indices under the important conjunction of the 20-! and 50- day moving averages. So, it is time to re-evaluate the major indices to determine their short-term direction.
Both the CBOE Volatility Index (VIX) and the Nasdaq 100 Volatility Index (VXN) had their highest close since Dec. 18 and are trending up, telling us that volatility is increasing and so is the likelihood of lower prices.
This is confirmed by the American Association of Individual Investors (AAII) Sentiment Survey for the week ending Jan. 8, which shows that respondents were 48.70% bullish and 35.06% bearish; the Investors Intelligence tells us that the advisors are now at 41.8% bullish up from 38.5% while the bears contracted by an equal amount. Our internal indicators (the Moving Average Convergence/Divergence — MACD, Stochastic, momentum, and Relative Strength Index — RSI) are still modestly overbought and heading down.
Conclusion: The market was overbought following the Dec. 29 to Jan. 6 rally.
The sentiment and internal indicators are telling us that a correction is warranted, but they are not yet at extreme levels, so the chances are strong that the real test will come at Dow 8,000 (DJI) and S&P 500 (SPX) 800 and that the support will hold. But the consolidation that began in November will likely extend for an indefinite period.
I had hoped to continue Monday’s piece on Bear Traps and the significance of NYSE short-interest, but apparently the new numbers have not yet been released. I’ll pick up this subject when the numbers are posted.
Today’s Trading Landscape
Earnings of note to be reported include: Electro-Optical Engineering (MELA), Infosys Technologies Ltd (INFY), Insteel Industries (IIIN), Linear Technology (LLTC) and Majesco Entertainment Co. (COOL).
Several economic reports are due including: International Council of Shopping Centers (ICSC) Chain Store Sales Index for Jan. 10, ! November Budget Balance (the consensus expects a deficit of $52 billion), Redbook Retail Sales Index for Jan. 10, December Federal Budget Balance, and ABC/Washington Post Consumer Confidence for Jan. 10.
Today Fed Chairman Ben Bernanke will speak at the London School of Economics.
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