After two straight days of institutional selling in the major averages, investors have good reason to tread cautiously.
If you started buying high-quality names after the market confirmed a new uptrend on Nov. 23, there’s nothing wrong with taking partial or full profits here. And if recent new buys are struggling, protecting capital and keeping losses small is sound strategy.
Headed into Friday, the distribution day count in IBD’s Big Picture column stood at seven for the broad-based NYSE Stock Exchange Composite Index and four for the Nasdaq Composite and S&P 500. When higher-volume declines start to cluster in the indices, it can often presage more price weakness.
What’s hard to believe is that after a 14% rally for the Nasdaq and S&P 500 since the mid-November lows, both indices have only pulled back 2-3% off their recent highs. That’s not much of a consolidation. A major support level for the NYSE Composite is its 50-day moving average around 8,698. The S&P 500’s 50-day line is at 1,473. For the Nasdaq, it’s 3,105.
The risk for more downside is clearly there, especially with a slew of retail earnings reports on the horizon. I’d like to think that retail CEOs will be confident about overall business and consumer spending in 2013, but we could hear a different tune. Nordstrom (JWN) didn’t get things off to a great start after the close Thursday. Shares fell 2% in after-hours trading after the upscale department store operator guided full-year earnings below expectations.
Next week, we’ll hear from the likes of Home Depot (HD), Macy’s (M), Saks (SKS), Target (TGT), TJX Companies (TJX) and J.C. Penney (JCP), among others.
It’s been tough watching solid gains evaporate over the last two sessions, but the market is in dire need of a consolidation phase — not a full-blown correction but a modest pullback that will give stocks time to catch their breath. My growth screens are scant with buy prospects and filled with extended stocks. A consolidation phase will change this and present new buying opportunities in due time.
[Editor’s note: Listen to Ken Shreve live today from 3-4 ET on his radio show: Breakout Investing on TFNN. ]
= = =
