Today was certainly a nasty reminder and more. It was a very unhappy day for the stock market as lots of bad news hit over the weekend from Europe and the United States. From Europe we had news that the country is not situated in a way to prevent defaults from taking place down the road. More help will be needed from everyone in order to stop what no one wants to see happen. It could lead to a domino effect should one country go down. The paper losses could take many more with it. Greece is first up on the docket to start the ball in motion. Europe pretty much admitted to it being in a state of desperation. Not good. On top of that, we had the new CEO of Cummins Inc. (CMI), a major market leader, tell the world that he believes Europe and the United States are both already in recession. He lowered expectations. It’s certainly not what you want to hear from this economic leader.
The combination of events over the weekend took our futures down, but it got worse when we heard from Wells Fargo & Company (WFC), a leader in the financial world, tell us they are missing their earnings report and will be guiding lower. Expectations were already low. They got lower this morning. The futures sunk fast and the selling was on. A large gap down that only got worse as the day wore on. The market closed near the lows for the day. There were a few attempts to buy cut down quickly. The sentiment trade is on and has been great but these days remind us of the bigger picture, which has been, and still is, bearish until the ills of the world can be cured. There isn’t much in terms of hope for that in the immediate future.
The biggest headache for this market, and the reason we’re in the market we’re in, is because the financial stocks got hit hard again today. Wells Fargo said all the wrong things today, but at least Citigroup (C) did not. Wells Fargo is a leader, and leaders have to lead higher with good news, but they gave only bad news this morning. The pain from this sector continues on without any light at the end of the tunnel.
What’s even more painful is the technical damage done to this stock today along with other financial stocks. Large gap downs that take out key exponential moving averages on high volume is never a good thing, and that’s exactly what Wells Fargo did today. This means the gap will now act as major resistance on all attempts back up in the near-term. There really aren’t many, if any, leading financial stocks that are solid. Visa, Inc. (V) and Mastercard Incorporated (MA) aren’t bad at all, but they’re not banks.
The banks are in deep trouble across the board because they still can’t find a way out of their foreclosure mess. Add in the threat of paper held against Greece, and the other problems, the news isn’t very good for the future. A default outside of our country will be devastating for the banks, and at that moment, should it take place, you’ll probably see the fed panic and do QE3. That will be, yet, another big mistake. We can only hope that no matter what happens anywhere in the world, he won’t make the financial mess we’re in much worse. If things get bad enough, I believe he will sadly.
The volume on today’s move was anemic, and that’s not good news. Volume will be light on both sides as fewer play the whipsaw bear flag we’ve been in now for over nine weeks. Week ten started today and we’re more near the top than anything else. This bear flag may sadly last months longer with the spread basically from 1099/1101 to 1235. The 200-day exponential moving average happens to be sitting at 1234, so 1234/5 will be incredibly tough resistance for now. A break above could occur, but that’ll likely be a head fake. So, we’ll need to be on our guard for head fakes to come, possibly both ways. Only a strong volume move below 1099, or a strong volume move above 1235, will be important to look at from a volume perspective. All else is noise and nothing else. Price can be very painful and very friendly with light volume. Volume is only a primary indicator at key inflection points and, right now, we’re not at any of them, good or bad.
Froth is something you desperately want to continue to avoid for the immediate future. You should not be taking on stocks with high P/E’s, especially anything over 25. The market is punishing the stocks with high P/E’s. That makes sense as many of them are violently overvalued. Stocks like Green Mountain Coffee Roasters Inc. (GMCR) got crushed today with its 105 P/E. There are other stocks all over the place, so please focus your long plays on stocks with lower P/E’s in order to avoid that type of carnage. It can happen to any stock at any time. But you want to do all you can to avoid this happening to you. Be careful and watch what you’re doing. It’s easy to want to play those stocks, because they’re such fast movers, but you need to understand the risk involved. It’s very high in this type of market environment. When you’re in a bear you must avoid these plays. In a bull market, you must own them. It’s as simple as that. This market says caution is the way to play every single day. Playing froth stocks is throwing caution out the window. Not the brightest thing to do these days.
S&P 500 1290 down to 1280/75 are key support levels. 1290 is the 50-day exponential moving average. 1280 is the 20-day exponential moving average. 1275 horizontal support. It would make sense to breach this bottom level before trying to rally once again. 1235 key resistance. The bear flag continues. There should be one more strong rally in the weeks ahead. Probably the last rally, but we’ll take it one day at a time as always.
Peace,
Jack
