The market once again made new highs this week, but the action Friday leaves investors with a little bit of a sour taste in their mouths. If you just glanced at the Dow or even the S&P today, you might think this was just another ho-hum day in this rally. However the action under the surface tells us Friday was anything but a quiet and healthy day. Some leading stocks and sectors got hit very hard, and the action feels a little heavy.
Agricultural Stocks See Heavy Selling
One sector that appears in real trouble, at least in the near-term, is the agricultural stocks. The sector rebounded from the last debacle in mid-January that was sparked by Cargill’s announcement that it would look to divest its 64% stake in potash and phosphate producer The Mosaic Company (MOS). However, the selling in the ags this week feels a bit more persistent and less impulsive. We have been long-term bullish on the ags and specifically the ferts, but the recent action makes us more cautious.
The recent leader among the ags, PotashCorp./Saskatechwan (POT) is down 3.5% today on decent volume. Today’s drop comes on the heels of a very bearish gravestone doji candlestick on Monday, which was followed by a sharp decline Tuesday. MOS has a similar chart as POT, shedding 4% today. A narrow earnings beat after the close yesterday from CF Industries Holdings, Inc. (CF) did little to help the cause, perhaps suggesting the market was pricing in universally blockbuster reports in the sector.
Apple Under Pressure
Concerns about Steve Jobs’ health were renewed this week amid reports that appeared very sickly as he was sighted entering a California cancer treatment facility. The Apple Inc. (AAPL) CEO was well enough to attend a dinner with President Obama last night along with several other prominent business leaders, but that did little to placate investor concerns. The stock fell 2.3% today despite recovering from an overnight drop to open slightly higher.
A healthy market has leadership, and AAPL has provided that over the past few months. Perhaps the most troubling aspect of today’s session is the fact that many market leading sectors and stocks like AAPL are the ones being targeted for selling. High flying momentum stocks have been extending gains over the past couple of weeks, and today’s action could trigger further downside among that group. A negative close in the Nasdaq illustrates that point that tech stocks are turning relatively weak after a strong run.
Rare Earth Falls from Pedestal
Rare earth stocks, while not part of major indices or traditional barometers of market strength, to me provide an interesting measuring stick for the current market conditions. With most of the sector having no earnings to this point, the rare earth trade is almost entirely speculative. Investors have been happy to chase these stocks higher until today. The steep drop in the rare earth stocks illustrates, again just my opinion, that some of the frothy, speculative money is drying up, at least temporarily, in this market.
Group ‘leader’ Molycorp, Inc. (MCP) fell 6.5% today after an SEC filing showed that a corporate insider, Craig M. Cogut, recently sold $305 million in stock. Avalon Rare Earth Metals Inc. (AVL), which had been the strongest rare earth stock of late, breaking out to new highs, pulled in more than 7% today. Active traders like to trade these volatile stocks, but they remain speculative and risky for investors hoping to hit it big.
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Overall, our view is still that this market has long-term upside, but once again we are seeing signs that all is not well. Many pundits contend that the market is propped up by the Fed and prices are inflated, a fact that will make the eventual correction more harsh than it otherwise would’ve been. It seems that each time we have seen ‘problems under the hood’ the market has shrugged them off and continued higher. Nonetheless, today there was some very curious action that is prompting active technical traders to reduce risk and stay on their toes for a complexion change.
*DISCLOSURE: Scott is long GLD; Short SPY.
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