US stock futures are pointing to a lower open Thursday after yesterday’s potent sell-off, which was the biggest decline in more than two months. The financials, agricultural and technology stocks all weighed on the indices after news made investors cautious on outlook. The latest data for investors will come this morning in the form of Morgan Stanley (MS) earnings and weekly jobless claims.
Poor earnings from Goldman Sachs Group Inc. (GS), Citigroup Inc. (C) and Wells Fargo Company (WFC) triggered a sell-off in the banks as they look to recover from the financial crisis. A narrow revenue miss was especially punished in group leader Goldman, which was expected to have a blockbuster quarter.
News that privately-held Cargill would sell their 63% stake in The Mosaic Company (MOS) sent the fertilizer company plummeting more than 10% with investors feeling the move may be a sign of a perceived top. MOS actually traded sharply higher after the close Tuesday when the news broke, but as investors digested the announcement, selling pressure prevailed. Other fertilizer stocks like Potash Corp./Saskatchewan (POT), CF Industries Holdings, Inc. (CF) and Monsanto Company (MON) were also hit hard.
Cloud Debacle Redux
Technology completed the hat trick of weak sectors, also getting hit hard yesterday. Cloud computing had another debacle during the session, and it intensified after hours yesterday when F5 Networks, Inc. (FFIV) lowered Q2 guidance estimates after missing narrowly in their Q1 report. The announcement sent FFIV down nearly 20% after hours, dragging other cloud stocks down with it. IBD top ranked stock Riverbed Technology, Inc. (RVBD) is down more than 14% from yesterday’s open, VMWare, Inc. (VMW) more than 8%, salesforce.com, inc. (CRM) nearly 6%, and Rackspace Hosting, Inc. (RAX) down 8.5%, just to name a few.
Cloud stocks carry lofty valuations, and any sign that high anticipated growth could slow sends shares tumbling, like we saw on October 6th. That sell-off came after Equinix, Inc. (EQIX) lowered guidance, and turned out to be a buying opportunity. Let’s see if this one is, too. If you are wary of exposure to individual companies, consider the PowerShares Dynamic Networking ETF (PXQ) for balanced exposure to the sector.
Widespread Technical Damage
Over the last two months the rally has hardly taken a breath, and a correction was inevitable as investors look to lock in some returns. Technical support areas have hardly been threatened, and buyers at every level have been rewarded. But don’t confuse a bull market with genius. After yesterday’s widespread selling, it would be prudent to clean up positions and not get greedy, says Scott Redler of T3Live.com. The selling felt even more rampant in individual stocks, as some of our favorite sectors for 2011 (banks, ags, and tech) were down on news. Redler expects those dips to be buyable.
The 1275-1278 area in the S&P held yesterday, but futures are heavy this morning and we could definitely break below today. If that level is breached, we will likely see at least S&P 1255-1258, says Redler. At that point, he will measure market composure and look for individual stocks to nibble on. If that level doesn’t hold, the next support stands at the 50-day moving average (1236 right now) and then major support is down at 1225-1227. With investors noting their desire to buy dips, Redler does not expect the market to reach major support, but will not trade aggressively long until the price action confirms such a strategy. For more individual stock commentary, check out Redler’s daily morning Pricepoint Sheet.
Selling Was Heavier Than DOW Suggests
The market was hit hard yesterday, harder than the DOW suggests, says Jordan Kimmel of T3Live.com. The advance-decline line was 1 to 4, a reminder that it’s often stairs up, elevator down in this market. With the first day of heavy selling do not average down in positions, just yet, says Kimmel.
A down day in light volume is one thing, but yesterday’s selling was aggressive on heavy volume. Lots of extended stocks are simply coming back to their bases after recent breakouts. Obey stops or trailing stops (or at least adjust size) in this still-fragile market, you can always buy stocks back or add tiers of stock.
When looking at individual stocks yesterday, it almost felt like the selling was even more catastrophic than the indices indicated. That means that there were some stocks that did not see as much selling. Kimmel says several stocks on his Magnet investing list held up well and still look intact.
RPC, Inc. (RES), an oil services company, is ready for a MACD buy signal after sitting near the top of the Magnet list over the past few weeks.
Acacia Research Corporation (ACTG) is a stock Kimmel has touted daily, the #2 ranked Magnet stock, and yesterday it nearly made the breakout. Broad market weakness likely prevented ACTG from holding the breakout, but its relative strength is a good sign.
For a short idea, look at Foster Wheeler AG (FWLT) says Kimmel. The stock has begun to show up on the Magnet short list due to decelerating revenues, and is a bit extended technically. With the market cracking a bit, this could an opportunity to look short FWLT.
DDi Corp. (DDIC) is another highly ranked Magnet stock, but had a tough day Wednesday in the weak market. However, the selling came on low volume and the stock remains in a base. Kimmel says he expects it to eventually break out above $12.25.
Finally, the solars were another sector that got smacked yesterday. ReneSola Ltd. (SOL) was hit especially hard. Kimmel believes the solars will have their day once again, but that for now you should tier down from solar holdings after technical damage.
*DISCLOSURE: Scott is short SPY. Jordan is long SOL, RES, DDIC, ACTG; Short FWLT.
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