By Sam Collins, InvestorPlace Chief Technical Analyst
Stocks began Thursday with optimism over the European Central Bank’s (ECB) decision to lower interest rates and embark on a stimulus program of purchasing securities. But with light trading and a shortened week with many traders still on vacation, stocks saw modest losses.
As a result of the ECB action, the U.S. dollar rose to its best level in over 13 months. The euro traded at 1.30 versus the dollar.
Hovnanian Enterprises (HOV) rose 1.2% after posting better-than-expected quarterly earnings. This led to an increase in the construction sector, with iShares US Home Construction (ITB) gaining 0.8%.
The energy group was the weakest of all S&P sectors after an unfavorable court ruling against BP (BP) in the 2010 Deepwater Horizon rig explosion. The stock fell 5.9%.
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The biotech sector was down with the iShares Nasdaq Biotechnology (IBB) falling 1.7%, presenting traders with a chance to buy my favorite biotech stock on a pullback.
The ADP National Employment Report rose 204,000 in August, which was below forecasts. Nonfarm labor productivity in Q2 was revised down to 2.3% from 2.5%, while the consensus expected a revision up to 2.6%.The ISM non-manufacturing index for August increased to 59.6 while analysts forecasted a drop to 57.8.
At Thursday’s close, the Dow Jones Industrial Average fell 9 points to 17,070, the S&P 500 lost 3 points at 1,998, the Nasdaq fell 10 points to 4,562, and the Russell 2000 dropped 5 points to 1,167. Volume picked up slightly with 620 million shares traded on the NYSE’s primary exchange and total volume at just over 3 billion shares. The Nasdaq crossed 1.7 billion shares. On the Big Board, decliners outpaced advancers by almost 2-to-1, and on the Nasdaq, decliners were ahead by 1.5-to-1.
The Dow industrials missed a breakout by a mere point Wednesday, at 17,152, and pulled back Thursday. But the index has a narrow trading zone with support at 17,000 and an intact bullish “V.”
MACD is turning down, but that’s not presently a strong negative since a break to new highs will turn it back up again. In other words, price is a better predictor than the indicator.
The Dow transports are a reliable indicator of future economic growth. Thus, market watchers were encouraged by their strong move higher Thursday and the expectation of better performance by the industrials that it forecasts.
The stock market has been resilient in the face of some of the worst news that can be thrown at investors. Imagine if we had known all that has occurred thus far in 2014! No doubt many would have sold or gone short, missing out gains or suffering large losses.
Now the ECB has embarked on an easy, perhaps I should say “easier,” money policy by injecting money into their banking system. Much of that will probably go to U.S. securities, both bonds and stocks.
Our strategy should be to continue to buy the dips. Despite the relatively high prices of stocks compared to last year, the S&P 500 is still at a mere 17.5 times earnings, well short of extremely overbought markets that in the past topped at north of 22 times earnings.
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