Market Stalls Out at Psychological Barrier

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This week marks the midpoint of the 2010 Q4 earnings season, and there is a consensus that earnings have generally done well. But for over a week, the market has stalled, despite the good news, and yesterday was no exception .

Netflix (NASDAQ: NFLX ) and Qualcomm (NASDAQ: QCOM ) beat earnings forecasts and issued encouraging forecasts, but even though the stocks moved higher, the market did not follow. Microsoft (NASDAQ: MSFT ) surprised everyone by jumping the gun and posting a positive earnings surprise 10 minutes before the close. But the bounce on the Nasdaq that resulted from the announcement was quickly erased by sellers in the last minutes before the closing bell. Oh, and then there was the big sell-off in Amazon.com (NASDAQ: AMZN ) after the company reported Q4 earnings that beat expectations but revenues missed by a small amount. (See the Trade of the Day to find out why you should pounce on AMZN.)

Daily Stock Market News

Dow: +4 at 11,989
S&P 500: +3 at 1,300
Nasdaq: +16 at 2,755


Volume and Breadth

NYSE: 989 million shares traded; advancers ahead 1.3-to-1
Nasdaq: 526 million shares traded; decliners ahead 1.1-to-1

Futures and Related ETFs

March Crude Oil: -$1.69 at $85.64 a barrel; Energy Select Sector SPDR (NYSE: XLE ) -42 cents at $71.42

February Gold: -$14.60 at $1,318.40 an ounce; PHLX Gold/Silver Sector Index (NASDAQ: XAU ) -5.24 points at 198.8

What the Markets Are Saying

Just weeks ago, the market was so sensitive to news that every announcement was reflected in an extreme reaction by the stock market. But the technical condition of the market has changed since then, following days of buying that drove the internal and sentiment indicators to an overbought condition. And now the major indices are hemmed in by sellers at the psychologically stiff band of resistance at Dow 12,000 and S&P 500 1,300.

If the Dow industrials are able to put together another winning week, it will be the ninth in a row, but last week, all other major indices closed lower ending their winning streaks. Along with the lower closes, most had buying climaxes (Jan. 25) with over 550 individual stocks experiencing the same technical reversal, according to Investors Intelligence (II).

II also reported that their Advisors Sentiment of bulls fell by just 1% to 55.1%, a contra indicator that has held around that number since early November. The bears fell to 19.1% from 20.9% a week ago, which is the lowest bear reading since April 10. II says, "the current readings suggest danger."

The other sentiment indicator that we follow, the American Association of Individual Investors (AAII) Sentiment Survey, shows that bullish sentiment dropped to a 10-week low, falling 8.7% to 42%. "But despite the recent fall bullish sentiment remains above its historical average for the 21st consecutive week. This is the second longest streak for above-average bullish sentiment since the survey began in 1987," according to AAII.

And so, while the market has pounded higher in the face of extremely overbought internal and sentiment numbers, it has finally stalled at two barriers that may have psychological significance, but little technical significance. However, a close above S&P 1,300 would still be a positive and likely lead to a run to the next real barrier, the S&P's August 2008 high of 1,313.

Despite the current stall, the markets are still in a strong uptrend, but the technical aspects have recently shown dramatic changes with the 8-to-1 downdraft of last Wednesday, and a clear divergence between the Dow industrials and the Dow transports, as well as an equally serious divergence between the major blue chips and the small caps, which I'll discuss later.

Meanwhile, the markets are making slight headway with the Dow and S&P achieving intraday breaks of their psychological barriers but unable to close above them. The Fed announcement this week of a continuation of its $600 billion debt purchase plan makes it clear that the uptrend will continue - it's only a matter of time before the barriers will fall.

The major question is this: Will the Fed allow the markets to experience "normal" corrections, which it needs to remain healthy, or will it force stocks into new high ground with the danger of a very nasty correction and an even more serious market reversal when the Fed's money dries up later this year?

Today's Trading Landscape

To see a list of the companies reporting earnings today, click here .

For a list of this week's economic reports due out, click here .

If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.




This article appears in: Investing , Stocks

Referenced Stocks: AAII , NFLX

Sam Collins

Sam Collins

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