The Safest Way to Play This Market

By Sam Collins,

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Even after Thursday's 1,000-point intraday sell-off and a 6% total fall in three sessions, U.S. stocks failed to rally on Friday. 

Economic data in the form of a rise of 290,000 in April non-farm jobs even failed to turn the market. But perhaps that was due to an unemployment rate that rose to 9.9% from 9.7%, even though the increase was due to workers re-entering the workforce but not employed.

New Coming Soon!

The hallmark of Friday's trading was fear and that generated selling in some of the biggest names in the technology sector. Hewlett-Packard ( HPQ ), Cisco Systems ( CSCO ) and Microsoft Corporation ( MSFT ) were off 3%. And Apple ( AAPL ) fell 4.22%.

But financial stocks were weak, as well, with American Express ( AXP ) falling 4.5%. And with 90% of the names in the S&P 500 ( SPX ) down, negative breadth was almost as bad as on Thursday.

The crux of the problem is still Europe's economic woes, and on Friday, the focus was on rumors that some European banks were having trouble selling debt instruments. The Libor rate, the rate at which banks lend to each other, rose to 0.42813%, the biggest one-day increase since January 2009. 

Money fled from most assets, including commodities, but gold rallied again -- this time to its highest level since Dec. 3 -- as investors sought out the safest haven for their money. Even U.S. Treasury notes fell, with the 10-year note ending the day at 3.431%.

At the close, the Dow Jones Industrial Average ( DJI ) was off 140 points to 10,380, the S&P 500 fell 17 points to 1,111, and the Nasdaq ( NASD ) lost 54 points to 2,266. The NYSE traded 2.4 billion shares with decliners ahead of advancers by 2.5-to-1. The Nasdaq traded 1.3 billion shares and decliners were ahead by 3.5-to-1.

June crude oil fell $2 a barrel to $75.11 over eurozone worries, and the Energy Select Sector SPDR ( XLE ) closed at $54.99, off $1.06.

Gold for June delivery rose $13.10 to $1,210.40 an ounce. The PHLX Gold/Silver Sector Index ( XAU ) fell 2.71 points to 171.88.

What the Markets Are Saying

On Friday, I opined that it was likely that we would see a bounce that day, only because of the odd nature of the decline and the likelihood that a number of stop-loss orders had been eliminated from the market. That didn't happen and the market closed lower. 

It has been interesting to reflect on the buying on Thursday that was automatically triggered by institutional "buy programs" installed close to the February low that may have been unintentionally triggered by what the computer folks are calling "the glitch." 

Friday's market action was interesting because of what it revealed, even though the S&P did not manage to close higher. The structured "buy programs" flicked in again, but this time the triggers were slightly higher than Thursday's, at the intraday low of 1,094, which is close to the 200-day moving average at 1,097.

Is this just coincidence? As one GS executive told the Senate Finance Committee the week before, "There are no coincidences on Wall Street."

So with two extremely volatile sell-off days behind us, it appears more than likely that there are still some institutional buy orders between the S&P 500's February closing low of 1,063 and the 200-day moving average at 1,097. And unless the market closes under the February low, the overall bull market is intact, but shaky.

As for what to do now, until the situation in Europe is solved to the satisfaction of the international bond markets, the stock market is treading water in dangerous seas. It is therefore wise for long-term investors to take precautionary action. They should hedge portfolios with options and other derivatives (eeeeek!), or seek a haven in either gold or money-market funds since there is a possibility that the economic crises could spread and even evolve into another bear market. Time will likely solve this issue, but being safe is always better than being sorry. 

With volatility now higher than at any time since April of 2009, traders have an opportunity to cash in on some very wide swings that are yet to come.

The next support is at the Feb. 25 low of around S&P 1,085, which also matches the November/December multiple lows at the same number. And if 1,085 is penetrated, look to the February closing low of 1,063. Beyond that -- don't ask.

As for resistance, look to the January high of 1,150. So the immediate trading zone on the S&P 500 is 1,085 to 1,150.

Tomorrow I'll discuss the trading zones for the Dow and Nasdaq. 

Today's Trading Landscape

Earnings to be reported before the opening include: American Oriental, Ares Capital, Broadridge Financial, China Fire & Security Group, China Information Security Technology, Comverge, Dean Foods, DISH Network, Dynegy, Echostar Holdings, Energy Conversion, Enzon Pharmaceuticals, EW Scripps, General Steel, Harbin Electric, Horsehead Holding, Hospitality Properties, Houston Wire & Cable, Imperial Sugar, Interactive Data, Landry's Seafood, Louisiana-Pacific, Natural Gas Services, Nelnet, Novavax, NRG Energy, Orbotech, PetMed Express, Quicksilver Gas, Quicksilver Resources, RadNet, ReneSola, RRSAT Global, Sterling Construction, Sunstone Hotel, TBS International, Telephone & Data, Tower Group, Transdigm Group, TravelCenters of America, Tyson Foods, US Cellular, Watson Pharmaceuticals and Xinyuan Real Estate.

Earnings to be reported after the close include: Ariad Pharmaceuticals, Assured Guaranty, AtriCure,, Circor, Clear Channel Outdoor, Cousins Properties, Denny's, Dole Food, DTS, EV Energy, Fluor, Global Defense Technology & Systems, Globecomm Systems, Hawaiian Electric, Healthcare Realty, HQ Sustainable Maritime Industries, Inter Parfums, K12, LDK Solar, Legg Mason, MarkWest Energy, Matrixx Initiatives, MBIA, McDermott, Medivation, Mindray Medical, Nuance Communications, Pan American Silver, Pike Electric,, Prospect Energy, Psychiatric Solutions, Safe Bulkers, Salix Pharmaceuticals, Sun Hydraulics, Time Warner Tcom, VisionChina Media, Warnaco Group and Winn-Dixie Stores.

There are no significant economic reports due today.

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

This article appears in: Investing Stocks

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Sam Collins

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