Why Traders Should Exercise Caution


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The second week of the new year began with mixed results with telecommunications stocks down sharply while technology stocks rescued the market from a general decline.

The Dow Jones Industrial Average fell 0.3%, led by a decline in DuPont (NYSE: DD ), which fell 1.5% after news of an agreement by the chemical giant to acquire Danisco, a Danish maker of enzyme and specialty food ingredients. But Alcoa (NYSE: AA ) rose 0.4%, ahead of Q4 earnings, which came in at 21 cents versus an estimate of 19 cents, while sales were lighter than expected.

Telecommunications stocks were down following confirmation by Verizon Communications (NYSE: VZ ) that it will offer the Apple (NASDAQ: AAPL ) iPhone. Sprint Nextel (NYSE: S ) fell 2.1% and AT&T (NYSE: T ) lost 1.8%.

In other corporate news, Duke Energy (NYSE: DUK ) agreed to acquire Progress Energy (NYSE: PGN ) for stock at $46.48 per share.

Concerns over European debt again plagued stocks. Over the weekend, it was reported that France and Germany pressured Portugal to accept an Ireland-type bailout package from the International Monetary Fund and the European Union ( The Wall Street Journal ).

Treasurys rose in response to worries about European borrowings. The 10-year note fell 5 basis points to yield 3.28%. But the euro rose to $1.2954, up from $1.2910 on Friday despite the concerns.

At yesterday's close, the Dow fell 37 points to 11,637, the S&P 500 fell 2 points to 1,270, and the Nasdaq rose 5 points to 2,709. The NYSE traded 954 million shares with advancers and decliners even. The Nasdaq crossed 491 million shares with advancers ahead by 1.3-to-1.

Crude oil for delivery in February rose $1.22 to $89.25 a barrel, and the Energy Select Sector SPDR (NYSE: XLE ) fell 27 cents to $68.01. February gold rose $5.20 to $1,374.10 an ounce. The PHLX Gold/Silver Sector Index (NASDAQ: XAU ) rose 1.2 points to 212.5.

What the Markets Are Saying

With our internal and sentiment indicators so overbought, it is natural to look for signs of deterioration in the major indices. But thus far, the only potential negatives have appeared in the Relative Strength Indices and momentum indicators of the Dow industrials and the S&P 500. Both have headed down from their extreme highs, and that could be an early warning of trouble ahead. And while the stochastic has flashed a sell signal, such a sell from the stochastic in a strong bull market does not carry a lot of weight. The Nasdaq, which is still getting a push by the technology sector, has a flat momentum indicator - neither a negative nor a positive.

In mid-December, I noted the similarity between the end of 2009 and 2010 - that we could see a surge at the beginning of the year very much like the two-week surge in January 2010. The strong opening last week drove all of the indices to my January objectives, and so now, with the indicators tending lower, rather than remaining in the extreme bullish camp, I think it wise to step back and exercise caution before entering into new equity positions.

An exception could include those positions that are in basically defensive groups like drugs, utilities, high-yielding blue chips, etc. And long-term positions and those that are of an intermediate term should be held. But short-term trades with goals of less than a month should be protected with trailing stop-loss orders.

This period of uncertainty will most likely not last very long, and could even be resolved by a rush to buy. But yesterday's puny volume of less than 1 billion shares on the NYSE is not encouraging. Let's step back and again let the market tell us its future direction. The yellow flag is flying, and smart traders shouldn't ignore it.

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 Nasdaq, Inc.

This article appears in: Investing , Stocks

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Sam Collins

Sam Collins

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