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Halloween Indicator Shows Market Likely to Get Spooked

By: Sam Collins
Posted: 4/19/2010 7:45:00 AM
Referenced Stocks: BAC;GE;GOOG;GS;MACD

 

Stocks were sharply lower on Friday following fraud charges being levied against Goldman Sachs ( GS ) by the Securities & Exchange Commission.  The sell-off ended a six-day winning streak for S&P 500 and gave the Dow Jones Industrial Average its worst loss in two months.

The key to the SEC charges, according to securities lawyers, is the word "fraud."  And with that word possibly attached to subprime securities and applied to other investment banks and brokerages, the financial group fell by over 9%.  Goldman Sachs fell over 13%.

Even better-than-expected earnings from General Electric ( GE ), Google ( GOOG ), and Bank of America ( BAC ) could not stop the tide of selling. 

In addition to the Goldman situation, one negative economic result also helped to hammer stocks:  The preliminary Consumer Sentiment Survey for April from the University of Michigan came in at 69.5, which was the worst reading since November and well below the 75.0 that was expected. 

Some good news was ignored:  Housing starts for March hit an annualized rate of 626,000, which is more than the rate of 610,000 that was expected.  Building permits for March came in at an annualized rate of 685,000 where 625,000 was expected.  

And hanging over the market was the cloud from the volcano in Iceland which some economists fear could turn the European recovery on its heels.  A rush to Treasuries resulted with the 10-year yield falling to 3.75%, which is about 25 basis points below where it was 10 days ago.

At the close on Friday, the Dow Jones Industrial Average was off 126 points at 11,019, the S&P 500 lost 20 points, closing at 1,192, and Nasdaq fell 34 points to 2,481. 

The volume on the NYSE increased to 1.8 billion shares (perhaps because of a combination of bad news and options expiration) and the decliners were ahead of advancers by over 4-to-1.  Nasdaq crossed 885 million shares with decliners ahead by 5-to-2.

Crude oil for May delivery was off $2.27 to $83.24 a barrel as investors sought safer assets.  The Amex Energy SPDR ( XLE ) fell $1.02 to $59.30.  June gold fell $23.40 to $1,136.90 an ounce, and the PHLX Gold/Silver Index ( XAU ) lost $4.39, closing at $168.67.

What the Markets Are Saying

The stock market has been plodding along to new highs almost daily, looking like nothing could stop it.  And yet with all of our internal indicators at "very overbought" or "overbought" levels, I've warned that all it would take would be some unforeseen negative event to trigger a sell-off.  We thought that perhaps the Greece debt situation would evolve into that bad news scenario, however that didn't happen (yet).  

But all of last week seemed to be a struggle for stocks despite the good news of daily earnings reports that beat analysts' earnings estimates by large numbers.  The market was acting poorly in the face of good news -- and that is not good.

Then the twin bombs hit on Friday:  Goldman was being charged with fraud and the Iceland volcanic ash continued to spew forth endangering Europe's fragile recovery.  The market tanked.

Last week week, I discussed the Halloween Indicator, also known as the "Sell in May and Go Away Indicator."  The triggers that I use to tell us when to sell are chiefly the "internal indicators" of stochastic, momentum, and the Moving Average Convergence/Divergence ( MACD ). 

On Friday, the stochastic and the MACD issued short-term sell signals and momentum is overbought.  The triggers on the Halloween Indicator have been fired, and those who follow it should be exiting stock positions and engaging in defensive strategies like call writing, put buying, etc.

And the sentiment indicators have also issued sell signals, but that is for tomorrow's discussion.

For now, sell before May and go away looks like a sound strategy.

Today's Trading Landscape

Earnings to be reported before the opening include: Amylin Pharmaceuticals, Arch Coal, Bank of Hawaii, Citigroup, Eli Lilly, Halliburton, Hasbro, IDEX Corp, M&T Bank, McMoRan Exploration, Sensient Technologies, Standard Pacific. After the close: Allegiant Travel, Atheros Communications, Brown & Brown, C&D Technologies, Crane, Crown Holdings, Equity LifeStyle Properties, IBM, ICU Medical, Packaging Corp, Pinnacle Financial, Renaissance Learning, RLI Corp, Steel Dynamics, Werner Enterprises, and Zions Bancorp.

Economic report due: Leading Indicators (the consensus expects 1.1%).

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