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Trading Signals Say ‘Sell’

The major stock indices spent all of Tuesday in negative territory following poor economic news and a policy announcement after the FOMC meeting.

Stocks opened down in response to lower foreign markets. But instead of rebounding in anticipation of a favorable Fed announcement, prices headed lower on news that Q2 non-farm productivity made a surprising 0.9% decline. And following that, wholesale inventories had a weaker-than-expected 0.1% increase.

By the time the Fed announcement came, the Dow was off about 125 points. However, stocks immediately rallied, taking back half of the losses on news that interest rates would remain at 0% to 0.25%, and that the current conditions warranted low levels of the federal funds rate for the near future.

In addition to keeping rates unchanged, the Fed chiefs plan to reinvest principal payments for agency debt and agency mortgage-backed securities in Treasuries. It is hoped that this will convince investors that the Fed could move closer to implementing quantitative easing measures to support economic growth and price stability.

As the impact of the announcements took hold, the markets fell from the initial round of buying, rose, and then just before the close, fell again. The feeling among floor traders seemed to be that the Fed has "shot their last cannons and they don't have much left. What they've done has to work because they don't have a whole lot left to do" (Wall Street Journal).

Despite the lower averages, defense-oriented stocks gained and telecom was up 0.4%.

But materials fell with Alcoa Inc. (NYSE: AA ) off 2.7%, AK Steel Holding Corporation (NYSE: AKS ) down 3.2%, and Titanium Metals Corporation (NYSE: TIE ) falling 1.6%.

Intel Corporation (NASDAQ: INTC ) was the Dow's worst performer, off 4%. And other chip stocks fell as well: Advanced Micro Devices (NYSE: AMD ) tumbled 8%, and Micron Technology, Inc. (NASDAQ: MU ) fell 3.6%.

Treasuries were in demand with a new three-year note auction yielding 0.844%, the lowest three-year note auction on record. The U.S. dollar held onto a small gain after being much higher in the morning.

At the close, the Dow Jones Industrial Average fell 55 points to 10,644, the S&P 500 was down 7 points at 1,121, and the Nasdaq lost 29 points to 2,277.

The NYSE traded 980 million shares with decliners ahead of advancers by more than 2.5-to-1. The Nasdaq crossed 595 million shares with decliners ahead by over 3.5-to-1.

Crude oil for September delivery was down $1.23 to $80.25 a barrel. The Energy Select Sector SPDR (NYSE: XLE ) fell 46 cents to $55.41.

Concerns over an economic recovery resulted in December gold rising $6.10 to $1,208.70 an ounce. The PHLX Gold/Silver Sector Index (NASDAQ: XAU ) closed at 175.27, off 0.15 points.

What the Markets Are Saying

After two attempts to rush through the resistance at S&P 1,130, stocks pulled back again following Monday's session that had all of the earmarks of a breakout-waiting-to-happen. Instead, fear gripped the market in the morning, then relief over the Fed's decision to leave rates alone rallied stocks which was quickly followed by a final sell-off over concerns that the Fed might not be able to handle a further economic decline.

Technically the bulls appear to have "snatched defeat from the hands of victory" following days of pushing against a major resistance zone after breaking above their 200-day moving averages. Now the only solace that they have is that the major indices managed to close just above their respective 200-day moving averages.

And yesterday's performance presents the bulls with something else to think about: Every major internal indicator on our list has fallen from overbought and yesterday issued a sell signal. Chief among the most watched indicators is Moving Average Convergence/Divergence, (MACD) , which is now "below the line," while both the slow and fast stochastic have flashed a strong "sell."

Granted, these are trading signals. But the timing for such a negative performance just couldn't be worse as traders, investors and portfolio managers want nothing more than to head to their favorite vacation spot following the big Fed announcement.

So, as the summer heat wears on, the market is looking more and more like another slide to the next major support levels at Dow 10,000, S&P 1,050, and Nasdaq 2,150 is in the cards.

Dow Theory Lesson: Bull Market

We've been studying the Dow Theory this week, and now we come to Dow's interpretation of the major market trends and their composition. Today we study the "bull market," which can be divided into three phases.

The first is the "accumulation" phase, which occurs when professional and savvy investors sense that even though business is depressed, it is now time to buy. These investors are willing to buy any and all shares from those who have panicked and are willing to sell at any price just to relieve their stress. Financial reports are usually at their worst at this time, and the public is disgusted with stocks and never want to invest in them again.

The bottom has now been made and upside volume begins to pick up, ushering in the second phase of "steady advance" when an improved tone of business and a rising trend of corporate earnings are first noticed. Technically oriented investors recognize the change in trend and enter the market.

The final phase is the "blow-off" phase when stocks are the main subject at every cocktail party, and your barber and cab driver can't wait to give you their latest tip. Volume is at its peak, most mid-quality stocks are moving well, but the low-priced stocks are in vogue and hitting new highs daily. However, the blue chips begin to fade. The suckers have taken the bait.

Tomorrow we will study the phases of a bear market.

Today's Trading Landscape

Earnings to be reported before the opening include: Avnet, CAE, Computer Sciences, E-House China, IAMGOLD, Kelly Services, Macy's, Maidenform Brands, Superior Industries, Susser and Winner Medical.

Earnings to be reported after the close include: Advance Auto Parts, Aegean Marine Petroleum, AirMedia, Archipelago Learning, Cisco Systems, Copa Holdings, Education Management, Enersys, Given Imaging, I.D. Systems, Pan American Silver, Silver Wheaton, SRA International, Stanley Furniture and Teekay Shipping.

Economic reports due: Bank Reserve Settlement, MBA purchase applications, international trade (the consensus expects -$42.5 billion), EIA petroleum status report, and Treasury budget (the consensus expects -$170 billion).

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

26 Broken Stocks to Sell Now -There's a long list of companies that have jumped off their lows but are still trading at dirt-cheap prices. But BEWARE: These "bargain" stocks aren't just cheap, they're broken. Get their names here or risk losing your shirt.

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

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

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