Option Investor
Market Updates

Many reasons cited for lower trade

Printer friendly version

While today's economic data releases came above economist's forecasts, the lower trade for equities has the newswires buzzing on just why stocks are trading lower after some better than forecasted data.

Treasuries find buying in the 5, 10 and 30-year maturities and has the benchmark 10-year YIELD ($TNX.X) 4.098% dropping rather sharply. One scenario cited for today's rather sharp drop in YILED is end of month asset balancing by portfolio managers as they take some profits in stocks and re-balance to Treasuries. Another scenario cited is that last weeks rise in YIELDS was influenced by a glut of corporate debt issuance where bond investors may have sold Treasuries last week to buy some higher yielding new corporate paper. Another scenario in play is that Treasury bears have been shorting the past couple of weeks, and today's action is simply short-covering related. On a short-term basis, it's my opinion that any of the scenarios in play could be argued and there would still be no firm agreement on just why Treasuries see buying. However, for those not needing an explanation the buying in Treasuries does find YIELD lower and stocks appear to be suffering slightly as a result.

I would also note the list of downgrades based on valuation are long. However, it is rather humorous to me (Jeff Bailey) that some "downgrades based on valuation" have the stock trading higher than the analyst's original target. Then, while the analyst downgrades the stock, with it trading 10% above his/her target, the analyst is raising their price target on the very same stock. It then appears to me the analyst is beating around the bush and should just be saying, "the stock has reached our original target and we'd sell the stock at a price that has exceeded our bullish target."

I think this type of "profit taking" is normal and perhaps why the Bullish % charts, which are near the higher risk levels for bulls usually are good indicators for eventual weakness. At some point, stocks just get a little too expensive or "overbought" and some type of pullback is needed in order to have bulls finding better risk/reward profiles. Nobody should feel guilty for saying, "we think profits should be taken."

The Dow Industrials (INDU) 8,733 -1.3% currently trades down 115 points and has been hovering near these levels for the better part of the noon trade after rebounding some 46 points from the morning low. A quick look at Dow breadth shows weakness with 25 components lower compares to marginal gains in 5 components. Only Boeing (NYSE:BA) $33.94 +1.34% trades with a gain of greater than one percent. Several components are lower by more than 2% with drug component Merck (NYSE:MRK) $58.66 -2.7% finding some selling after competitor Eli Lilly (NYSE:LLY) $65.22 -4.24% said its osteoporosis drug Forteo won FDA approval today. Many industry watchers will note that Lilly's Forteo represents more competition for Merck's Fosamax.

Other Dow components suffering losses greater than 2% have in alphabetical order, American Express (NYSE:AXP) $38.25 -2.8%, Citigroup (NYSE:C) $37.72 -2.4%, Caterpillar (NYSE:CAT) $47.25 -2.9%, Johnson & Johnson (NYSE:JNJ) $57.00 -2.7%, JP Morgan (NYSE:JPM) $24.45 -2%, 3M (NYSE:MMM) 125.86 -2.1% and United Technologies (NYSE:UTX) $63.24 -2.4%.

The broader S&P 500 Index (SPX.X) 920 -1.28% is lower by 12 points, -1.28% as sector action is decidedly to the downside today. Bucking the more negative tone to equities is the HMO Index (HMO.X) 479 +3.44% after an -8% decline yesterday. The CBOE Internet Index (INX.X) 107.29 +1.17% clings to a gain after trading up 3% earlier this morning, while the Morgan Stanley Health Provider Index (RXH.X) 272.76 +0.9% rounds out the sector gainers list.

Technology sectors, other than Internet, are showing the greater losses among the sectors, but this would be expected under normal profit taking and looks rather marginal when considering their moves from the October lows. Biotechnology (BTK.X) 365 -3.6%, Fiber Optic (FOP.X) 55.55 -3.6%, Semiconductor (SOX.X) 361 -3.5% and Networking (NWX.X) 155.85 -3.2% round out technology losses, while the Securities Broker/Dealer Index (XBD.X) 447 -2.24%, Natural Gas Index (XNG.X) 146.66 -2% and Dow Transportation Index (TRAN) 2,277 -2% show equal percentage losses and hint of evenly distributed profit taking.

Volume is running just about average and perhaps a little on the light side with the NYSE showing just over 900 million shares traded. NASDAQ volume is slightly heavier at just over the 1.2 billion mark.

Breadth is negative, but not overly so, with decliners having a 19 to 12 advantage at both the NYSE and NASDAQ. Here too, market internals hint that today's action may support the scenario of some asset allocation away from stocks on profit taking, with the selling being rather indiscriminate and evenly distributed.

Despite the weaker breadth, the number of new stocks trading new highs versus new lows is surprisingly positive. The NYSE shows 23 stocks posting new highs on the NYSE versus 18 stocks trading new lows. Meanwhile, the NASDAQ Composite continues to be more impressive in this category with 39 stocks trading new highs versus 26 stocks at new lows.

Jeff Bailey

Intraday Update Archives