Sam Collins

Take Cover

by Sam Collins   03/11/08

Financial stocks led the markets lower Monday for the third-consecutive trading day, with many of the same names making news and taking hits.

Citigroup (C) cut its earnings estimates for a number of investment banks, including Countrywide Financial (CFC), while Citigroup itself fell 5.8%. American Express (AXP) dropped 3.6%, JPMorgan Chase (JPM) was down 2.9% and Bank of America (BAC) was off 3.9%.

Fitch Ratings also downgraded eight banks, including Washington Mutual (WM), which was off 6.3%, and Fannie Mae (FNM), which dropped almost 3%, while Freddie Mac (FRE) fell 2.26%.

However, there was one bright spot yesterday among the blue chips and that was McDonald's (MCD), which reported that global same-store sales were up 11.7%, and the stock responded by advancing 2.8%.

The Dow (DJI) had only four gainers of its 30 listing. At the close, the Dow Industrials were off 154 points to 11,740, the S&P 500 (SPX) lost 20 points at 1,273 and the Nasdaq (NASD) fell 43 points, ending at 2,169.

The New York Stock Exchange traded 1.6 billion shares and decliners exceeded advancers by 5-to-1, while the Nasdaq crossed 962 million shares at a negative breadth of 3-to-1.

Crude oil (April contract) achieved another record high at $108.21 and closed at $107.90, up $2.75. The Amex Energy SPDR (XLE) was off 91 cents at $72.85. April gold futures fell $2.90, closing at $974.20 per troy ounce, and the PHLX Gold/Silver Index (XAU) fell $7.47, closing at $189.05.

What the Markets Are Saying

Despite a three-day sell-off, with almost all of the internal indicators now at or close to oversold territory, and the sentiment indicators at extreme levels of fear, stocks continue to drive lower. The indices are approaching the intraday low from Jan. 22, with the S&P 500 (SPX) just above three points away from it; the Dow (DJI) is 105 points from its Jan. 22 low.

Just below those levels is the huge band of trading that begins at Dow 11,300 and S&P 1,250, which should provide some temporary support. Does that mean that the markets are about to execute a major reversal? Most likely no.

But after such a protracted decline, traders may want to pay close attention to the internal indicators, especially the Moving Average Convergence/Divergence, momentum and the slow stochastic. So far, only the momentum indicator has reached the level of the Jan. 22, sell-off, with the other two not far behind.

But one or two more days like yesterday could put all of the indicators at the same sold-off extremes seen during that very emotional sell-off day. For now, traders should remain short and defensive.

However, with the probability of a reaction rally high, it might be prudent to cover shorts now rather than wait for a reversal and then cover, since sharp rallies in bear markets can be killers. Such a short-covering rally could drive the S&P 500 to the mid-range of its last consolidation (1,350 or so) before again diving into the massive trading band below 1,250.

Today's Trading Landscape

The earnings reports expected today include AM Castle (CAS), Dick's (DKS), Kroger (KR), Piedmont Natural Gas (PNY) and Take-Two (TTWO).

The only economic report due is the January trade deficit (the consensus expects $59.5 billion versus $58.8 billion in December).

The Wall Street Journal reports that there is increasing pressure on the Fed to take more "innovative responses" to avoid a deep recession. Lending directly to financial institutions and direct purchases of debt by Fannie Mae and Freddie Mac are two suggested courses of action. If "new action" occurs, it could lead to a sharp rally in stocks.

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