Sam Collins

Prepare for a Possible Pullback

by Sam Collins   10/13/09

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In a Columbus Day light-volume session, stocks opened higher, but momentum lagged at midday and by late afternoon the earlier gains had vanished. Most of the weakness was in the financial sector, while energy stocks were strong throughout the day. Then, with an hour remaining, the financial stocks came to life and what looked like a reversal day down turned into a small gain.

The strongest stocks in the late rally were Wells Fargo (WFC), up 3.66%, Bank of America (BAC), up 3.03%, and JPMorgan Chase (JPM), up 0.5%. 

Technology stocks, and especially the microchip sector, were down for the entire day. SanDisk (SNDK) fell 2% after a downgrade by UBS to a "sell" rating, and some traders were quoted as saying that investors are nervous about the tech sector as the stocks head into earnings season.

Despite that, two of the technology stocks in the Dow Jones Industrial Average (DJI) did well, with IBM (IBM) and Intel Corp. (INTC) showing gains while Cisco Systems (CSCO) was down modestly.

At the close, the Dow was up 21 points to 9,886, the S&P 500 (SPX) rose 5 points to 1,076, and the Nasdaq (NASD) lost fractionally, falling to 2,139. 

Holiday volume was very light with just 947 million shares traded on the NYSE and 518 million on the Nasdaq. The Big Board had slightly more advancers than decliners, but the Nasdaq had more decliners by a ratio 4-to-3.

Crude oil for November delivery rose $1.50 to $73.27 a barrel, and the Energy Select Sector SPDR (XLE) rose 76 cents to $56.92. 

Gold (December contract) rose $8.90 to $1,057.50 on a weaker U.S. dollar, and the PHLX Gold/Silver Index (XAU) fell 31 cents to $176.07 after making a new intraday high at $180.10.

What the Markets Are Saying

Yesterday's market action may be interpreted by some technicians as showing a market that "lacks conviction and may be topping out," and they could be correct. However, any conclusion based on the meager data provided by a day of light holiday volume is lacking substance.

However, last week I noted that prices were approaching new highs, the top of the bull channels, and, thus, near-term resistance. Therefore, in the near future, it would be no surprise to have the major indices make new intraday highs, or even new closing highs, followed by reversals and a trip back down to the 50-day moving averages and the support lines of the bull channels.

This is all part of an orderly advance that began in March, and with just one exception in June, has provided investors with a steady pattern of predictable gains.

It is again time to prepare for a pullback, but don't be surprised by a breakout. It is likely that at some time we'll be rewarded with a high-volume thrust through the top of the channel that will take us to a new emotional high and our intermediate targets -- and that is where we will cash in.

Today's Trading Landscape

Earnings to be reported include: Altera Corp. (ALTR), Bank of the Ozarks (OZRK), Community Trust Bancorp (CTBI), CSX Corp. (CSX), Domino's Pizza (DPZ), EXFO Electro-Optical Engineering (EXFO), Flushing Financial Corp. (FFIC), Heritage-Crystal Clean (HCCI), Indiana Community Bancorp (INCB), Intel Corp. (INTC), Johnson & Johnson (JNJ), LG Display Co. Ltd. (LPL), Linear Tech Corp. (LLTC), USANA Health Sciences (USNA) and Westamerica Bancorp (WABC).

Economic reports due: NFIB Small Business Optimism Index, ICSC/Goldman Sachs chain store sales, Redbook, federal budget balance and the ABC/Washington Post consumer confidence index.

Late News: Goldman Sachs (GS) was cut to "neutral" from "buy" by noted analyst Meredith Whitney.  

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