Brace for a Sell-off

Late selling, which was primarily focused on the technology sector, drove prices lower, and we posted the first monthly loss for the major indices in three months. The Dow Industrials were off 1.01% for November, the S&P 500 was down 0.61%, and the Nasdaq was off and 1.01%. Sovereign debt problems were again at the forefront of news, as S&P put Portugal’s debt rating on “credit watch,” a warning that in most cases leads to a downgrade. And the yield spreads on the debt of weaker euro nations widened in response. Despite an improvement in consumer confidence and better manufacturing results, the euro crisis seemed to overshadow all else. The latest consumer confidence numbers for November rose to a five-month high of 54.1 from 49.9 in October. But U.S. home prices were down 1.5% in the third quarter. Tech stocks fell 1.4% yesterday, making them the poorest performing group. The sector was also one of the worst performers for the month, off 1.8%, and contributed greatly to losses in both the S&P 500 and Nasdaq. The Nasdaq was especially hurt by Google Inc.’s (NASDAQ: GOOG ) 4.5% loss yesterday, following reports that it is offering to buy Groupon, a social network geared toward discount shoppers. The Groupon story was followed by the announcement of a European Commission antitrust investigation into allegations that Google has abused its dominant position in online search. Caterpillar Inc. (NYSE: CAT ) rose 1.1%, which resulted from a better-than-expected report from the Chicago-area manufacturing data. Wal-Mart Stores, Inc. (NYSE: WMT ) rose 0.5%, and The Walt Disney Company (NYSE: DIS ) gained 0.3%. Treasurys ended November with a gain when late in the month investors fled to safer assets. Yesterday, the benchmark 10-year note’s yield fell to 2.795%. The 30-year bond yielded 4.101%, and the euro fell to $1.2981 from $1.3123 on Monday. At the close, the Dow Jones Industrial Average was down 47 points to 11,006, the S&P 500 fell 7 points to 1,186, and the Nasdaq was off 27 points at 2,498. NYSE volume totaled 1.54 billion shares, and the Nasdaq traded 807 million shares. On both exchanges, decliners outpaced advancers by about 2-to-1. Crude oil for January delivery rose $1.97 to $85.73 a barrel in the face of both a stronger dollar and lower stock prices. The fall was attributed to buying of gasoline futures. The Energy Select Sector SPDR (NYSE: XLE ) fell 22 cents to $62.71. February gold gained $3.20 to settle at $1,367.50 an ounce, and the PHLX Gold/Silver Sector Index (NASDAQ: XAU ) rose 2.37 points to 213.17. What the Markets Are Saying For most of the month, and especially in the past 10 days, the typical pattern has been early selling followed by a rally at the end of the day. That pattern changed yesterday, with early selling, a rally at midday that never got to the breakeven point, and then an afternoon of continuous selling punctuated with a crescendo on the close. And there was another change, as well: Some of the world’s favorite technology stocks drove the Nasdaq lower with a negative volume ratio exceeding 3-to-1, while on the NYSE volume hit 1.55 billion shares for one of the highest volume days of the month. The major indices closed the day within a hair of breaking down from November’s significant support zone. The Dow and NYSE Composite missed disaster by a fraction, but with both, the intraday low cracked support. Also of importance, both the Dow and NYSE Composite closed below their 50-day moving averages with the NYSE down the most — now almost a full percentage point below its important blue line. As for sentiment, the widely followed CBOE Volatility Index (VIX) rose by more than 2 points to 23.54 — an enormous jump from the 17.76 low registered just five sessions ago. And the VIX closed above its important 200-day moving average for the first time since late September.  What’s it all add up to?  In a two words: more selling. The support at S&P 1,174 is within 8 points of cracking. Perhaps the bulls can pull a rabbit out of the hat, but if they do, it will be akin to pure magic helped along by more Fed Treasury purchases.   With the S&P 500 on the verge of a breakdown, traders should buy this ETF . Today’s Trading Landscape To see a list of the companies reporting earnings today, click here . For a list of this week’s economic reports due out, click here . If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net .
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