Signs of a Correction to Watch For

Strong selling in telecommunications stocks yesterday took back a good portion of an earlier broad-based gain with Dow components Verizon Communications (NYSE: VZ ), down 1.6%, and AT&T (NYSE: T ), off 1.5%, accounting for much of the afternoon decline.  But the Dow still managed to book a gain as financial, energy and technology stocks pulled their share of the load. Bank of America (NYSE: BAC ) rose 2.43%, Intel (NASDAQ: INTC ) gained 1.93%, Chevron (NYSE: CVX ) rose 1.57%, and Hewlett-Packard (NYSE: HPQ ) was up 1.54%. Worries over the sovereign debt issues in Europe eased somewhat as the European Central Bank moved to buy euro-area government bonds for the second consecutive day  In addition to internal European buying, Japan and China said that they too are prepared to buy euro bonds. Another snowstorm threatened the Northeast, and it was reported that some investors decided to sell late yesterday since they may not be able to get to New York City.  Treasury prices fell and the yield on the 10-year note rose to 3.338%, up 5 basis points. The euro rose to $1.2980, up from $1.2954 on Monday. At Tuesday’s close, the Dow Jones Industrial Average rose 34 points to 11,672, the S&P 500 gained 5 points at 1,274, and the Nasdaq was up 9 points to 2,717. The NYSE traded 943 million shares with advancers over decliners by 1.6-to-1. The Nasdaq crossed 472 million shares with advancers ahead by 1.7-to-1. Crude oil for February delivery rose $1.86 to $91.33 a barrel, and the Energy Select Sector SPDR (NYSE: XLE ) gained $1.13, closing at $69.14. February gold fell 50 cents to $1,383.80 an ounce. The PHLX Gold/Silver Sector Index (NASDAQ: XAU ) closed at 216.37, up 3.87 points. What the Markets Are Saying Following the gains of early last week, this week has been downright boring. But if this is all that we are going to get in the way of a consolidation, then we should be happy. Unfortunately, corrections don’t run their course until every nerve is rattled and investors wonder if the uptrend will ever resume again. As pointed out last week, the May 2010 correction resulted in a bone-chilling decline of more than 15%. We had a minor pullback of just 5% in November, but Santa came early and headed off that decline. Momentum fell again yesterday, and one of the key indices, the broad-based NYSE Composite, fell 1.8%. This index is one of my favorite barometers because of the many sectors that it represents. Every stock on the NYSE is included, and it often flashes both buy and sell signals before the word seems to get around to the Dow and Nasdaq. And speaking of the Nasdaq, lower-quality stocks generally reside there. Now, of course, I’m not speaking of Microsoft (NASDAQ: MSFT ), Intel, Apple (NASDAQ: AAPL ), etc. But a host of lower-quality technology, financial, and others in which the public takes a special delight make the Nasdaq an indicator of its own. When the Nasdaq runs faster than the “quality indices,” this can be another indication of an overbought market.  But let’s be clear: I am not saying to sell now. Just prepare for a correction since one will occur, of that you can be sure.  As the likelihood of a correction increases, there are triggers that you should recognize that will save your precious gains. A final climax spike in Nasdaq is common at tops. It takes the form of a blast to a new high, and then a high-volume decline and a close under its near-term bullish support line. An even faster variation of this is the one-day and key-reversal day. This sometimes occurs when a new high is made (often on a gap) and then the index or stock closes below the close of the prior day. An even more powerful version has the final price lower than the low of the prior day. Those who are sensitive to pre-correction data, indicators and signals are wise investors. Those who just plod along “smelling the roses” and concluding that the advance will continue while ignoring the gathering storm clouds become casualties of ignorance.  For one stock it’s time to take profits in, see the Trade of the Day . 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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