Good day! The S&P 500 and Nasdaq had their largest one-day drops since last August and the Dow felt its largest one-day loss since mid-November on Friday.
There were a number of factors that contributed to the market's downfall on the day. The first, and the ones you've likely heard the most about prior to Friday, are the two major levels of resistance that the market has been flirting with in the Dow and S&P 500. The Dow Jones Ind. Ave. has been testing the 12,000 level, while the S&P 500 has pushed up against the 1,300 level. Both are significant price points in the minds of market participants and have been widely followed as major resistance points after nearly 9 weeks of gains in the market. These price levels, combined with one of the longest weekly rallies in years, were enough to start to put the bulls on edge.
Dow Jones Industrial Average (Figure 1)
As I mentioned earlier this month, January is also a common month for the market to kick off a correction on the larger time frames. Sometimes it only lasts a few months. Sometimes it's substantially longer. The slowing momentum over the course of the week as January wound down also made it easier for the market to not only correct, but for that correction to take hold quickly in the form of a selloff and not just another trading range.
Next were earnings. The market has been hit with some fairly mixed earning so far this season, but those heading into Friday were particularly disappointing. Although Amazon.com (AMZN) posted stronger-than-expected quarterly results, it's forecast did not follow suit and the subsequent selloff of 7.22% weighed heavily on the Nasdaq. Amazon has become quite extended on the weekly charts over the past 6 months, so we'll likely see it continue to struggle this year as it takes time to catch its breath.
Ford (F) fared even worse. It's results were well below analyst expectations and it posted a loss of 13.41% for the session. It will have a difficult time attempting to recover from such a loss and could take weeks or even longer to do so.
Although the resistance levels, the trend extension, and even the disappointing earnings were strong factors in favor of a correction on the daily charts at least, Friday's primary catalyst came from abroad. A number of nations in the Arab World have experienced extreme political unrest in recent years, and particularly over the past several weeks, but the most recent was ignited in Egypt as men took to the streets in protest of the government and direction of the country under President Mubarak's leadership.
S&P 500 (Figure 2)
If there is one thing the market doesn't like, it's uncertainty, and on Friday we saw a rapid flight to what are traditionally viewed as "safe havens". Gold shot higher, at least stalling its larger weekly correction and oil prices also soared as concern increased regarding supply lines in the Middle East, such as through the Suez Canal. Approximately a million barrels of oil per day pass through that gateway from the Persian Gulf to the Mediterranean. Gold rose $22.30 an ounce to settle at $1,340.70 on Friday, while crude oil settle higher by $3.70 a barrel at $89.34.
In other news on Friday, the U.S. economy grew at an annual rate of 3.2% in the fourth quarter. This was higher than the third quarter, but still missed analysts' expectations of a 3.5% annual GDP. Personal consumption, on the other hand, was up 4.4%, which is the highest reading in 4 years. The Reuters/University of Michgan's consumer sentiment index rose from an initial reading of 72.7 and a forecast of 73.2 to 74.2 in January.
Nasdaq Composite (Figure 3)
The Dow Jones Industrial Average ($DJI) had a loss of 166.14 points, or 1.39%, and closed at 11,823.70 on Friday. Despite the extreme selloff in the market, two stocks in the Dow still managed to post a gain... albeit barely. They were DuPont (DD) (+0.04%) and Procter & Gamble (PG) (+0.03%). The biggest losers were Microsoft (MSFT) (-3.88%), Home Depot (HD) (+3.37%), Hewlett-Packard (HPQ) (-2.63%), and Cisco (CSCO) (-2.38%). The Dow ended the week lower by 0.41%. It is up 2.13% year-to-date, but down 16.53% since October 2007 highs.
The S&P 500 ($SPX) fell 23.20 points or 1.79%, and closed at 1,276.34. Only thirty stocks in the S&P 500 managed to post a gain. None of the S&P 500's industry groups managed to post a gain. The top declining sectors were consumer discretionary (-3.2%), technology (-2.3%), telecoms (-2.2%), and financials (-1.8%). The top individual percentage performers were Massey Energy Company (MEE) (+5.22%), Dover Corp. (DOV) (+4.49%), Denbury Res. Inc. (DNR) (+3.60%), and Netflix (NFLX) (+3.37%). Monster Worldwide (MWW) was by far the biggest loser in the S&P 500. It fell 25.43%. Ford Motor (F) (-13.41%) was the next largest decliner. Compuware (CPWR) (-9.42%), Sandisk (SNDK) (-8.81%), and Amazon.com (AMZN) (-7.22%) were other major losers. The S&P 500 ended the week hloser by 0.55%. It is up 1.49% year-to-date, but down 18.45% since October 2007 highs.
The Nasdaq Composite ($COMPX) ended the session lower by 68.39 points, or 2.48%, on Friday and it closed at 2,686.89. Netflix (NFLX) (+3.37%) and Verisign Inc. (VRSN) (+2.58%) were the only two stocks in the Nasdaq-100 to post a gain. Sandisk (SNDK) (-8.81%), Amazon.com (AMZN) (-7.22%), Celgene Corp. (CELG) (-6.69%), and Ctrip.com (CTRP) (-5.90%) were the top percentage decliners in the Nasdaq-100. The Nasdaq Composite ended the week lower by 0.10%. It is up1.28% year-to-date, but still 4.17% off October 2007 highs.
Unless otherwise stated, the index action described in this article relates to the E-mini futures contracts for the respective indices. Actual index action may differ slightly in terms of pattern formation, although the market bias will remain the same.
Toni Hansen is president and co-founder of the Bastiat Group Inc., DBA Trading From Main Street. Toni is one of the most respected technical analysts and traders in the industry. She has been trading and educating new traders, money managers, professional market analysts and traders throughout the boom and bust of the last decade. She has worked in conjunction with some of the world's top financial exchanges. Learn more about Toni Hansen and the educational services she provides through her website at http://www.tonihansen.com.