U.S. Stock Market - 2nd Day of Selling

After an avalanche of selling yesterday, U.S. stocks were mostly lower again this morning as investors attempted to weigh the potential consequences of a major change in Federal Reserve monetary policy. On Wednesday, with its release of the minutes from the Fed’s January 30^th FOMC meeting, the Fed announced its intention to open a vigorous debate at its next FOMC meeting concerning the current phase of quantitative easing, possible exit strategies, and the ongoing risks of too much monetary accommodation.

Without significant positive news to distract investors from these latest Fed revelations, sellers mostly dominated for the second straight day. European share prices were down sharply (about -1.5% on average), which also weighed on U.S share prices today. Despite all the negativity, most major stock averages rebounded from their worst levels of the day to finish with only moderate losses. Reassuring comments from Fed Governor John Williams around 3:00 PM ET may have contributed to the last hour rebound today, but overall end-of-the-day losses were still significant.

Here are today’s closing marks, with changes from Wednesday’s close:

                                                                                    Thursday’s Changes                

Dow Jones Industrial Average                    13,880.62        - 46.92             -0.34%           

S&P 500 Index                                              1,502.42         - 18.99             -0.63%           

NASDAQ Composite Index                           3,131.49         - 32.92             -1.04%           

Russell 2000 Index                                          905.40          -   8.10             -0.89%                       

Two months from now, when most major averages are down at least 10% from here, most everyone will view yesterday’s intra-day high (set near the opening of trade) as the peak for the first half of 2013 and maybe even the peak for the entire year. In hindsight, Wall Street analysts, who are experts at looking in the rearview mirror, will say that “caution flags” were everywhere and that investors should have “raised cash” in preparation for this “obvious correction”. These same pundits will point to the dangerous level of insider selling (9 sales for every 1 buy in January), overbought technicals, too much bullish sentiment among often-wrong trading groups, consumer cutbacks in the retail sector related to higher gas prices and an uptick in payroll taxes, Wal-Mart’s leak last Friday that February sales were a “disaster” in the first two weeks, corporate earnings forecasts for 2013 that were too optimistic and back-loaded, and the first indications that the Federal Reserve may ease off the accelerator with respect to monetary policy. And I haven’t even mentioned the Fiscal drag on the U.S. economy of potential “sequester” spending cuts scheduled for March 1^st or a possible shut-down of the Federal Government later this year because of debt limit issues.

As mentioned in this column yesterday, daily and weekly chart sell signals were triggered at yesterday’s close by my computer-based trading system. These sell signals reverse the buy signals that were triggered on November 16^th (see Daily Chart of the S&P 500 Index below).

Is there any place to hide while stocks experience the correction that has been advertised here for the last three weeks? My answer is maybe yes. Since “cash” earns almost nothing right now, maybe it’s time to buy the beaten-down precious metals mining stocks. The Philadelphia Gold/Silver Miners Index posted a new 52-week low yesterday at 134.34 which is down 32% from its September 2012 peak at 196.72. Some precious metals mining stocks are down more than 50% during this period. A few brave souls dipped their toes in the water this morning with bids in this oversold group, and most gold/silver mining stocks were actually plus on the day today. One of the more interesting stories that I happen to read this afternoon was a column by Chris McKhann over at optionmonster.com. Chris reported that there were three major out-of-the-money call buys worth a total of $5.3 million in the last three minutes of yesterday’s regular trading session in three different gold mining stocks (Barrick Gold, Goldcorp, and Newmont Mining). Of course these three companies are the largest gold miners in the world, and all three trades were made by the same buyer. I mention this today because Newmont Mining just happened to post better-than-expected earnings after the close today and jumped about 3% on this news. Another miner, Pan American Silver, posted decent earnings this morning and boosted its estimates of recoverable silver reserves by 35%. This silver mining company was up 6.36% today. In the interest of full disclosure, I am long Endeavour Silver (EXK) in one of the investment accounts that I manage, but the “best of breed” in this industry is probably Goldcorp (GG) among gold miners and First Majestic Silver (AG) among silver miners. I have no positions right now in either company, but I may establish a position here at any time.

Bottom Line: While a minor rebound in U.S. stock prices is possible and even likely early tomorrow, I don’t expect buyers to maintain the upper hand for very long. The weekend financial press will be loaded with articles attempting to gauge the latest apparent turn in Federal Reserve monetary policy, and many investors will want to lighten their long positions heading into the weekend. And even though Congress returns from its winter break on Monday, I would not expect any resolution of the automatic sequester spending cuts issue anytime soon. A major correction in stocks is now underway and preservation of capital should now be the #1 priority for all investors. Cash is King (and a few small positions in Gold/Silver Mining Stocks makes sense here given valuations of between 8x and 12x forward earnings for this group in 2013).

S&P 500 Index Daily Bar Chart with Computer-based Buy & Sell Signals