U.S. Stock Market - Intermediate Term Top or Just Profit Taking?

After advancing above 14,000 for the first time in 5 years last Friday, the Dow Jones Industrial Average and most major U.S. stock market indices succumbed to heavy selling. Today was the worst down day of the New Year, so far.

Here are today’s closing marks for four popular indices, with changes from Friday’s close:

Dow Jones Industrial Average               13,880.08        -129.71            -0.93%

S&P 500 Index                                       1,495.71        -  17.46            -1.15%

NASDAQ Composite Index                    3,131.17        -  47.93            -1.51%

Russell 2000 Index                                      899.28        -  11.92            -1.31%

If you ask a dozen investment professionals why the market declined today, you may get a dozen different reasons. A random sampling may include the following responses: higher bond yields in Italy & Spain, over-bought technical conditions, too much bullish sentiment, the DOJ suit against S&P, or maybe just normal profit taking.

However, except for me, I don’t think too many market pundits are ready to say that last Friday’s peak represents a major turning point in the U.S. stock market. I personally would have liked to have witnessed some sort of upside buying capitulation and then a same-day downside reversal to justify my bearish call, but you can’t always get what you want. Two or three months from now we will all look back and see how obvious the February 1^st top was, but for now this bearish proclamation may fall into the category of bold-call-to-be-confirmed at a later date.

Many tech stocks rolled over today, and I now have an official daily chart sell signal in the “SOX” semiconductor index as triggered by my proprietary computer based trading system. In the interest of full disclosure, NO sell signals have yet been triggered on the daily or weekly charts for any major stock index within my computer trading system. And quite frankly, unless there is an unexpected rally back to new reaction highs, sell signals can now only be triggered on the monthly charts for these major indices. With respect to the S&P 500 Index, it would take a decline of almost 75 points (about 5%) to trigger a monthly chart sell signal in my system. Even though I think this is possible here in February, waiting on the sidelines for a 5% decline isn’t my preferred approach.

Bottom Line: The stock market recovery high as posted last Friday, February 1^st probably represents a significant turning point. And a correction of at least 10% in the overall market is now underway!

 

Russell 2000 Monthly Chart  with Computer-based Buy & Sell Signals