U.S. Stock Market - Say It Ain't So Mr. Chairman?

U.S. stock prices experienced selling pressure almost immediately this morning at the NYSE opening bell. Futures had been up modestly pre-market, but sellers quickly gained the upper hand once the regular session began. The Dow Jones Industrial Average was an exception and managed to trade in positive territory for the first 90 minutes. However, this closely watch bell-weather then joined every other major index in negative territory by 11:00 AM ET. The modest losses that were experienced in the first half of the trading day looked like natural profit-taking after a great upside run. However, there was a fairly dramatic tone change immediately following the 2:00 PM ET release of the Federal Reserve minutes from its late January FOMC meeting. At first, these minutes appeared bullish for stocks as Fed officials voted to maintain their accommodative monetary policy by reaffirming the Fed’s commitment to buy $85 billion/month worth of Treasury and Agency Mortgage-back securities. The DJIA had been down about 40 points just before the release of the Fed minutes, but then it rebounded to near unchanged immediately following the Fed’s official press release. However, sellers soon dominated once again when the “small print” of the Fed minutes revealed that many Fed governors were openly concerned and one Fed Governor, Esther George, actually voted against the current accommodative stance on the grounds of “concern that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause and increase in long-term inflation expectations”. Apparently, there are now expectations of a vigorous debate at the next Federal Reserve meeting in March with respect to the monthly bond purchase program and the disposition of the Fed's now-bloated balance sheet, among other key issues. Even a hint that the Federal Reserve might be looking for an exit strategy from its 4-year record level of accommodation was enough to trigger a deluge of selling in the stock market following the release of today's Fed minutes.

In the last two hours of NYSE dealings today, most stocks fell sharply. At the end of the day, declining stocks outpaced advancing stocks by more than 3 : 1 on the NYSE and by almost 4 : 1 on the NASDAQ, And the picture was even worse if we look at volume. On the NYSE, down volume exceeded up volume by a factor of 10 : 1. And on the NASDAQ, down volume outpaced up volume by a factor of 5 : 1.

In every major index, all of February gains were lost in today’s single session. Four or five more days like today, and every major index will be down on the year!

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

                                                                                    Wednesday’s Changes            

Dow Jones Industrial Average                     13,927.54         -108.13              -0.77%           

S&P 500 Index                                                1511.95           -18.99              -1.24%           

NASDAQ Composite Index                             3,164.41          -49.19              -1.53%           

Russell 2000 Index                                             913.50          -18.50              -1.98%                       

For all major stock market averages, sell signals were finally triggered within my computer-based trading system. In fact, sell signals were triggered in both the Daily Charts and the Weekly Charts, which adds to the credibility of the bearish call.

For your review, I have attached the latest daily bar chart of the Russell 2000 Index and also the latest weekly bar chart of the S&P 500 Index. All computer buy and sell signals are reflected on both charts, and the “red sell dot” is clearly shown today. As you can see from these charts, my computer algorithm isn’t always right, but its track record at major turns is impressive.

Bottom Line: It is my view that the long-awaited correction is finally underway. Computer generated sell signals were triggered today in every major stock index and also dozens of individual stocks (including Google). Uninformed bullish pundits may say that today’s selling was an “over-reaction” to the Fed’s press release. However, the Fed’s press release was probably just the catalyst that triggered sell orders that were already queued and waiting for any reasonable excuse to execute. Most major U.S. stock market indices were stretched and overbought technically, and sentiment indicators reflected too much bullishness among often-wrong investor groups. Today’s decline was inevitable, but forecasting the extent of the expected correction is now another matter. My view has been clearly indicated in this column over the last three weeks. I think this expected correction will be at least 10% (from top to bottom).

Russell 2000 Index Daily Bar Chart with Computer Buy & Sell Signals

S&P 500 Index Weekly Bar Chart with Computer Buy & Sell Signals