Financials Drag Down Stocks

Stocks sold of sharply on Tuesday, as market players returned from a three-day weekend and the nation welcomed the 44th person to hold the office of President of the United States. After last Friday’s late day rebound, which helped to keep the nascent oversold bounce alive, indications were for a soft open to the day as overseas markets took big hits on talk about the nationalization of more financial institutions in the U.K. as well as news that RBS (NYSE: RBS) said that it could have lost as much as £28 billion last year. Still despite the overnight pressure, index futures we're in that bad of shape as we headed towards the bell.

Unfortunately, however, the action was straight down once the day got under way. While just about every area of the market saw pressure early on – gold was just about the only thing to catch a bid during the day – it was the financials which really weighed down the action early on. After making a quick southerly trip over the course of the first 30 minutes or so, the downward pressures abated somewhat, but the market continued to slowly slip lower for the rest of the morning and through the New York lunch hour.

Although there was no apparent catalyst, the angle of descent steepened once again, as market players who were hanging around long enough to see if the inauguration might get the buyers moving decided that discretion was the better part of valor and began heading towards the sidelines. What started off as a day in which the broader market was weighed down by the renewed pressure in the financials turned ugly as just about every area of the market saw accelerated moves to the downside which lasted right into the close.

When it was all said and done, the indices lost, on average, an ugly 5.02% on breadth that was a very bearish 27:4 to the negative. In fact, just about the only positive thing to be found in all of Tuesday’s mess was that volume was mixed on the major exchanges, with the Nasdaq showing a downtick in the number of shares that exchanged hands (which, of course, means that the NYSE saw higher volume).

We’ve been saying for quite a while now that, without the participation of the financials, this market’s going to have a tough time making progress to the upside. Fortunately, we’re not having to deal with the same sort of credit market crisis that we saw several months ago. We’ll see where we head form here, but the bottom line is that we are dealing once again with a market that is taking some technical damage.

The thing, of course, that makes the action we’ve seen recently so frustrating is that just a couple of weeks ago we were talking about how promising some of the action had been. Several charts were starting to set up, industries which typically do well as the market starts looking towards the beginning of the next economic cycle were starting to show some momentum, and there were indications that investors were starting to become less risk averse.

During all of that, however, we said that we needed to see if the bulls would be able to keep up their pace of once volume started coming back into the market and the seasonal influences became less prevalent. These, then, are the very reasons why it is so important for investors to protect their capital in the midst of a bear market and respect the trend until proven otherwise. This is why it’s dangerous to trust any action to the upside to last and why we need to assume that the market is just going to continue to keep teaching us the same lessons over and over again.

We’ll see how things go as we move forward. We’re still above the November lows and we’ve become extended to the downside once again, but if the bulls had a tough row to hoe before, their task is doubly as taunting now.

Let’s go to the charts.

The Nasdaq took a hit during today's trade on decreasing volume. The action is quite bearish and the index is rolling over back into its steep downtrend.

The S&P 500 (INDEX: $SPX) finished sharply lower during today's session on light volume. Financial names continue to crumble as BAC (NYSE: BAC), C (NYSE: C) and WFC (NYSE: WFC) move lower. Overall, the price action has taken a turn for the worse and the index is resuming its primary downtrend.

The Russell 2000 (INDEX: $RUT) was slammed during today's trade. The price action was ugly and the index is firmly below its 50dma. We continue to hold high levels of cash and are playing defense.

 

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