Stocks Sink As Investors Exercise Caution

Monday was definitely a “risk off” day for investors, following the release of several analysts’ reports, which have suggested that stocks are headed into the “overbought” range. On Friday, Goldman Sachs (GS) released a report, explaining that the outlook for strong returns is weaker than it was at this point last year.

On Monday, Goldman’s Chief Equity Strategist David Kostin made a television appearance in which he reminded investors to keep their eyes on earnings. Thursday’s earnings miss by Alcoa (AA) got earnings reporting season off to a gloomy start, reminding investors that – going forward – those steep stock prices could result in some uncomfortable price / earnings ratios as the reports get released.

The Dow Jones Industrial Average (DIA) lost 179 points to finish Monday’s trading session at 16,257 for a 1.09 percent drop. The S&P 500 (SPY) sank 1.26 percent to finish at 1,819.

The Nasdaq 100 (QQQ) fell 1.47 percent to finish at 3,512. The Russell 2000 (IWM) sank 1.41 percent to end the day at 1,148.

In other major markets, oil (USO) fell 1.14 percent to close at $32.81.

On London’s ICE Futures Europe Exchange, March futures for Brent crude oil declined 95 cents (0.89 percent) to $105.66/bbl. (BNO).

February gold futures advanced $5.40 (0.43 percent) to $1,252.30 per ounce (GLD).

Transports were doing fine until they ran off the road at 11:00, as the Dow Jones Transportation Average fell 1.40 percent despite hitting a record intraday high of 7,485.34 (IYT).

In Japan, the stock market was closed for Coming of Age Day. Meanwhile, the yen gained unwanted strength, climbing to 103.34 per dollar during business hours in Tokyo (FXY). A stronger yen causes Japanese exports to be less competitively priced in foreign markets.

Stocks declined modestly in mainland China as concerns about the revival of the nation’s IPO trading continued to haunt the technology sector. The Shanghai Composite Index declined 0.19 percent to 2,009 (FXI). Hong Kong’s Hang Seng Index advanced 0.19 percent to 22,888 (EWH).

In Europe, the banking sector led a stock market advance as a result of Sunday’s ruling by the Basel Committee, which loosened capitalization requirements for banks. After limiting the leverage ratio for banks in the wake of the financial crisis, restricting bank loans from exceeding 300 percent of the lending institution’s capital (as per Basel III), Sunday’s ruling allowed banks to exclude their short-term finance operations when calculating the ratio. The Euro STOXX 50 Index advanced 0.25 percent to 3,111 on Monday – climbing further above its 50-day moving average of 3,043. Its Relative Strength Index is 60.00 (FEZ).

Technical indicators revealed that the S&P 500 remained above its 50-day moving average of 1,801 after sinking 1.26 percent to finish Monday’s trading session at 1,819. Its Relative Strength Index fell from 64.03 to 50.13. The MACD is dropping below the signal line, which would suggest that the S&P could continue its decline during the immediate future.

On Monday, all sectors finished solidly in negative territory. The consumer discretionary sector took the hardest hit, falling 2.00 percent.

Consumer Discretionary (XLY): -2.00%

Technology: (XLK): -1.08%

Industrials (XLI): -1.21%

Materials: (XLB): -1.36%

Energy (XLE): -1.99%

Financials: (XLF): -1.50%

Utilities (XLU): -1.02%

Health Care: (XLV): -0.81%

Consumer Staples (XLP): -0.57%

Bottom line: With corporate quarterly earnings reporting season underway, investors have become skittish about stock prices in the wake of widespread commentary, which raised concern that quarterly earnings may not measure-up to the elevated prices.