Dow Jones Industrial Average and major stock indexes were down on Friday
The Dow Jones Industrial Average (DIA) fell 318 points (1.96%) on Friday and was joined by the SP500 (SPY) which dropped 2.09%, the Nasdaq Composite (QQQ) shedding 2.15% and the Russell 2000 (IWM) tumbling 2.4%
The widely published reasons for the carnage were worries over China’s economic slowdown, problems in emerging markets and weaker than expected U.S. earnings reports. Other signs of previous market tops like margin debt, excessive bullishness and investor complacency were also players in last week’s decline.
The pain was most strongly felt in frothy momentum stocks like Tesla (TSLA) down 3.8%, Apple (APPLE) -1.8%, Amazon (AMZN) -3.1%, Google (GOOG) -3.3%, First Solar (FSLR) -3.5% and 3D Systems (DDD) -6.4%.
The Dow Jones Industrial Average (DIA) fell below the psychologically important 16,000 level and was also down 3.5% for the week, its worst weekly performance in three years. All four major indexes, the Dow Jones Industrial Average (DIA) SP500 (SPY) Nasdaq Composite (QQQ) and Russell 2000 (IWM) are now in the red for 2014.
On My Stock Market Radar
Various reasons were offered for the week’s sell off, with the most widely accepted being the drop in China’s economic activity.
On a technical basis, we see significant damage inflicted on the Dow Jones Industrial Average and other major indexes.
In the chart below, we see relative strength and momentum in steep decline and the index has broken the 50 day moving average.
Support exists at the 15,700 level and the 200 day moving average at 15,438.
In point and figure charting, we see a “sell” signal with a new double bottom breakdown and a new price target of 15,250. Bear market territory starts at 15,200.
Earnings reports were mixed with Microsoft (MSFT) beating estimates and Starbucks (SBUX) showing a healthy 25% profit gain.
China’s economic growth came in at 7.7% for Q4 but investors were stunned by the HSBC China Manufacturing Index reported at 49.6, putting the world’s second largest economy in contraction territory.
Weekly jobless claims were 326,000, beating expectations but January’s Markit PMI registered 53.7, down from last month’s 55. Existing home sales missed expectations and December leading indicators posted a 0.1% gain compared to the previous month’s 1.0%.
Next week brings a wave of important economic reports:
Monday: December New Home Sales
Tuesday: January consumer confidence, November Case/Shiller home prices, December durable goods
Wednesday: Federal Reserve statement,
Thursday: weekly jobless claims, Q4 GDP estimate,
Friday: December personal income and spending, January Chicago PMI, January University of Michigan consumer sentiment
Earnings reports will also be closely watched with the following market movers in play:
Monday: Caterpillar (CAT) Apple (AAPL)
Tuesday: DR Horton (DHI) Ford (F) Pfizer (PFE)
Wednesday: Boeing (BA) Las Vegas Sands (LVS)
Thursday: Exxon (XOM) Time Warner (TWX) United Parcel (UPS) Amazon (AMZN) Google (GOOG) Wynn Resorts (WYNN)
Friday: Berkshire Hathaway (BRK/B) Chevron (CVX) Mastercard (MA)
The most important event next week is likely to be the Federal Reserve meeting and announcement scheduled for Wednesday. Wall Street Journal reporter Jon Hilsenrath reported this week that the Fed is likely to continue its taper program with a further reduction in its bond buying activities.
This will be Ben Bernanke’s last meeting and it will be interesting to see if last week’s stock market activity will alter the Fed’s plans.
A further $10 billion cut is anticipated but could be subject to change, and Wednesday’s announcement will be closely watched. The Fed’s balance sheet is north of $4 Trillion and this has made Fed members and analysts nervous as it could be the basis for global asset bubbles that could pop or, some say, have already started to pop with last week’s emerging market and currency meltdown.
There has been a close correlation between the expansion of the Fed’s balance sheet and the SP500 since the beginning of quantitative easing and so Fed action this week will likely be a significant market mover in either direction.
Bottom line: Global financial markets entered a new period of instability last week and volatility is likely to continue in the week ahead as earnings, economic reports and the Federal Reserve meeting take center stage.
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