MLR - Premarket Pulse February 21, 2013
General markets were hit hard on higher volume. While yesterday's action was similar to an earlier sell-off in February, one difference was the number of leading stocks that sold off hard on heavy volume. The market began the day off in somewhat weak fashion and then sold off with more authority after the Fed's meeting minutes were released showing a number of Fed officials said the central bank may have to slow or end the QE purchases before observing a substantial improvement in the labor market outlook. A drop in employment to 6.5% was the key level at which officials had agreed to slow or end QE. That said, some officials argued that ending QE too soon could damage the economy. Markets overall reacted negatively to this news.
The first clue that something is not quite right is the sharp and sustained sell-off in precious metals. If QE is indeed "alive and well," it is certainly not showing up in the action of the precious metals. The SPDR Gold Shares (GLD) and iShares Silver Trust (SLV) are now looking to test their support lows at 150 and 25, respectively, and investors should not seek to catch a falling knife. China has been talking up the dollar, indicating that it will likely remain the world's reserve currency for some time to come, and as other currencies around the world fall against the dollar, this creates further downside for the precious metals.
Futures are lower this morning following a drop in the euro against the dollar to a six-week low, after the euro-zone purchasing-managers' index (PMI) came in weaker than expected, a sign that the euro-zone may not pull out of recession until much later this year.
Leading stocks got hit hard, including a few with high volume downside reversals including LinkedIn (LNKD) and Celgene (CELG). The alleged "recovery" in housing was considered an underpinning of the currrent rally, but homebuilders across the board got slammed with a number of leading names off more than -5% including DHI, PHM, MDC, RYL, and USG after leading builder Toll Brothers (TOL) reported weaker than expected first quarter results and U.S. housing starts came in below expectations. Most homebuilders, with the exception of DHI which broke down through the intra-day low of its prior buyable gap-up day, slashed through their 50-day moving averages.
Michael Kors (KORS) gapped down sharply yesterday on heavy volume, and after-hours announced the pricing of their latest 25-million-share secondary offering at 61.50. In our view this additional supply of stock being dumped into the market will likely absorb buying interest in the short-term, and with the general market coming off again this morning the stock is likely to move lower. We are not long the stock ourselves at this time.
Investors should watch their stops carefully, and in cases where a position has taken a sharp, abnormal, high-volume hit might do well to consider taking at least partial profits.
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