The Dow Slumps Despite Buffet’s Buying Spree

(eToro Blog) Equity markets in the U.S. consolidated after Friday's large run up as investors took profit on stocks that experienced large gains, though the focus remained primarily on European debt issues, even as the correlation between U.S. stocks and Italian debt continued to grow. Investors also focused on news that Warren Buffet had purchased IBM stock during the past quarter and said he is poised to invest more in the technology sector.

Weakness was seen across most sectors and Apple computer seemed to be leading the technology sector lower. Apple has pushed through short term support areas, which has put a drag on the Nasdaq technology index. Volume was very light across the board, as both the NYSE and Nasdaq saw below normal volume.

Prior to the opening bell, during a 3-hour interview, Warren Buffet told CNBS's Becky Quick that he had purchased more than $10.7 billion worth of IBM over the past 6 months. Berkshire Hathaway, the conglomerate Buffets runs, now owns more than 5% of IBM. Buffet also mentioned that he believes Microsoft was very attractive, but would never purchase the company due to his relationship with founder Bill Gates. IBM is up more than 28% for 2011, and Mr. Buffet claims his average purchase price during the past 6 months is close to $170.

As bond yields in Italy rose on Monday toward that 7% level, it's translating to investors selling equities here, on fears that Europe does not have a mechanism to save Italy. However, one positive for U.S. equities was the surprise increase in Japanese growth. Japan’s third quarter GDP rose 1.5% on a quarter over quarter basis after the 0.3% contraction in the second quarter and declines in Q1 and Q4 of 2010 as consumption and exports rebounded from declines brought about by the March earthquake. Private consumption grew 1.0% in the third quarter, while net exports contributed 0.4% to GDP growth. Corporate capital spending increased 1.1%, and GDP rose 6.0% on an annualized basis after a 1.3% drop in Q2. Although the increase in Japanese growth might be short lived, the rebound is more than welcome after the longer than expected supply chain disruptions

Market participants continue to show concern and this is reflected in the high level of the VIX volatility index. The VIX reflects the level of implied volatility of at-the-money options, which is an approximation of how much investors need to pay for downside protection for equities.

Technically, the S&P 500 Index remains in a tight range, as investor await news that will push market in a specific direction. Worries over European debt seem to counter the better than expected economic and earnings data released in the U.S. Short term support on the large cap index is the 100-day moving average near 1230 while sShort term resistance is the 200-day moving average near 1275. The RSI (relative strength index), remains range bound near 53, which reflects a neutral market environment.

The Dow was the best performing of the major U.S. indexes, buoyed by the strength of IBM. The Dow continues to trade above the 200-day moving average near 11,972, and is poised to test short term resistance near 12,300. A break of this level is likely to see a test of target resistance near 12,800.  

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