Another Stormy Day For Stocks And ETFs

The selling continued yesterday as investors fretted over earnings announcements and downward revisions in economic outlook.

Alcoa (AA) didn’t impress anyone Tuesday with its earnings report and forecast for falling global demand for aluminum. The International Monetary Fund added to the pervasive gloom with a reduction in its outlook for global growth for the rest of 2012 and 2013 while multiple warnings for lower earnings and slower growth have been issued by the likes of Chevron (CVX) and FedEx (FDX). On the positive side, the Federal Reserve Beige Book report yesterday indicated an ongoing modest expansion for the United States.

But Yum Brands (NYSE:YUM) bucked the gloomy trend with an 8% jump yesterday based on better than expected earnings, sales and a bright outlook going forward for its major consumer brands like Taco Bell, Pizza Hut and Kentucky Fried Chicken.

Major U.S. Stock Index ETFs:

Dow Jones Industrial Average (NYSEARCA:DIA) -128 points/-0.95%

S&P 500 (NYSEARCA:SPY) -0.6%

Nasdaq 100 (NYSEARCA:QQQ) -0.49%

Russell 2000 (NYSEARCA:IWM) -0.14%

On a technical level, markets had reached extremely overbought levels and so this correction was not unexpected. Now the overbought conditions have been resolved and levels are in the more normal range with the technology sector and Nasdaq heading towards oversold levels.

Interestingly, VIX, the CBOE S&P Volatility Index, also known as the “fear index,” declined yesterday in spite of the strong sell off. VIX usually moves inversely to equities and so VIX did not confirm yesterday’s sell off.

Major indexes and ETFs have also returned to significant support levels and so if this selling is going to stop, it should stop sometime very soon.

Earnings expectations have been dialed so far down that any positive news will likely be a surprise to the upside. Today and Friday bring some major economic reports regarding employment and consumer sentiment while earnings season continues to ramp up.

Bottom line: U.S. stock indexes continue to correct after August’s and September’s sharp run-up and rise to overbought levels. Corrections like these are generally healthy and necessary for up trends to continue and so now we come to serious support levels that must be held to confirm the durability of the current bull market.

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