Thursday was bad for almost everyone, but the biotech and materials sectors suffered the most. Let’s look at sector ETFs and leaders of the decline to see why yesterday’s trading was so bitter.
After what had been a horrible week for the market, Thursday’s plunge was much worse than almost all expected. Those who had been calling for a bear market for the last two years were probably the only ones who were not surprised.
The market internals were some of the worst I have ever seen, with the Arms Index (TRIN) closing at 4.64, while the number of new lows jumped sharply to 441 from just 86 on Monday. The major averages are now already close to their next key support levels that I discussed earlier in the week.
The major market averages are oversold on a number of levels, and most are currently below their weekly Starc-bands. That said, they can still get more oversold...just like the bond and gold market can still become more overbought. There is the stretched rubber band effect that is likely to kick in at some point in the next week.
The markets are now nervously waiting for the monthly jobs report, although I have to expect that if we get a pretty bad number it is already factored into prices. The first signs of a short-term low would likely be when stocks stop declining on worse-than-expected economic news.
Though everything was slammed Thursday, there were a few individual stocks that stood out as they plunged much more than their respective industry groups.
Chart Analysis: Clearly Dendreon Corp. (DNDN) was the biggest loser of the day, as it dropped 67% on reports of disappointing sales for its prostrate cancer vaccine. An analyst’s downgrade added fuel to the fire.
- It closed Thursday at $11.69 after making a high in May 2010 of $57.67. There is a bit of support from 2008 in the $10 area, but then the prior bear-market lows are much lower, around $3
- Volume was heavy on the decline, as one would expect
- Opinions on DNDN are now mixed—some are saying this drop marks a death knell for biotech, while others are actually looking to buy DNDN
- Clearly, any rally in DNDN will have trouble surpassing the $15 to $18 area
The iShares Nasdaq Biotechnology (IBB) was also hit hard, down 7.8%—but compared to DNDN, that looks pretty good. IBB traded as high as $110 in early July.
- The support from the 2010 high has been broken, with the longer term uptrend and more important chart support to follow in the $85-87 area (line b)
- Volume was clearly heavy on the decline, and the downside target from the potential double top formation has already been exceeded
- The uptrend in the weekly on-balance volume (OBV, line c) has been broken, and it has dropped below the prior lows
- Bounces in IBB should have trouble getting back above the $100 level
NEXT: Another Big Loser
The materials sector was also not immune, as Walter Energy, Inc. (WLT), which produces and exports metallurgical coal (primarily for the steel industry) was down 29.5% on Thursday. It closed just above the major 38.2% support level at $76.95.
- The key level to watch from a retracement and chart basis is in the $57 to $66 area, which encompasses the 50% support level.
- Though the volume was very large on the decline, and the OBV is back below its WMA, it did confirm the most recent highs.
- There is now strong resistance in the $93 to $95 area, which corresponds to the 2010 highs.
The Select Sector SPDR Materials (XLB) was down 6.7% for the day, closing at $34.40 and below the support from the 2010 highs. The major 38.2% retracement support from the 2009 lows is at $32.37.
- The more important 50% support is now at $29.60.
- As I noted in May, the weekly OBV had formed a negative divergence at the April highs, indicating that a weekly top was in place.
- The OBV had just rallied back to its declining WMA in early July before its recent plunge. It would take a sharp reversal over the next few weeks before it bottoms out.
- There is strong resistance in the $36.30 to $37 area, which corresponds to the June lows.
What it Means: There are two different messages. For biotechnology, while there are quite a few home runs in the sector, there are also disasters. It is particularly dangerous to hold them through earnings if the price action is neutral to negative.
How to Profit: As we go to press, the monthly jobs data has just been released, and numbers were better than expected. The stock index futures are higher before the opening, but a higher daily close is needed to stabilize the market.
Stock AnalysisThese three stocks are resilient, fundamentally sound and also pay generous dividends.
ProfessionalsMutual funds are a good choice for emotional investors. Here are five popular funds to consider.
Investing NewsAre stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
Investing NewsHere are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
Investing NewsHere are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
Stock AnalysisIf you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
Stock AnalysisLearn about the top energy companies in Russia, a country that holds some of the largest reserves of oil, natural gas and coal in the world.
Mutual Funds & ETFsExplore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
Chart AdvisorInvestors are keeping an eye on the transportation industry. We'll take a look at the trend direction and how to trade it.
InvestingBeing vigilant about the amount you pay and what you get for is important, but adding ETFs into the investment mix fits well with a value-seeking nature.
Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>