The market's cracks are starting to show

The charts are signaling vulnerability and the economy contracted in Q4.

By InvestorPlace Jan 31, 2013 2:20PM
 Broken window copyright Andrew Holt, Digital Vision, Getty ImagesBy Sam Collins

iplogoStocks started off Wednesday on a down note following the Commerce Department's report that fourth-quarter GDP contracted by 0.1%. Analysts had expected 1% growth.

The decline was mostly attributable to a 22.2% cut in defense spending, but resulted in the first contraction since the beginning of the recovery in 2009. But there was some positive news in the study: Personal consumption expenditures rose 2.2% -- and that category accounts for 70% of GDP.

Amazon (AMZN) rose 4.8% after reporting better-than-expected operating income, and Boeing (BA) gained 1.3% following better earnings despite management’s guidance of lower earnings for 2013 than previously anticipated.

At Wednesday's close, the Dow Jones Industrial Average was off 44 points at 13,910, the S&P 500 fell 6 points to 1,502, and the Nasdaq was off 11 points at 3,142. The NYSE traded 704 million shares and the Nasdaq crossed 452 million shares. Decliners outpaced advancers on the Big Board by 1.8-to-1, and by 2.3-to-1 on the Nasdaq.

DJI Chart

Click to Enlarge

Trade of the Day Chart Key

A sharp advance like that on the Dow Jones Industrial Average chart usually can't be maintained for much longer than two months. The industrials have held onto it for almost three months, but that streak may be coming to an end.

Wednesday's lower close was very near a key reversal day. Also note the slightly curving moving average convergence/divergence (MACD) red line, the first hint of a loss of momentum.

DJT Chart
Click to Enlarge

The Dow Jones Transportation Average accomplished a steep angle of advance that must be close to a record for duration, degree, and total advancing days. But like the industrials' chart, the angle is close to breaking. The MACD fast line (red) shows a clear hook down, and its blue histogram is close to entering bearish territory.

Conclusion: There may be more new highs in the next several days; however, prudence dictates that new positions be entered with a high degree of caution. All internal indicators are overbought, and less optimistic economic indicators could follow the negative GDP numbers. It is clearly time to consider taking profits on trading positions.

All investors should become aware of important support zones for both the major indices and stocks they wish to own since a buying opportunity may shortly occur.

For the S&P 500, the first line of support is at 1,480 (20-day moving average), then the support line at 1,474, and finally, at 1,440 (50-day moving average). For the Dow, the first support is at 13,605 (20-day moving average), then the support line at 13,653, and finally, 13,277 (50-day moving average). The Nasdaq's support zones will be covered on Friday.

More from InvestorPlace

Jan 31, 2013 5:19PM

    Personal consumption expenditures rose 2.2%, 4th quarter includes December which includes the Christmas holidays people buy more during the holidays. For the GDP to contact during the 4th quarter is a very serious and troubling sign.


   Also MSN talks about the large jump in personal incomes in December like is was a good thing, it was people cashing out investments, moving money, and getting their finances out of areas that were taxable out of fear over how high taxes were going to increase Jan 1st. Not a good thing.


Both parties are still focused on their personal agendas passing out kool-aid to everyone, but not focusing on Americas needs. Both sides are throwing up large smoke screens to keep people distracted from the upcoming financial collapse. IE. gun control, the deficit, immigration, Obama Care, tax the rich, entitlements, Gay rights, abortion, on and on. These are all important issues, but Americas house is on fire and both parties are arguing over the type of carpet we need.  We have to put the fire out first, Jobs, Jobs Jobs but know one is focusing on most important issue. At this rate Americas house will be burnt down but we will have a real nice roll of carpeting sitting on the front lawn. We are in big trouble.          


Let's see the Federal Reserve is buying $80 billion of worhtless assets each month now from busted out mortages to US T-bills.


no wonder the stock market is taking off.


only trouble is that it is a bubble that is going to go pop any moment now.



Jan 31, 2013 4:57PM

Bernanke and the others have replaced the economic law of supply and demand with the new “the rich banker always wins” law of economics. For this new law to work the government must continually prop up asset and commodity prices to assure the rich bankers always “make” money.

Jan 31, 2013 3:36PM
Don't worry, be happy, Obama the magnificent will conquer all.
Jan 31, 2013 5:51PM

This does look a lot like 07. Artificial interest rates, government solvency being maintained through counterfieting and fed purchase of bad debt on a scale even an idiot would find scary, market driven by flash trading, not investors, more people in the wagon than those pulling it, true economic consequences of Obama just starting to surface and costs escalating daily as groups opt out, especially unions. If it was so frigging good, why did unions work so hard to get it passed?

The squandering of national wealth by Washington is nearly always prefaced by statements proclaiming that a majority of the americans support the program or so polls indicate. That, if true, doesnt mean its wise. If public opinion had any validity in influencing what Washington does, Obama Care would have never passed. 

Jan 31, 2013 6:12PM
Showing cracks ??? You mean taking more money from people's pay checks and jacking up the prices of everything we have to buy can't hold up the stock market ??  Who knew ?
The price of gas went from $3.09 to $3.25 in less than 24 hours at my local station.If oil went down $5.00 tomorrow,it would take a month for gas to come down again.What a bunch of crap !!

Jan 31, 2013 5:03PM
Who has a nickel; this sounds like a good betting opportunity. 10% retraction from these levels by June; mark your calenders.
Jan 31, 2013 5:38PM

Well we don't actually make a PRODUCT in America anymore. All that was offshored and now we make a nifty NEW NON-product......DEBT! Hurrah! Hurrah! Hurrah folks! Yessir step right up...she walks she talks she crawls on her belly like a reptile!! Monetized bundled up and no place to go.

Since nobody seems to care about actual wealth anymore, why doesn't the Fed just print enough toilet paper Benny Bucks to pay off the debt!! What's the difference?? Everytime the Fed prints more, the market just pee-pees all over itself in a big 'rally' anyway. In fact, why do we pay income tax? The Fed can just print a big steaming pile........of Benny Bucks and pay for everything!!!!


Jan 31, 2013 5:31PM
This is Ivy League out-of-the-box thinking... break the sides off the box off before looking to see if they had been holding the flood waters back. If we don't nosedive it will only be from secret printing of more market dollars. If we continue devaluing the dollar and not hire, we will lose everything.
Jan 31, 2013 6:11PM
   As government spending is curtailed, the economy will faulter at the same rate. We have reached the end of an economy driven by debt. It will be a long slow wind down for everybody. Less painful for the rich, but still a future of less for us all.
Jan 31, 2013 6:14PM
At least before the last crash, Alan Greenspan had the grace to caution against over exhuberance.  Now the rubes are just on their own - gambling with their welfare checks.    The rich get richer and the poor get poorer because each continues to do what made them rich or poor to begin with. 
Jan 31, 2013 7:18PM
The Dow will likely be around 15k by the end of 2013.  Not because the American economy will be healthy, but because there is so much inflation from all the Federal Reserve's counterfeiting that earnings will continue to rise (as the counterfeit money makes its way through the economy), and stock prices will inevitably rise with earnings to keep a natural P/E equilibrium.  It's a myth that inflation makes stock prices tank.  It actually tends to make stock prices rise artificially.

There will still be a lot of people out of work and hurting, but if enough counterfeit money is printed stock prices can soar even when the economy sucks.  It's just the basic economics of prices rising to account for the correspondent, continuously eroding value of each wealth unit.  So, by the end of 2013, stock prices will be higher, and the value of each American dollar will be lower.

p.s. When you look at the Forbes 400 in 2014, what do you think it'll show?  That the stock market tanked and the rich got poorer?  Very likely, you'll be reading the opposite: Stocks went up and the rich got richer!
Jan 31, 2013 7:12PM
Didn't I just read an article within the last week or so about how gas prices were going to be lower this year ?? It must be nice to have a job where you can be wrong all the time and still get paid.

Jan 31, 2013 7:53PM

....just the beginning of a huge downturn......


Move into cash - let it go down 10-15% and then bottom fish for maximum profits. All we need to start the cycle is one day down of 200 points...then the drops will be exponential!


Good luck everyone and Obama.....thanks for nothing!!

Jan 31, 2013 8:57PM
The bitter far right was in the market and the lower and middle classes were not hence the rich get richer and the poor get poorer.  The whole problem is that the poor and middle class desire/need to be able to purchase low cost items (made in China).  They help in the outsourcing of their own jobs thru no falt of their own.  I speak as the owner of a Specialty chemical manufacturing company, the larger I grow my business the more regulation and higher costs I incur.  I have to compete against international companies that have much much lower overhead do to where they due business (low regulation and tax burden). We cannot bring jobs back unless there is demand, in this economic market the demand is for cheap (made in china).  The average American is dooming themselves with this mentality.  We will either have to put tariffs on imports to put the USA companies on a level playing field or keep debasing our money ( printing/stimulus) until we are as cheap as China........and we all know how good their factory workers are treated and kept safe.

Please excuse the grammar ant typos.  Done on the iPad.  I gotta go back to work.  I don't hate the 1%, I'm working like heck to be one so I can provide the American dream for me and my kids, and hopefully theirs also.

Jan 31, 2013 6:09PM
Come on guys! Money managers are begging you to jump in! All they ask is where MORE FISH! Fishy, fishy, fIshy where are you? WE ARE WORKING FOR YOU! DO NOT MISS THE OPPORTUNITY TO MAKE MONEY! THE BULL MARKET JUST STARTED! YOU WILL MISS AND REGRET THAT YOU DID NOT MAKE ANY MONEY!  
Jan 31, 2013 9:54PM
Cracks are an understatement. Wait until the government cuts the defense industry. Then you will have military personnel on unemployment along with some kind of training money because they can't find work. Then you'll have the defense industry lay off people because contracts will be cut. But the government will somehow think this will be better to have thousands laid off along with paying all of the unemployment and special interest money that it caused.
Jan 31, 2013 7:53PM
This world is setting itself up for a visit from the anti-christ.
Feb 1, 2013 1:42AM
Yes a correction, then a budget fix, then a surge, then Q1 2013 earnings and sell in May and don't ever come back. Hopefully FED will start to raise rates next Fall and the rest is history.
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