U.S. stock market action on Monday was highly unusual with the Dow Jones Industrials rallying strongly while the Nasdaq experienced major selling. This behavior is bearish and indicates lower stock prices in the future.
The open set the tone for the day with the Dow up over 100 points shortly thereafter and the Nasdaq down more than 20 points. The Dow rallied even further and the Nasdaq sold down to even lower levels. By the close however, not much had changed from the open. The Dow was up 72 points to 12,921 and the Nasdaq down 23 points to 2988. The S&P 500 and the small cap Russell 2000 were caught in the middle and were barely changed. The S&P 500 fell 0.69 points to 1369.57 and the Russell 2000 rose 1.79 points to 798.08.
The explanation for the Dow Industrials rally was the supposedly good retail sales numbers (fueled by inflation with rapidly rising gasoline prices leading the way) and bailout poster child Citigroup's (C) mediocre earnings report. The culprits on the Nasdaq were easy to spot with big selling in Apple Computer (AAPL) and Google (GOOG) dragging the index down. Apple closed at 580, down $25 (4.2%) , and Google was lower by $19 (3.0%) for a final price of 606 at the end of the day. It was the second day of major selling for Google. Both drops indicate the big money is getting out of these stocks.
All the major four indices closed below their 50-day simple moving average (a strong technical negative). This was the first time the Nasdaq has done so this since last December. The Dow has done this for six days in a row however and the Russell 2000 for seven. If a stock or index moves below its 50-day moving average and stays there for several days, it should be assumed that it will eventually fall to its 200-day. This is still in the realm of normal bull market activity.
Non-confirmation in a bull market should always be considered a negative for stocks. A bullish behaving Dow and a bearish acting Nasdaq is not a good sign. The Dow Industrials itself has a separate non-confirmation problem with the Transportation Average. Even though the Industrials went to new highs in the last few weeks, the Transportation Average has not. Perhaps it still will, but it doesn't look like it will happen. This has been a reliable market sell signal for over 100 years.
Disclaimer: This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.