The trend is your friend, until it’s not, and today investors and the trend had their biggest spat of the year. The market trended lower for most of the day, but the real damage came following the 2pm Fed minutes, which revealed the most hawkish comments by FOMC governors in years. The S&P finished down 1.24%, closing on its lows below the 8-day moving average, while the Nasdaq fell even harder, shedding 1.54%
Yesterday, despite the S&P closing at new multi-year highs, we noted some signs of trouble under the hood. The Homebuilders (NYSE:XHB), in particular, broke down yesterday morning, and although they were able to pare losses into the close the daily bar felt like it could lead to more weakness. This morning, after weak earnings from Toll Brothers (NYSE:TOL), we got major follow-through to the downside in the ETF. The XHB finished the day down 4.45%, closing well below its 8- and 21-day moving averages and just above its 50-day MA. With the potent sell-off, the ETF isn’t far from the top of its New Year’s earnings gap up.
There were no signs of weakness yesterday from the financials, and today’s sell-off wasn’t nearly as sharp as the XHB, but the Financial Sector ETF (NYSE:XLF) closed on its lows below the 8-day moving average for the first time this year. We have talked about using the 8-day as a roadmap for the market and leading sectors, and a break of that indicator represents a time for more caution. The financials have been crucial to the market rally this year in the absence of leadership from tech, and further weakening from the group could be too much for the market to bear.
Now that the Fed minutes are out, we may know why Gold (NYSE:GLD) resolved its descending wedge pattern to the downside. The precious metals have been selling off hard over the past two weeks, much to the chagrin of gold bugs looking for “currency wars” to re-ignite the faltering group. Today, though, the damage grew much more significant. GLD opened sharply lower heading into the Fed minutes, and when they struck a more hawkish tone than we have heard in years, it was look-out-below for GLD. The ETF closed the day down 2.5%, and looks like it could test major support around the $148-150 area.
Overall, many traders took this as a day to take notice, lighten up on longs, and potentially add to hedges or short exposure. Many have been trying to time this type of pullback for weeks and have gotten run over. I will always tend towards following the trend rather than trying to pick tops and bottoms, because I believe over the long-term that approach gives you the best odds for success.
Make sure to tune into tomorrow’s Morning Call as we check the temperature of each major sector ETF to identify how deep this correction could go and which stocks to look at for potential dip-buying opportunities.
Disclosure: Scott Redler is long VZ, FB, GE, BAC. Short SPY
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