After making fresh all-time highs yesterday, markets are lower today. There isn’t much fresh news, but stocks reached an overbought level and are attempting to work off that condition. There were some earnings out last night and today, and while they are mixed for the most part, Caterpillar’s (CAT) report this morning is a bit troublesome. Not only did CAT miss the top and bottom line expectations, but they also lowered guidance for the fourth consecutive quarter. This has major implications for the global outlook, as CAT’s earnings are generally driven by global economic growth. Although the news was very negative, stocks are holding up relatively well. Today’s laggard is the Nasdaq, which is lower by about 0.7%, while the relative-strength winner is the Russell 2000, which is off by about 0.4%. Bonds are seeing a continued bid, as the fixed-income securities are up another 0.8% and currently are at a three-month high. Metals are seeing some weakness today after the recent spike — gold and silver are each about 0.5% lower for the day.
CHART OF THE DAY
Sears Holdings Corp. (SHLD) – After a sharp recent spike, shares of the retailer have been very weak over the past two weeks. In fact, SHLD has sold off by about 12% in a matter of 11 trading days. The current chart suggests SHLD could be consolidation and working off the recent oversold conditions, but more downside could be in order. On the sentiment front, options speculators are downright giddy. In fact, over the past 10 days, calls have been bought at nearly an 8:1 ratio over puts. This suggests extreme optimism, and could lead to a bearish unwinding of these bullish bets.
I like a bearish entry here with a stop on a close above $58.50. I would initially target a move down to 50, with 40 as a stretch target.
WHAT I’M EXPECTING
I’m looking for a continuation of today’s selling into the weekend. Should the S&P 500 be able to retake and hold the 1750 level, I would reverse this thesis.