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Did the Dip in the DJIA Last Week Presage an Upcoming Crash?


On the Silver Anniversary of the October 1987 crash, the Dow dropped 1%. An investor who lived through both shares his notes.

Indeed, while the market's daily internal energy was used up by mid-week, its weekly and monthly energy levels remained fully charged. Historically that suggests any decline should not gain much traction. Obviously, that was not the case on Friday. The media's causa proxima for the Dow Dive was the slew of weak corporate earnings reports. To wit, so far just 58.6% of companies have beaten their earnings estimates, while only 43.2% have bettered their revenue estimates. This week, earnings season will be in full swing with some 700 companies reporting. Yet while last week's earnings numbers were soft, the economic numbers had a decidedly stronger tilt with 10 coming in above expectations and three below.

Looking at the charts, while the S&P 500 failed to break out above a double-top around 1470, and in the process left what looks conspicuously like a triple-top, most of the indices closed higher for the week. The exceptions were the Russell 2000 (^RUT) (NYSEARCA:IWM), the Nasdaq Composite (^IXIC) (INDEXNASDAQ:.IXIC), and the NASDAQ-100 (^NDX) (INDEXNASDAQ:NDX), all of which were weighed down by the technology stocks. Indeed, the technology sector was the biggest loser for the week with a decline of 2.42% followed by consumer staples (-0.65%) and telecommunication services (-0.15%).

By Friday's close, most of the indexes I monitor were testing, or marginally breaking, their respective 50-DMAs, except for the aforementioned tech-heavy indices. In those cases, not only did they decisively violate their 50-DMAs, but they also broke below their post-QE3 support levels with the NDX closing at its lowest level in more than two months. While I would like to believe the SPX will gather itself together and break out above the now visible triple-top around the 1470 level, it just doesn't feel like that is going to play. A more likely scenario is for a break below the oft mentioned 1418 level followed by a dip towards the 1400, which I continue to think should be bought on the premise the SPX will break out consistent with the presidential election year pattern.

On that premise, one name that has a Strong Buy recommendation from our fundamental analyst is 3%-yielding Covanta (CVA) (NYSE:CVA). Covanta is the nation's largest owner/operator of waste-to-energy (WTE) facilities and disposes of approximately 5% of the nation's waste stream while generating approximately 6 Mwh of renewable energy. As our fundamental analyst writes, "Covanta's recurring revenue stream, including 75% of waste revenue under long-term contract with inflation escalators, provides a stable base while higher power economics, metal recovery and special waste should drive future growth. Covanta's robust free cash flows afford a solid dividend with growth prospects, funds available for a recurring buyback and, in our view, attractive total return prospects."

The call for this week: The Industrials finally experienced a daily decline of more than 1% for the first time in nearly four months. While many believe this is the beginning of a collapse, it does not appear that way to me. Indeed, the evidence of a major top in the equity markets is nowhere near conclusive. So while it may take a few sessions for the markets to stabilize, I continue to think the path of least resistance remains up.
No positions in stocks mentioned.
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