US Stocks Close Sharply Lower; DJIA Ends Month Flat

NEW YORK (MarketWatch) -- U.S. stocks tumbled Friday, with Bank of America, JPMorgan Chase and Alcoa leading the Dow Jones Industrial Average's components lower as investors again grew concerned about the economy after the short-lived excitement over Thursday's good report on gross domestic product.

The Dow Friday posted its biggest one-day point drop since April 20, and ended October just 0.45 point above where it began. Other major measures, including the Standard & Poor's 500 and the Nasdaq Composite, ended the month in the red, marking their first monthly declines since February.

The Dow closed down 249.85 points, or 2.51%, at 9712.73, marking its 10th triple-digit movement this month. Five of them were down and five up, reflecting how volatile the market has gotten as investors try to get a handle on whether the 48% surge in the Dow since March can be justified by economic fundamentals. For the week, the Dow fell 259.45 points, or 2.6%, marking its second consecutive week in the red.

Among the Dow's big movers Friday, Bank of America tumbled 1.15, or 7.3%, to 14.58, while JPMorgan slid 2.58, or 5.8%, to 41.77, and Alcoa dropped 58 cents, or 4.5%, to 12.42.

Across other measures, the Nasdaq Composite fell 52.44, or 2.50%, to 2045.11. It was down 5.08% for the week, and 3.65% for the month.

The Standard & Poor's 500 dropped 29.93, or 2.81%, to 1036.18. For the week, it dropped 4.02%; it was down 1.98% for the month.

Friday's declines come as the latest measure of consumer spending came in weak, reflecting the biggest drop since December 2008, although it was in line with economists' expectations.

Still, investors are growing hungry for economic data to start showing improvement and strength, rather than simply being above or in line with expectations. In addition, they are starting to wonder how much of the economic growth that was reported Thursday would have been there if it weren't for all the government support through such programs as the "cash for clunkers" funding for automobile purchases.

Nonetheless, some market participants said Friday's decline was typical of a market in recovery, and therefore no major cause for concern.

"It's not unprecedented after having such a strong rally," said Mary Ann Bartels, head of U.S. technical and market analysis at Bank of America Merrill Lynch. "Markets need to consolidate in order to achieve new recovery highs, and a correction will broaden out the base-building process we've been in since last year," giving stocks more support for a move higher, she said.

Life insurers fell in an exaggeration of the declines across the market, as the sector is exposed to equities through its variable-annuity guarantees and other equity-linked retirement-income products. MetLife was among the decliners, slumping 2.81, or 7.6%, to 34.03, after it swung to a third-quarter loss on $1.4 billion in investment losses. The life insurer's stock had climbed 7.8% Wednesday ahead of the report.

McAfee declined 1.87, or 4.3%, to 41.88, after the security-software company said its third-quarter profit fell 25% as higher costs led to lower margins.

Stereo maker Harman International Industries was a bright spot, surging 4.61, or 14%, to 37.61, after the company reported fiscal first-quarter sales above Street expectations. The company said its markets are stabilizing and it is gaining market share.

Estee Lauder also rose, climbing 1.36, or 3.3%, to 42.50, after its fiscal first-quarter profit more than doubled as the beauty-products company posted higher earnings across all of its businesses. Goldman Sachs raised its investment rating on the stock to neutral from conviction sell.

ITT fell 3.66, or 6.7%, to 50.70, after the defense and industrial conglomerate reported a 73% drop in third-quarter profit, stemming from a $131 million charge for asbestos-liability claims.

Cummins was down 2.86, or 6.2%, to 43.06, after the engine maker reported its third-quarter earnings fell 59% from last year's record results as it struggles in the face of weak North American and European trucking and construction markets.

Beckman Coulter fell 2.73, or 4.1%, to 64.33. The maker of biomedical instrument systems and test equipment posted a 94% plunge in third-quarter earnings as restructuring and acquisition costs masked higher sales and margins.

Universal Health Services' latest quarterly earnings beat analysts' expectations, but its shares fell 5.07, or 8.4%, to 55.65, as investors focused on the hospital operator's growing bad debt, which climbed more than analysts had been expecting. The news weighed on Tenet Healthcare, which fell 37 cents, or 6.7%, to 5.12.

With Dow Near 10,000, Stocks Might Get Stuck

Some strategists say sell-off might be in the cards.

NEW YORK (MarketWatch) -- With the Dow Jones Industrial Average fast approaching the 10,000 mark, more than a year after plummeting through it near the height of the financial crisis, market strategists believe passing the magic level convincingly might prove a sticky affair.

The blue-chip average holds a special place for the public. Reaching that level might therefore help soothe some of the trauma experienced when investors saw the Dow industrials sink more than 500 points on Oct. 7, 2008 -- the last day it traded above the 10,000 level.

"10,000 is such a big number," said Darin Newsom, senior analyst at Telvent DTN. "Reaching it the first time was a big deal and falling through it was a big deal."

But cheery media headlines and sighs of relief that 401ks have regained some ground might not be enough for the market, at least in the near term.

"For the market right now, it brings up the question of whether we're running out of gas," Newsom said. "Are we sizing up for a possible sell-off? These are some of the ramifications as we test this level."

Newsom thinks the Dow might be making a "last gasp" run at 10,000 for this year, as the market tends to reach highs in October. And reaching the number will raise questions as to what justifies further gains after the Dow's more-than-50% rally from its 2009 lows reached in March.

Overhead supply

"Being back closer to where we were before the disaster might signal it's time to get more cautious," said Marc Pado, market strategist at Cantor Fitzgerald.

A number of analysts, including Pado, believe the market is likely to run into so-called overhead supply below and above Dow 10,000. Overhead supply consists of a pool of willing sellers who had bought the market just before it went down and are keen to break even.

"The higher we go from here, the more supply we have," the analyst said.

The market has already shown signs of hesitations whenever the Dow has traded above 9,900. On Tuesday, the Dow industrials fell back 14.74 points, or 0.2%, to 9,871.06. The S&P 500 Index dropped 3 points, or 0.3%, at 1,073.18, while the Nasdaq Composite Index rose 0.75 points to 2,139.89.

Should the Dow break through 10,000 and hold above the mark against selling efforts, the level could then become support. Cantor's Pado still thinks the Dow will reach his price target of 10,500 before the end of the year. But not before a 7-10% sell-off in the market in the near term.

"We can continue to push higher but if companies reporting earnings only meet expectations, people will be disappointed and the 10,000 level will be the perfect excuse [for a sell-off]," he said.

Psychological factor

Retail investors have remained largely cautious since the March rally and Dow 10,000 might eventually do some work at restoring a certain level of confidence in the market, said Donald Selkin, chief market strategist at National Securities.

"Whenever it's a round number like that it's psychological," Selkin said. "A decisive break above that level, which would then be acting as a support on the downside, would in turn help investor psychology."

Selkin, however, also thinks that the market will first sell off upon reaching the level.

"We've been rallying into earnings and have had a relentless run to higher levels," he said. "We're very overbought."

Gold Taps Fresh Record Above $1,060

NEW YORK (MarketWatch) -- Gold futures climbed above $1,060 an ounce Thursday, marking a fresh record high for the third session in a row, as investment demand continued to rise and as the dollar weakened once more.

The gains appear likely to push the winning streak for the precious metal to five. Holdings in the SPDR Gold Trust, the biggest exchange-traded fund backed by physical gold, rose for a fourth straight session, reaching the highest level in three months.

Fostering the gains in gold, the dollar gave ground in currency trading, under renewed pressure as the European Central Bank and the Bank of England made no changes in their respective interest-rate policies.

Gold for October delivery rose as high as $1,060.40 an ounce, the loftiest level ever for a front-month contract. It was last up $16.30, or 1.6%, to stand at $1,059.60 on the Comex division of the New York Mercantile Exchange.

Gold for December delivery, the most actively traded contract, was up $14.40, or 1.4%, at $1,058.80 an ounce, modestly off its intraday high of $1,062.70.

"New records each day, as higher volume, higher moving averages, higher open interest and huge ETF demand from investors continue," said George Gero, a precious-metals trader for RBC Capital Markets. "ECB and BOE left rates at lows, cheap rates make it easy to hold gold for investors as they prepare for possible future inflation."

SPDR Gold Trust holdings reached 1,109.31 metric tons on Wednesday, up 8.8 metric tons from a day earlier. That's the highest level since July 13. "The fact that the gold price broke through the old high of March 2008 is obviously attracting financial investors to the gold market," said analysts at Commerzbank in a note.

If demand for gold ETFs continues to rise, "a further gold-price increase has to be expected, especially as short-term oriented market participants are likely to be jumping on the bandwagon."

'Top heavy' in the short term?

Some analysts questioned whether the rally in gold could continue, however. Christopher Ecclestone, mining strategist at Global Hunter Securities, said gold's strength was "like a feather being pushed up by the lightest of breezes. There is no substance to the rise."

Indeed, gold's performance in the euro, the British pound and other currencies has been lackluster compared to its rise in U.S. dollars, a trend suggesting that investors are more interested in bullion as a hedge against the greenback than global inflation. "The short-term outlook is again beginning to look top-heavy with gold vulnerable to a correction should the dollar recover," said James Moore, analyst at TheBullionDesk.com.

In foreign-exchange trading, the dollar index moved down 0.4% to 76.191, leaving the benchmark just slightly higher than the one-year low hit about two weeks ago. A weaker dollar typically pushes up dollar-denominated commodities prices. The European Central Bank, which sets monetary policy for the 16 nations that use the euro, left its key lending rate unchanged at a record low of 1%. The Bank of England did likewise, its key lending rate unchanged at a record-low 0.5%.

For now, "gold prices continue to trend higher, driven by the same factors as in previous days -- a weaker [U.S. dollar] and still-low bond yields," analysts at Credit Suisse wrote in a note to clients issued Thursday.

Also in metals trading, December silver futures rose 17 cents, or 1%, to $17.67 an ounce. October platinum gained $8.80, or 0.7%, to $1,329.30 an ounce, and December palladium rose $4.95, or 1.6%, to $319 an ounce. December copper added 8.85 cents to $2.868 a pound, a 3.2% advance.

Is October Correction Inevitable For The Dow Jones ?

In order to predict the future, one must consider the past and research similar market cycles to come up with a probable forecast for the future. After studying comparable periods to the one we are experiencing today, investors will realize that an October correction is not likely.

Consider the following:

We have not yet recovered fully from 2008. The market rebound after the crash of 1987 did not see a correction of 10% until 1990, which is more than two years later. Moreover, that correction was after "only" a 35% drop from top to bottom. At present, we are only six months removed from a 55% drop in the market.

October may be a negative month, but it's usually more in the range of 3% to 5%. The Octobers of 2008 and 1987 were the two biggest October sell-offs of the last 30 years, but each was preceded by a negative September. This year, September was positive.

During past October sell-offs, the month didn't represent the first wave of the attack. May and June often paved the way. October then stepped up to wipe out the survivors who believed the worst was over. Again, we did not see major selloffs in May or in June. In fact, this past June marked the fourth consecutive month of gains.

If we do sink lower in October, the catalyst can easily be the lack of top-line growth in earnings reports. However, if top-line growth is present, it can be another factor driving the market up in October.

To play devil's advocate, I must point out that six months after the market bottomed in 1987, the market was 21% higher. After the 2002 bottom, it was 24% higher. Today, we are 58% higher than we were in March. This is a significant jump.

To prepare investments for October, consider diversifying with a prudent amount of truly non-correlated asset classes like Treasury Inflation-Protected Securities (TIPS), commodities such as precious metals, managed futures and inverse funds.

If you have already pulled significant assets out of the market and are sitting on the sidelines, get back in but not all at once. Dollar-cost-average back into a diversified portfolio in order to avoid buying in on the worst day of the year, and consider tactical asset allocation programs for a small percentage of your portfolio.

On the fixed income side, TIPS is a good way to get some income and inflation protection. The Fidelity Floating Rate Bond Fund still looks attractive. Blackrock Global Allocation is a wonderful fund with multiple asset classes.

For equities, Tom Soviero and some of the rest of the folks over at Fidelity Leveraged Company Stock Fund, are some of the best in the business, as is the team running the Kinetics Paradigm Fund.

In conclusion, it is inevitable that a correction will occur in the market at some point, but research shows that an October correction is unlikely. A 3% to 5% pullback is conceivable for October, but do not prepare investments for a major selloff. You will regret it.