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Transports, Small Caps Suggest Pullback Could be Imminent

Scott Redler

Major US indices finished the day down around 0.3%, but based on some of the reaction in the trading punditry you would think we had another Black Friday. That is a testament to just how strong the market has been so far in 2013. The S&P held above its 8-day moving average, but a few other indices broke below theirs, which could be a harbinger of things to come. A weak GDP number this morning was the catalyst for some of the weakness we saw today.

The Fed rate decision was a non-event, as expected. The FOMC voted to keep rates exceptionally low, and are now consistently tying rates to the unemployment picture. The jobless rate is not yet near a level where it appears the Fed would be willing to raise rates or tug the reigns on QE. Gold's ETF (GLD) finished the day up 0.75%, with most of the gains coming before the open of US markets.

We have been watching the Transports ETF (IYT) as a leading indicator for the market as the group has shown relative strength this year. The IYT was one of the ETFs to break below its 8-day moving average today, perhaps foreshadowing a coming pullback in the market. It will be interesting to see what this micro bearish development leads to.

The small-cap Russell 2000 ETF (IWM) also broke below its 8-day moving average today. Traders often look at small cap stocks as a gauge of risk appetite, and today's action could indicate a bit of "risk off." These types of divergences with the S&P are important to note, and the T3 Live team will be watching stocks closely tomorrow to see what this leads to.

Amazon (AMZN) opened more than 8% higher, near all-time highs, this morning after its earnings report last night but immediately sold off hard when the opening bell rang this morning. The stock closed the entire gap in the fist 40 minutes of the session, and was able to pare intraday losses only slightly into the close. AMZN still finished the day up 4.8%, and now it will be key to watch whether it holds higher.

Facebook (FB) reported earnings after the close today and has been on a roller coaster ride after hours. The company delivered basically an inline report with a slight revenue beat, and the stock initially popped higher after the numbers were released. However, the stock then plummeted as much as 10% before recovering back to the flat line. FB has started to drift lower again, but is currently down only around 2%. Expectations were running high based on FB's recent rally, and it appears an inline report is not enough to take the stock higher at these levels.

Earnings stocks continue to provide opportunity in what has otherwise been a fairly lethargic market. The action today could suggest that at least a slight pullback is imminent, but if the S&P resumed its rally tomorrow it wouldn't be the first time the market made a fool out of conventional wisdom.

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*DISCLOSURES: Scott Redler is long FB, DELL, BAC, GE, DBC, TBT, WMT. Short SPY. Long LNKD call spread.