Ready, Aim, Bargain Hunt

On Friday, biotech stocks and high-P/E technology issues continued to be the subject of selling as the first quarter of 2014 drew nearer to its close. Biotechs were strong immediately after the opening but quickly lost momentum, while funds flowed into energy and consumer-oriented stocks.

For the week, the blue chips, as represented by the Dow Jones Industrial Average, rose 0.1%, while the S&P 500 fell 0.5% and the tech-heavy Nasdaq fell 2.8% - it's the biggest weekly decline since October 2012. The iShares Nasdaq Biotechnology ( IBB) plummeted 6.8% for the week, its biggest weekly drop since August 2011.

In economic news, it was reported that personal income rose 0.3% in February, which slightly beat analysts' forecasts. The Thomson Reuters/University of Michigan consumer sentiment index for March was revised upward by 0.1 to 80, which fell short of an expected reading of 80.5.

At Friday's close, the Dow rose 59 points to 16,323, the S&P 500 gained 9 points at 1,858, and the Nasdaq was up 5 points at 4,156. The NYSE's primary market traded 639 million shares compared to 793 million on Thursday. Total NYSE volume was 2.9 billion shares versus the Nasdaq's 2 billion shares.

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Since its Feb. 25 all-time high, IBB has plunged 16.7%, driving its MACD indicator to the most oversold reading since August 2011. Its next support is at the January breakout line at $227.

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The Nasdaq has violated support at its breakout point at 4,243 (now resistance) and its 50-day moving average at 4,222. But as a result of the selling of high-P/E techs and biotechs, MACD is at its lowest point since the February low, and is thus very oversold and due for a rally.

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While tech and high-P/E stocks have been pounded, the blue-chip Dow industrials have held their own, as has the S&P 500 (not shown). The Dow has been flat since penetrating its 50-day moving average in February.

It now sits above a broad support zone from 15,720 to 16,175. Its MACD indicator is within a fraction of triggering a buy signal.

Conclusion: We expected to see some group rotation as the quarter drew to a close, and I warned several times that neither the Nasdaq nor the biotechs could support so sharp an advance for very long. Today is the end of Q1 and hopefully will mark the end of the selling of the former high-flyers.

There is every reason to be optimistic: The major indices (S&P 500 and Dow) have held; the public is scared (bulls are at the lowest in seven weeks, according to AAII); short interest is at the highest level since September 2011; and Investment Dealers' Digest points out that April is traditionally the strongest month of the year for the Dow, averaging a 2% gain since 1950.

Those who have a weak tolerance for risk should wait for further evidence of a bottom in biotechs and other high-P/E stocks. But traders and those investors willing to take a risk should use the current weakness to go for the bargains in high-quality, oversold stocks.

Today's Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week's economic reports due out, click here.

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