Danger Is on the Dow's Horizon


Following a massive week in which the Dow Jones Industrial Average (INDEX: ^DJI) increased by more than 300 points, the markets took it easy today, closing down by 40 points or 0.03%. As the rest of the week unfolds, however, the big question on traders' minds is: Where will the markets go from here?

Will the market rejoin reality?
It's tough to deny that last week's quantitative easing-induced gains outpaced the fundamentals. A report from the Federal Reserve Bank of New York released today showed that manufacturing activity in its region has contracted in September by the largest margin since November 2010. While the results of the so-called Empire State Index may not be cause for enormous concern, particularly because the data is geographically limited in scope, it nevertheless adds to an already formidable accumulation of evidence suggesting a slowdown.

Two weeks ago, the Institute of Supply Management announced that its index of national manufacturing activity contracted for the third consecutive month. Three days later, the Bureau of Labor Statistics released an abominable jobs report estimating that nonfarm employment was up by only 96,000 jobs last month, well under the level necessary to combat unemployment. And as my colleague Alex Dumortier pointed out at the end of last week, the third-quarter earnings recession may have already begun, with companies such as FedEx, UPS, and Intel all issuing downward revenue and/or earnings guidance.

Taken together, in turn, these factors suggest that equities got ahead of themselves last week and are thus due for a correction.

Winners and losers from today's trading
The index's best-performing stock was pharmaceutical company Pfizer (NYS: PFE) , finishing the day up by nearly 1% and just off its recent 52-week high. The drugmaker's performance is probably a function of two factors. First, Pfizer is a well-known defensive stock that yields a healthy 3.7%. And second, according to my colleague Mike Klesta: "Pfizer's Inlyta recently got the nod from the European Medicines Agency, so the drug can now be prescribed for advanced renal-cell carcinoma. Every approval counts in the world of pharmaceuticals."

The day's award for runner-up goes to AT&T, the American telecom giant and favorite among dividend investors. Given that Verizon was also up, it's been suggested that the performance is related to the iPhone 5's staggering success. Over the weekend, AT&T reported the smartphone has sold faster than any previous iPhone thus far. And earlier today, Apple (NAS: AAPL) itself announced it had taken 2 million preorders within the first 24 hours after the release. This figure is roughly double the first-day preorders of the iPhone 4S and lends considerable credibility to Apple's claim that its newest device is the "biggest thing to happen to iPhone since iPhone."

Leading the way down were Alcoa (NYS: AA) and Bank of America (NYS: BAC) , both of which gained considerably in last week's rally. With respect to Alcoa, the impetus for the fall was the aforementioned manufacturing data coming out of New York. Quite simply, it isn't too big of a stretch to conclude that an aluminum manufacturer won't flourish unless manufacturing does. And with respect to Bank of America, beyond its characteristic volatility, as my colleague David Williamson noted, it's likely that the downward trend is "nothing more than light profit-taking."

Foolish bottom line
While it'd be nice to think that the markets will settle down soon for the first time since the European debt crisis broke out, don't hold your breath. In addition to the gathering economic storm clouds here at home, there's little evidence that our European brethren will resolve their differences anytime in the near future. It's for this reason that investors must be selective with the stocks they buy, sticking to safe picks such as those identified in our recent free report about three Dow stocks every dividend investor needs.

In addition, if you're interested in Apple, Intel, or Bank of America specifically, be sure to pick up our in-depth reports on those companies. The report on Apple is located here. Intel's is here. And Bank of America's here. All of the reports come with a year's worth of free and timely updates on the companies at issue therein.

The article Danger Is on the Dow's Horizon originally appeared on Fool.com.

Fool contributor John Maxfield owns shares of Bank of America. The Motley Fool owns shares of Intel, Bank of America, and Apple.Motley Fool newsletter serviceshave recommended buying shares of Apple, FedEx, UPS, and Intel and creating a bull call spread position in Apple. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days. The Motley Fool has adisclosure policy.

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