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Weaker than forecasted ISM has stocks lower

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While yesterday's more regional Chicago PMI economic report came in below expectation and sent some shockwaves through the markets on its release, today's broader ISM (formerly National PMI) report also showed some cooling off with a 50.5% reading for July, which was below consensus estimates for 55.3%, compared to June's 56.2%.

The key components had new orders, production and employment components all seeing some declines. While the Institute of Supply Management index came in below expectations, the reading above 50% still indicated marginal growth in the economy.

Also weighing on stocks with the Dow Industrials -143 (-1.6%) points, S&P 500 down 17 points (-1.95%) and NASDAQ Composite off 28 points (-2.21%) was June's construction spending which fell -2.2%, which was well below economists forecast for a marginal +0.2% gain.

This morning's jobless claims report, combined with the two economic releases mentioned above has investors removing some risk from their portfolios by selling stocks, and rotating back into Treasuries.

Treasury YIELDS are lower across the board with more aggressive buying in the shorter-term maturities as the 5-year YIELD ($FVX.X) 3.37% drops sharply. Key level to monitor as it relates to YIELD is 3.3%. This 3.3% level is where it appears an asset allocation shift took place back on July 24th.

The benchmark 10-year YIELD ($TNX.X) 4.415% is also lower (buying in the bond) and this YIELD has come close to filling its July 29th gap higher. Key level near-term is a YIELD range of 4.35% to 4.365% to look for YIELD support. A break lower from these levels most likely has stocks further vulnerable to lower price action.

Citigroup Chart - 30-minute interval

While I think the bulk of recent economic data has been "factored" into things, I'm still looking for some lower risk bearish trades. In the past couple of session, I've legged into some Aug. $32.50 puts and targeting the $30 level. Need a break below $32 to fill a gap that could send the stock to $30. Should we continue to see money rotate toward bonds, $28 is ultimate target. Bears will leverage downward trend, with a tight stop just above $33.75 or $34.

Jeff Bailey
Senior Market Technician
Option Investor


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