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ISM Index and construction spending below forecast

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The major indexes are just off their morning lows of the session with the broader S&P 500 Index (SPX.X) 908.65 -0.8% falling 8 points, but off its lows of 902.83 as more economic data released during today's session shows some lingering effects of a weak U.S. economy.

The Commerce Department that new construction spending in March fell 1% to an annual rate of $868.5 billion, which was well below economist's forecast for a 0.2% increase. The Commerce Department said that while the pace of residential construction climbed 0.1% to $454 billion in the latest month, public spending fell 3.5% on reduced government construction of housing, hospitals and prisons, which marked the biggest decline in government spending since March 2002. Lower tax receipts undoubtedly due to the slower economy and lack of jobs are most likely reflected in the government data as state governments look to stem the flow of red ink attributed to declining tax receipts.

Additional economic data released during market hours had the Institute for Supply Management (ISM) manufacturing index falling to 45.4 in April, down from 46.2 in March, and below economist's forecast for a slight rebound to 47. Reading's below 50 are considered to be that of contraction and April's 47 reading.

There has been NO good news in today's economic data. None that I can find anyway, and the fundamental side of me certainly begins to think that stocks are mostly likely "fairly priced" for any new bullish entries at this point.

In today's Market Monitor, I've profiled a partial bearish position in the NASDAQ-100 Index Tracking Stock (AMEX:QQQ) $27.37 -0.29% as an EARLY bearish entry at this point. I've suggested that option trader buy a MINIMUM of 3-months expiration, which at this point would be for September expiration. I'm looking at a higher level of 70% bullish % as one reason to be bearish the more tech-heavy QQQ, and my downside target would be $25. I suggest partial positions currently and would then look to add to positions once we were to see a reversal lower in the bullish %, which would be FIRST hint of any internal weakening taking place. Those traders that prefer to take on more risk and trade the underlying QQQ, I've suggested an initial stop just above at $27.80, or the recent highs of $28.06.

Treasuries have seen some selling come into them since our 11:00 intra-day update at OptionInvestor.com. The benchmark 10-year YIELD ($TNX.X) 3.847% saw a YIELD low of 3.793%, but does appear to have seen some technical selling from the "old" downward trend from its December 2, 2002 relative high of 4.351%, which I had attached to the January 13th high of 4.203%. For there to be ANY sellers at that level with today's less than spectacular economic data perhaps shows that the bond market has been factoring in some of today's economic data. This morning's rebound in the 10- year YIELD should also serve some notice to bearish equity traders about trying to OVERLEVERAGE at this point in the game.

While the NASDAQ-100 Bullish % ($BNDX) has reached a more "overbought" level of 70% bullish %, the S&P 500 Bullish % ($BPSPX), S&P 100 Bullish % ($BPOEX), NASDAQ Composite Bullish % ($BPCOMPQ), NYSE Bullish % ($BPNYA) and very narrow Dow Industrials Bullish % ($BPINDU) would still have significant internal strengthening to be found before reading more "overbought" levels. Bullish % charts can be view for FREE at www.stockcharts.com by using the above symbols. The conventional scale used on a point and figure chart is 2% box size, thus needed a 6% change for a reversing chart entry.

Sector action, which had been broadly negative in the first two- hours of trade has seen modest improvement. The Gold/Silver Index (XAU.X) 68.03 +4.16% continues to build on this morning's gains and still leads today's sector winner list. Moving fractionally positive at this hour is the GSTI Software Index (GSO.X) 111.56 +0.24%, Disk Drive Index (DDX.X) 82.31 +0.15%, Combined Telecom (IXTCX) 129 +0.34%, Drugs (DRG.X) 315.18 +0.05%, Airlines (XAL.X) 39.06 ++0.15% and the CBOE Oil Index (OIX.X) 247.33 +0.27%.

Sector weakness has the Forest/Paper Products Index (FPP.X) 273.63 -2.5% leading sector losers, while other sectors exhibiting weakness is the Dow Jones Home Construction Index (DJUSHB) 358 -1.93%, Morgan Stanley Cyclical Index (CYC.X) 451.22 -1.48%, S&P Retail Index (RLX.X) 293.79 -1.93%, along with the Utilities Index (UTY.X) 260 -1.18% down by more than 1%.

Who could possibly give a sector update without mentioning the S&P Banks Index (BIX.X) 289.23 -0.03%, which is just now nearing the unchanged level. We've been keeping a close eye on this sector as one would think it would be very vulnerable to losses under the scenario for an economy coming apart at the seams. Not seeing it today, despite the weak economic data.

Jeff Bailey

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