Has the market moved to the bear camp in one day, or was today just an orderly selloff after a strong run? Time will tell for sure, but it is interesting to note how the first sign of negativity has tongues wagging about the idea that "the reversal is finally here".
So what exactly happened to shock the giddiness out of the bulls? Can you say N-A-P-M? Sure, we knew you could. But wait, wasn't that Tuesday? Yes, that was for actual production of goods, but the NAPM figures for services was released this morning with much fanfare. It seems that purchasing managers have cut back spending for services much farther than anticipated with only 47% saying they will increase purchasing (50% is neutral). Anything less is thought to be a contraction, and 47% caused a small earthquake in the consensus figures estimated to come in 50-51%. What this says is that the downward spiral of the economy is not just a manufacturers issue. The sub-50% level in manufacturing just found a 47% services bride with whom to walk the isle. That reflects a continued weakening of the broad economy.
But wait there is more. Initial jobless claims came in higher than expected too at 421K vs. 390-400K est. That puts the 4-wk average at the highest level since October 1992, and shows the jobless rate is accelerating. For those who think we have seen the bottom of the recent economic downturn, guess again. That does not speak well to future unemployment rates or the economy.
But that is just fundamental stuff that does not really matter, right? I would not bet against that trend. While the mantra may be to not fight the Fed, lowered interest rates (by 200 basis points) do not seem to be doing the job at re-stimulating the economy despite that bulls were rushing to buy the dips on that basis. The presumption until today was that rate cuts are working. Now, nobody is sure. And that may in fact be the catalyst for a major reversal in favor of the bears.
But in direct conflict with that, selling volume today was only moderate and quite orderly, indicating no clear change of direction in the bears favor just yet. Prices were again rising off their lows into the close too. Should that suggest that we buy everything in sight tomorrow morning? Maybe, maybe not. It all hinges on the unemployment, earnings, and workweek information to be released before the market opens tomorrow. Of all that buying we saw into the close on major indices, there was no unusual contract volume in SPX calls OR puts. Meaning: pros stood on the sidelines and let the small speculators take that risk in front of tomorrow's numbers. We choose to follow the pros.
Here is what we will look for. Estimates are for 4.4% unemployment, 0.3% wage increase, and a 34.2-34.3 hour workweek. There are so many possible reactions to the combination of numbers that we have to wait to see how the market responds in the morning. But the lack of professional bullish activity in the S&P going into tomorrow should raise a caution flag, not by the activity, but by the lack of BULLISH activity. If this were a "normal dip", buyers should have appeared at points of support, but they did not and the indices sold off further. An absence of bulls today may embolden bears in the morning. Stay tuned.
Speaking of support, shall we poke around a few charts? For tonight, you will need to pull up your own set of chart as the screen shot software of yours truly has gone to software purgatory.
That said, let us start with the Dow since it is still showing the strongest characteristics compared to the S&P and the NASDAQ.
Dow Industrial Chart (INDU):
(Beautiful chart montage goes here!)
Notice the red lines of support on the daily/60/30 charts that that held up today - nice that INDU found a bottom there at 10,725 and rebounded nearly 75 points into the close. However, despite the stochastics looking like a successful Space Shuttle launch on the 10/5 chart setup in the final hour of trading, and the 60/30 stochastic poking up from oversold, INDU failed to get back up the 10,800 level of support it needs to assault the 10,900 and 11,000 levels.
Moreover, we can see bearish divergence formed on the 60-min chart from May 1st, which should have been a flashing caution sign for the day trader. Also, if INDU cannot get back over 10,900 by the time daily stochastics reach overbought and rolls again, that too would be bearish divergence. The good news is that the daily charts while overbought in oscillators, show no weakness yet.
Consensus unemployment numbers could keep the bull alive and we'll look back on this day as just a blip on the screen. But a major miss, or any interpretation of such with the real numbers could turn green pasture into fields of ice in which sure-footed bulls will flub all Dorothy Hammill imitations. Slippery ground ahead if so for the INDU.
S&P 500 chart (SPX):
(Another beautiful chart montage goes here!)
On the SPX too, we see similar patterns, except that support at 1250 was violated with a weaker rebound into the close, and support coming in at 1240. The rebound did not reach back up to 1250 and that could now become a point of resistance. . .hope not for the bulls, but test and failure would be lovely for bears just waiting for a square meal after little foraging success in the last three weeks. Bearish divergence already exists here on the daily chart as of today. Much weakness here, but bulls can still save it if they rediscover religion in Uncle Al, and their mantra, "don't fight the Fed". Support at 1250 would turn back bears and lessen the notion that today was anything but pebble in the hoof.
NASDAQ 100 tracking stock chart (QQQ):
(Final beautiful chart montage goes here!)
The NASDAQ is a tougher animal, but also the weakest right now. The daily chart oscillators never made it back to overbought before reversing with today's red candle. Fact is that technology is stalling its advance with downgrades in the semiconductor-manufacturing sector late in the afternoon. While the QQQ found support at $46 late in the afternoon before it too reversed, the recovery was milder than the SPX or the INDU. While no bearish divergence yet exists on the daily chart, it sure does on the 60-min. Again, daytraders in particular need to be concerned here more than the rest of us. If $45.50 cannot hold support tomorrow, look for $43.75 in the windshield. Bulls can graze again if it reaches back up to $47.50 and holds. Minor resistance at $48, then easy pickings to $49.50. After that, blue sky. But plan for rain.
VIX? It gapped back up to roughly 30, a former point of support, but now possibly resistance. If so, then it is possible that the market could resume bullish as the VIX falls back under 30. Any move over 30 shows put buyers stepping up and possibly more downside ahead.
With the most recent COT from last week still showing a big net short position, the possibility for further downhill sliding is very real. The good news is that we will have fresher numbers for you in the weekend wrap.
Bottom line: nobody knows for sure what will happen tomorrow as it will be predicated on the unemployment number's reception by investors in the morning. Lack of SPX option activity into the close makes future bullish action suspect by flashing a stealth warning that commercial traders, by not taking a position ahead of tomorrow's numbers do not have confidence in a bullish outcome. It isn't negative either, but that never stopped them from buying before important numbers in the past three weeks. It sure did today and that is another sign that today could be foretelling of more weakness to come.
See you at the bell.