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Market Wrap

ISM's PMI Leaves Bulls Wanting Less and More

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Stocks began today's session on a sour note with banks grabbing negative headlines and setting a negative tone early, while key economic data released at 10:00 AM EDT showed the manufacturing sector continued to exhibit some sign of slowing in May.

Shares of Wachovia (NYSE:WB) $23.40 -1.68% finished down $0.40 having traded a new multi-year low ($22.72) at this morning's open after the company said its Chief Executive Officer Ken Thompson was forced out by the company's board of directors.

Market participants drew little comfort from the continued shakeup with Mr. Thompson becoming the third CEO of a major U.S. financial institution to lose the top job as a result of the credit crisis.

Washington Mutual (NYSE:WM) $9.00 -0.22% also slid to a new multi-year low ($8.75) at the open of today's trade. Hit hard since the middle of 2007 due to deterioration in the mortgage and credit markets, the company announced today that it was splitting CEO and chairman roles in an effort to focus on the problems at hand.

Then banking concern said Stephen Frank will assume the title of chairman of the board, while Kerry Killinger will remain as chief executive.

At 10:00 AM EDT, as stocks were pushing their worst levels of early trade, U.S. construction spending figures were released by the Commerce Department.

The department said spending on U.S. construction projects fell by 0.4% in May to an annual rate of $1.21 trillion. The figures were roughly inline with economists' forecast for a 0.5% decline. I (Jeff Bailey) saw little sign of a market response to an upwardly revised March figure, where March's previously reported 1.1% decline was revised to a still negative 0.6% decline.

That "lack of response" may well have been due to the more closely monitored Institute for Supply Management's (ISM) manufacturing report (national), also released at 10:00 AM EDT.

While the ISM Manufacturing Index came in at a "better-than-forecasted" measure of 49.6 (consensus was 48.5), a look inside the numbers, or sub-index readings deserve closer scrutiny.

ISM's May'08 PMI -

As noted in tonight's market wrap tile, May's ISM data left many bulls more than likely wanting "less" from the Prices component, which jumped to a very expansionary measure of 87.0.

Levels above 50.0 for the PMI and sub-index measures signal growth, while levels below 50.0 signal contraction.

One bright spot, or sign of renewed expansion in the above data series had production improving to a 51.2 measure in May, its highest measure since January.

That increase in production may have been attributed to some of contraction-like measures we've see from the backlog of orders, where in May we would now see a notable decline to 46.0 from 51.5.

Here's a quick look at the ISM Mfg. Index measures since Oct'07 and how each of the sub-index components have been measured.

ISM Mfg. Index & Sub-Index Measures Since Oct'07

In my opinion, May's "elevated" measure of 87.0 for prices will be tied to the sharp rise in raw materials costs.

The CRB Index in my U.S. Market Watch (CEC:CRY) 425.77 +0.85%, while largely weighted with oil prices, has risen 92 points, or 27.6% since the end of Sep'07, and is up just more than 67 points, or 18.7% since the end of Dec'07.

Also a concerning focal point to economists was the still anemic employment index measure of 45.5. While a modest improvement from April's 45.4 measure, April's lackluster construction spending data doesn't appear to hold thought of any sharp rebounds for June.

The weaker U.S. dollar looks to even out some of the trade deficit with exports looking "even keel" at 49.5, while the exports index shows some bullish expansion at 59.5.

Still, at these "weaker" levels of the dollar versus major global currencies (euro, yen and pound), dollar strength and weakness continues to impact market sentiment.

Closing U.S. Market Watch - 06/02/08 @ 05:00 PM EDT

One major item I drew attention to last week was the notable "lag" in the Dow Industrials (INDU) $125.04 -1.06%.

One of the PRIMARY themes that remained was the weakness in financials. While not heavily weighted components, at Friday's close shares of American Express (NYSE:AXP) $45.25 -2.37% today, had fallen 5.33% on a 20DyNet% basis. JP Morgan (NYSE:JPM) $42.15 -1.97% today, had fallen 7.66%; American Intl. Group (NYSE:AIG) $35.87 -0.36% today had fallen 10.62%; Bank of America (NYSE:BAC) $33.58 -1.26% today had fallen 7.20% and Citigroup (NYSE:C) $21.46 -1.96% today had declined 7.36%.

General Electric (NYSE:GE) $30.41 -1.00% shed $0.31 today, and his past quarter's earnings report and troubles with its financing arm still look to weigh on the shares.

General Motor's (NYSE:GM) $17.44 +1.98% did gain $0.34/share today, but now the smallest-weighted component was down a eye-popping 15.72% 20DyNet at Friday's close.

I'd have to think that some of the sharp declines in the above "financial" names partially reflect today's news out of Standard & Poors.

At roughly the mid-point of today's session, Standard & Poors credit ratings opened the proverbial floodgate with some various CreditWatch "negative" alerts for Lehman Brothers (NYSE:LEH) $33.90 -7.90%, Merrill Lynch (NYSE:MER) $42.62 -2.95% and Morgan Stanley (NYSE:MS) $43.10 -2.55%.


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S&P cited the outlooks on the large financial institutions sector as being predominantly "negative" due to the weaker U.S. economy and its impact on consumer lending.

Shares of Citigroup (NYSE:C) $21.46 -1.96% did ease from their session lows of $21.00 when Standard & Poors removed the company from its CreditWatch, where they had placed the company's debt on April 15, 2008, with negative implications. The ratings firm said, "Despite the challenges facing Citigroup over the next two years because of deteriorating consumer credit, its fundamental earnings power is unimpaired."

With that being about the most "positive" thing S&P said today, market participants will monitor this banking giant near-term.

Citigroup (NYSE:C) - $0.50 and $1 box chart

The supply (O) / demand (X) chart of Citigroup (C) remains longer-term bearish. After generating a reversing higher Point and Figure "buy signal" at $25.00 in early April, sellers (O) have driven the stock back down to near-term support above the $20.00 level. A trade at $20.00 is viewed further negative. Excellent RISK/REWARD profile for BULLS as they RISK $1.00 downside to a trade at $20.00, while longer-term REWARD, utilizing the bullish vertical count to $40 is roughly $17.00.

Should the stock trade $20.00, it would be deemed BEARISH for the stock.

Trade and account management would dictate BULLISH CAUTION and SMALL BULLISH positions currently as the BANK sector is "bear confirmed."

Traders and investors would be well advised to monitor the Financial Select SPDR (XLF) $24.39 -1.49% at these levels of critical support.

Financial Select SPDR (XLF) - $0.50 box

With Standard & Poors growing further negative the LARGER financials, the XLF's Point and Figure chart provides and excellent view of what is at stake.

On 05/20/08 the XLF generated a reversing lower point and figure sell signal at $25.50, and now trades just above important support at $24.00.

I think we as traders and investors can begin to make the tie between Citigroup (C) at $20.00 and the XLF at $24.00.

Trades at either, or both respective levels will likely weigh heavily on the sector, if not the broader market as well.

S&P 500 Index (SPX.X) - 10-point box

An old point and figure chartist saying is that the "first sell signal in the new upward trend is often a buying opportunity." That's what we find here in the S&P 500 Index (SPX.X).

Having turned "bull confirmed" in early April (4), the recent selling has generated a double bottom sell signal at 1,380.

I've placed this month's (June's) newly calculated MONTHLY Pivot Levels on our point and figure chart.

AGGRESSIVE bulls can play here with a stop just below MONTHLY S1 of 1,369. More CONSERVATIVE bulls can play on a trade at 1,350, with a stop below MONTHLY S2 of 1,377.

A couple of weeks ago I adjusted my economic forecast from "modest recession" to "modest growth" for 2008.

I would be VERY surprised if the SPX traded 1,472 and MONTHLY R2 this month, let alone by July expiration, so pick options accordingly.

S&P 500 Bullish % ($BPSPX) - 2% box chart

At tonight's close, StockCharts.com's S&P 500 Bullish % ($BPSPX) saw a net gain of 2 stocks to reversing higher PnF "buy signals" and status for this broader-market indicator is "bull correction."

In early April (4) at 44.00%, this major market bullish % achieved "bull confirmed" status, rose to 52.00% on the above chart, then reversed to "bull correction" status at 45%, then reversed back up again to "bull confirmed" status at 52% to rise as high as 62.00%.

Look for buyers (old bears and new bulls) to be buying this pullback.

It would currently take a measure on the above chart to 44.00% for this indicator to achieve "bear confirmed" status.

IWM and QQQQ Montage - Daily Intervals

Both the IWM and QQQQ have been the "bullish leadership" major averages in recent months, but some of the near-term softening in the INDU and SPX.X look to be keeping buyers cautious.

Look for these two averages to BREAK TO NEW RELATIVE highs as a CONFIRMATION of any rebound in the INDU and SPX.X.

Need the FINANCIALS to find a footing to provide a LIFT for the SPX.X.

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