Market Stats

Stocks sold off sharply on renewed worries over an economic slowdown. Yesterday the Federal Reserve confirmed our fears about the U.S. economic recovery slowing down. While the initial reaction to the FOMC announcement was positive, investor sentiment changed overnight. The markets began to wonder, why didn't the Fed act more aggressively if the situation is getting worse. Weak economic data out of China and Japan, disappointing comments from the Bank of England, and U.S. trade numbers that were worse than expected all combined to deliver a bad day for stocks around the globe. The U.S. dollar and treasuries surged as money ran for safer securities. The yield on the 10-year note fell to 2.69% and the yield on the 2-year note hit a new all-time record low of 0.48% intraday before settling at 0.52%. Gold futures rose modestly with a $1.90 gain to $1,199.90 an ounce. Crude oil futures sold off sharply with a -3.6% decline to $77.34 a barrel.

Chart of the U.S. dollar ETF (UUP):

Chart of the Euro ETF (FXE):

Foreign markets are rolling over with big declines in Japan and Europe. While the dollar is rising against the euro it fell to a new 15-year low against the yen. This yen strength combined with a sharp drop in machinery orders sent the Japanese markets tumbling. The NIKKEI index lost -2.7%. Meanwhile in China the government said investment and factory output fell to its slowest pace in almost a year. Investors have been fearful that as China slams on the brakes to slow down its red hot economy it might go too far. Now that China is seeing success in their efforts to slow down their economy the world worries that the pullback will affect earnings for companies around the globe. The Hong Kong Hang Seng index lost -0.8% but the Shanghai index managed a +0.47% gain.

Wednesday saw painful declines in European stocks. The major indices posted their biggest one-day drop in six weeks and closed at three-week lows. Disappointment in the U.S. Fed's choice of actions on Tuesday was combined with worrisome comments from the Bank of England today. The BoE said the economic rebound in the U.K. was "highly uncertain" and the central bank might need to produce more stimulus and more quantitative easing. Exacerbating the bearish comments was a sharp drop in Britain's July consumer confidence index, which fell 7 points to 56. The flight to safety is also evident in the German bond market with the yield on the 10-year bund falling to 2.43%, the lowest level since 1989. At the end of the day the English FTSE lost -2.4%. The German DAX lost -2.1% and the French CAC-40 fell -2.7%.

The Commerce Department's report on U.S. trade for June was a market-moving event this morning. It was widely expected that the trade gap would worsen but no one expected the trade deficit widen to $49.9 billion. This was an 18.8% jump from May to June. Sales of American exports fell -1.3% to $150.5 billion while imports rose +3% to $200.3 billion. The problem here is the impact on GDP estimates. The trade gap is so much worse than expected that the U.S. estimates on Q2 GDP growth will probably get revised from an already disappointing +2.4% growth to +1.3%. This could spark a flurry of downgrades as Wall Street firms reduce their expectations for growth in the second half of 2010. The Commerce Department will release its revised Q2 GDP estimates on Friday, August 27th.

The U.S. Treasury Department was making headlines and not for the $24 billion auction of 10-year bonds. Just one day after Congress passed and President Obama signed into law the $26 billion jobs bill the Treasury said July's budget deficit rose to $165 billion. Thus far, for the 2010 fiscal year, U.S. government revenues are up 0.7% over 2009 levels at $1.75 trillion. Yet government spending is up to $2.92 trillion. That's actually down -2.8% from a year ago. Currently the Obama administration expects the 2010 deficit to hit a record-breaking $1.47 trillion.

President Obama has not been very successful in his attempts to slow down the tide of foreclosures. The latest plan involves the Treasury providing $3 billion to unemployed homeowners. I hate the idea of people losing their homes and I certainly don't want to argue politics but this seems to be delaying the inevitable. This morning the Treasury Department said it would provide $2 billion to 17 states that have the worst unemployment levels. The remaining $1 billion would be given to the Department of Housing and Urban Development for a new program that provides zero-percent interest rate loans up to $50,000 for up to 24 months. Part of the money to fund this comes from the $700 billion Wall Street bailout that has been returned to the Treasury. As yet there are no estimates on how many homeowners this might help. Without knowing the details it certainly seems like the government is trying to push the foreclosure problem down the road until either housing values rebound or jobs rebound.

Government agencies were also in the news as regulators reported on a review of the May 6th, 2010 "flash crash" where the Dow Jones Industrial Average lost more than 700 points in just a few minutes. There has been a number of changes since the May 6th event, most notably trading curbs on individual stocks, but in spite of the changes put in place by the SEC and the exchanges we remain at risk. After questioning industry analysts and insiders over the still not fully understood market breakdown CFTC Commissioner Michael Dun said not only can the crash happen again, several of the people the panel questioned believe it will happen again. Another follow up report is expected in September and the advisory committee will likely make recommendations in October.

Earnings reports continue to trickle in. Today's biggest headline in corporate earnings was technology giant Cisco Systems (CSCO). Wall Street was looking for a profit of 42 cents a share on revenues of $10.88 billion. The company beat by a penny with 43 cents a share on revenues of only $10.8 billion. CSCO is the major player when it comes to IT spending on routers and switches for Internet traffic and networking. Their results are a reflection of the health of the entire industry. The $10.8 billion in sales was a record-setting pace for CSCO and up +27% from a year ago but it also proves that CSCO and the tech sector is not immune to the global slowdown. Investors are worried that a drop in government spending across the U.S. and around the world could have a negative impact on CSCO.

This afternoon CNBC said that CSCO normally beats estimates by 14%. While the company beat on the bottom line it was a narrow win and the revenue miss was very disappointing for Wall Street. CSCO said orders remain strong with most of their big markets seeing orders up +20% and emerging markets up +35% year over year. Last quarter the company generated $3.2 billion in cash, lifting its cash hoard to $39.9 billion. CEO John Chambers said the company still expects +18% growth this quarter in spite of the cautious attitudes pervading so many of his customers. CSCO lost 2.3% during normal trading and fell another -8% in after hours to $21.85 a share.

Chart of the Cisco Systems (CSCO):

Technically the market looks pretty ugly. It's not very often we see the S&P 500 lose -2.8% in one session. It was a very widespread decline with every sector in the red. Here is a list of some of the worst performers:

-4.8% Banking Index (BIX)
-4.5% Airline Index (XAL)
-4.3% Dow Jones Railroad Index (DJUSRR)
-4.2% Dow Jones Casino Index (DJUSCA)
-4.2% Semiconductor Index (SOX)
-4.2% Dow Jones Transportation Index ($TRAN)
-4.0% Healthcare index (HMO)
-3.8% Cyclicals (CYC)
-3.8% Defense Sector (DFI)
-3.6% Oil Services Index (OSX)
-3.4% Biotech Index (BTK)
-3.0% Oil Index (OIX)
-2.5% Goldminers ETF (GDX)
-2.0% Retail Index (RLX)

We were expecting the market decline with the bear-wedge pattern stalling under resistance. The S&P 500 managed to stop at its 50-dma on Wednesday afternoon. If the market does see an oversold bounce I would expect it to fail in the 1110-1120 zone and short-term traders could use any bounce as a new entry point for bearish positions. Once the S&P 500 breaks the 50-dma we can look for short-term support near 1160, 1140 and the July lows in the 1020-1010 zone. Whether it takes two weeks or six weeks I would expect a retest of the July lows.

Chart of the S&P 500 index:

The NASDAQ doesn't look any better. The index gapped open lower at its 50-dma and then continued to fall from there. This is a very ugly breakdown and while we might see an oversold bounce look for the top of the gap near 2250 to be new overhead resistance. On a short-term basis we can look for support near 2150-2140 near the late May-early June lows. However, I would expect a correction toward the July lows over the next few weeks. We have been warning readers to keep an eye on the SOX semiconductor index. Today that index fell toward significant support in the 330-325 zone. A close under 325 would be very bearish and help lead the NASDAQ lower.

Chart of the NASDAQ index:

Chart of the SOX Semiconductor index:

We like to look at the Russell 2000 small cap index as a measure of fund manager sentiment. The index has broken down under its 50-dma and 200-dma again. It has also closed under the short-term trendline of higher lows. Overall the trend of lower highs and lower lows is back in play.

Chart of the small cap Russell 2000 index:

Looking ahead I don't see a lot of compelling reasons for traders to buy stocks at this time. August and September are traditionally the worst months of the year for stocks. The Q2 earnings season was generally positive but the optimism was short lived, which is exactly what we expected. After weeks and weeks of economic data as evidence of our slowing momentum the Fed just confirmed for us that we are in "soft patch". The double-dip recession camp has lots of ammunition and many are placing odds of a double dip in the U.S at 50%. Europe remains weak and now there are renewed worries that China may be slowing down too fast. I do think there is a chance we'll see a late fall rally higher. However, I would prefer to look for bullish positions on a bounce from the July lows. We may not see that entry point for several more weeks.

-James