Market Stats

The market sell-off continued early this morning with new signs the U.S. economic recovery is stumbling. The Dow Jones Industrial Average briefly traded under psychological support at the 10,000 level and the S&P 500 index traded under support near 1040 on very disappointing economic data. The durable goods report and the new home sales data both missed expectations by a wide margin. However, stocks managed to rebound from support with an oversold bounce and ended a four-day losing streak.

Commodities like gold and oil managed to rally in spite of the dollar's strength. The bounce in crude oil futures is a surprise given the weekly inventory data. This morning the EIA said stockpiles rose 4.11 million barrels, the third weekly rise in a row. Economists were only expecting a rise of 200,000 barrels. Oil prices initially fell to a new 11-week low but like stocks, the price of oil delivered an intraday reversal and the commodity closed higher with a +1.2% gain to $72.52 a barrel. Gold was strong from the start and the precious metal rose nearly $8 to $1,241 an ounce, closing at new eight-week highs. Traders' first reaction was to sell the economic news this morning and money poured into the bond market again hitting a new high. Yields, which move opposite bond prices, spiked to new lows. The yield on the 10-year U.S. treasury hit 2.419% but bonds reversed as well and the yield settled at 2.538%.

Stock market weakness has been widespread with declines across the major global indices. The Hong Kong Hang Seng index lost 0.11% but the Chinese Shanghai index lost -2.0%. The Japanese market continues to struggle with a rising currency. The yen hit a nine-year high versus the euro and tagged another new 15-year high against the dollar. A rising yen makes Japanese exports more expensive and the NIKKEI index lost -1.7% on the session. There has been some speculation that Japan might try and intervene in the currency markets soon.

East of the Atlantic there seems to be a tale of two Europes. Yesterday Standard & Poor's lowered their credit rating on Ireland over banking concerns. This news helped push borrowing costs for countries like Ireland and Greece higher today as investors worry over a potential default. Yields on Irish and Greek bonds soared as traders demand more reward for the risk they're taking. The price of credit default swaps in Greece hit new 18-month highs. Yet in Germany it's a different story.

Germany is Europe's largest economy and the country saw a record-setting +2.2% GDP growth last quarter. Last week Bundesbank raised their GDP forecast for Germany to +3%. Today the Ifo Institute announced that their business climate index, a measure of business confidence, marked its fourth monthly gain n a row and hit a new three-year high in August. Economists were expecting a drop to 105.7 but Ifo said their confidence index rose from 106.2 in July to 106.7 in August. Another eurozone surprise was the strength in Portugal's debt sale. The country of Portugal is on the list of troubled economies that investors are worried about and yet the country managed to sell 1.3 billion euros worth of bonds on Wednesday in five and ten year notes. This was up from the original plan to sell 750 million to 1.25 billion euros in debt. At the end of the day the English FTSE index lost -0.75%. The German DAX lost -0.61%.

The major headlines this morning were focused on the New Home sales numbers and the Durable Goods report. Economic data continues to point to a slowing economy, which is fanning the flames for double-dip recession fears. Yesterday investors were disappointed with the existing home sales, where the National Association of Realtors announced that the pace of existing home sales crashed -27% to a new 15-year low in July. This morning the Commerce Department said New Home sales plunged to the lowest level on record. Economists were expecting a pace of 330,000 sales a year. Unfortunately July's sales came in at 276,000. That is a -12.4% drop and the lowest level since records began back in 1963.

Consumers are nervous about their jobs and they're not buying homes in spite of the record-low mortgage rates. Plus new homes are facing stiff competition from the sale of foreclosures and short-sales although you can see from yesterday's existing home sales data that even these distressed properties are not moving very fast. The median price of a home has fallen to $204,000, which is a -4.8% drop from a year ago. All four regions of the country saw sales decline with the biggest drop in the West at -25%. Another worrisome figure is the supply of new homes on the market, which increased from 8 months in June to 9.1 months in July. Not surprisingly the homebuilder confidence index fell to its lowest level since March 2009.

Oddly enough homebuilders rallied on the news presumably on hopes the worst is behind them. They did get a boost from DHR, which garnered an analyst upgrade this morning. Plus, Toll Brothers (TOL) reported earnings that were better than expected prior to the bell. TOL is the largest luxury homebuilder in the U.S. The company delivered earnings of 16 cents a share, which was 30 cents better than expected (analysts were looking for a loss of 14 cents). Revenues of $454.2 million were also significantly better than expected. TOL said the number of homes sold dropped -16% and the number of contracts signed fell -11%. Believe it or not analysts were expecting these figures to be worse. The stock gapped open higher and closed with a +5.8% gain just over $17 and its 50-dma. Rival builders BZH, PHM, RYL, and DHI were all up sharply with gains in the +3.0% to +4.6% range.

Of course we have been warning readers to expect terrible numbers from the real estate market. I am more concerned with the manufacturing data out today. The Commerce Department said orders for durable goods rose just +0.3%. This was the first gain for the durable goods orders in three months but economists were expecting a gain of +3.0%. The gain was fueled by the one industry and that was transportation, which rose +13.1%. If you back out the transportation number then orders for durable goods actually fell -3.8% in July. That's the biggest drop since January 2009. If you drill down even farther you would see that the transportation gains were fueled by the volatile aircraft component, which saw a +75.9% jump in orders. Naturally investors are concerned. If you're worried about another recession we don't want to see orders for durable goods in negative territory.

In other news today the Department of Agriculture said food price inflation was extremely low and poised to rise at its slowest pace since 1992. The government revised their estimates on food inflation from +1.5-2.5% down to +0.5-1.5% for 2010. This was somewhat surprising given the recent rally (new highs) in wheat and pork prices.

Industry insiders are expecting computer maker DELL to raise their bid for 3PAR (NYSE:PAR). The company is in the data storage business with what 3PAR calls its "utility computing". A couple of weeks ago shares of PAR gapped from the $10 level to $18 on news it was being acquired by DELL for $1.15 billion. On Monday shares of PAR gapped from $18 to $26 on news that HPQ had offered a higher bid of $1.6 billion. Now speculation is growing that DELL will make a higher bid and analysts are estimating a final price near $29 a share.

After hours tonight there were a handful of earnings reports. Guess?, JDSU, and JoAnn Stores made headlines. Apparel designer and retailers Guess? (GES) delivered a profit of 72 cents a share. That was 4 cents better than expected. Revenues managed to beat Wall Street's estimates at $577.1 million. GES issued Q3 guidance that was in-line with estimates but the company's 2011 guidance was under expectations. The stock was trading down about -6.4% after hours.

Shares of JDS Uniphase (JDSU) were trading down under support at $10.00 in after hours following its earnings beat. The company reported a profit of 15 cents a share, better than the street's 14 cent estimate. Revenues rose almost 20% to $398.1 million, which was just enough to beat estimates. Traders were selling the news with a spike toward $9.50 but JDSU appears to be paring its losses with a bounce back to $9.90. Shares closed the regular session at $10.22.

JoAnn Stores (JAS) is up about $2 after hours following a better than expected earnings report. JAS reported a profit of 20 cents, which was 18 cents better than expected. Revenues bested estimates at $439.3 million for the quarter. Management gave relatively optimistic guidance and shares look poised to gap open higher tomorrow near resistance at its 200-dma.

Technically the market had reached oversold levels and traders are buying the dip to support (while bears take profits by covering their shorts). The S&P 500 had lost -4% in the last four days and a decline toward support near 1040 was widely anticipated. On a very short-term basis the S&P 500 could easily see an oversold bounce back toward the 1070-1080 zone. There is some short-term resistance at the simple 10-dma near 1075 to give you a clear target. We may want to wait for the next lower high before considering new bearish positions.

Hourly Chart of the S&P 500 index:

Chart of the S&P 500 index:

The NASDAQ Composite dipped toward the 2100 level this morning and rebounded back toward short-term resistance near 2150. The high today was 2148. Technically this index has produced a bullish engulfing (reversal) candlestick pattern but it needs to see confirmation. We can look for a bounce back toward resistance under the 2200 level.

Chart of the NASDAQ index:

Yesterday and today the small cap Russell 2000 index managed to bounce from its July lows. This was the perfect spot to look for support and now that this support level is holding the $RUT could see a rebound back to 620 or its 50-dma closer to 630.

Chart of the Russell 2000 index:

Tomorrow stocks could react to the weekly initial jobless claims. Last week investors were shocked to see weekly claims jump to 500,000. This week economists are looking for initial claims to come in at 485,000. The bigger event will be Friday's Q2 GDP revision. Many expect the government to lower their Q2 GDP growth estimates down from +2.4% to +1.4% there is speculation it could drop to +1.0%.

Speaking of GDP estimates, Nouriel Roubini, the infamous economics professor at NYU, made headlines this afternoon on his Twitter account. Nouriel suspects that Q3 GDP growth will be in the +0.0-to-1.0% range and closer to 0% than +1%. He is concerned about capex spending, which was very healthy in Q2, but appears to have stalled in Q3. Mr. Roubini estimates that our risk of a double-dip recession is greater than 40%.

Roubini wasn't the only analyst sharing their opinion today. Arnaud Mares, with Morgan Stanley, issued a report today highlighting the risks of sovereign debt default. To paraphrase, this Morgan Stanley director believes it's not a matter of if governments will default on their debt but a question of how they will default. The aging populations of the Western world are too great and governments will try and pay back their creditors in devalued currencies or at a lower rate of return. Another analyst, this time at Goldman Sachs, said the parade of disappointing economic data in the U.S. will force the Federal Reserve into a new round of quantitative easing. Jim O'Neill, the Chief Global Economist at Goldman Sachs believes we will see the Fed come out with a new program by October this year.

In summary, the trend is down but stocks were oversold and we're bouncing from support. This bounce could last a couple of days or all of next week but everything could change on Friday if the U.S. Q2 GDP estimates are worse than expected.

-James