Market Stats

It has been a rough month for the bulls with the S&P 500 index off nearly 9% since the failed rally on June 21st. The selling pressure has been consistent with the index down seven out of the last eight sessions. Yesterday's fears over European banks ability to payback their emergency loans eased somewhat thanks to a better than expected 3-month loan auction by the ECB.

Unfortunately the ADP employment report this morning was significantly worse than expected and portends dour results for the non-farm payroll data on Friday. An afternoon headline that Moody's could downgrade Spain's credit rating again only added to the sour mood. Stocks were flirting with a minor gain most of the day until the last couple of hours. There is some speculation that fund managers did some end of quarter window un-dressing to sell their losers before they have to print quarterly statements.

It's June 30th and thus ends the second quarter of 2010. The stock market rally that began in February peaked in April and it's been a rocky road lower ever since. According to Bloomberg, investors have lost about $7 trillion (with a T) from global equity markets around the world since the April 15th peak. The S&P 500 is down almost -12% for the quarter and off -15% from its April highs. The NASDAQ Composite is down -12% for the quarter and down -16.6% from its April highs. Second quarter results for the DJIA and Russell 2000 are -10% (each) with the Dow Industrials down -12.7% from its April highs and the $RUT down -17.8% from its April highs. This was the worst quarter for U.S. stocks since 2008.

Commodities also suffered their worst quarterly decline since 2008. The combined commodity index fell 11% thanks to big declines in industrial metals and oil. Gold and natural gas managed to outperform the rest of the commodity group with an +11% rally in gold and a +17% rally in natural gas for the quarter. Speaking of commodities the weekly inventory numbers were out this morning. The Energy Information Administration reported that crude oil inventories fell two million barrels while gasoline supplies rose 500,000 barrels marking their first gain in eight weeks. Oil ended the day down 69 cents to $75.25 a barrel. Gold futures closed with a fractional gain at $1,243.20 an ounce.

Asian markets continued to struggle following yesterday's sharp revision for China's leading economic indicators. If you missed it the Conference Board adjusted April's gain from +1.7% to +0.3% suggesting China might be overdoing it with their attempts to slow down their economy. Last week the Japanese NIKKEI index broke through support at 10,000 and the 9,800 level. This week the sell-off continues with the NIKKEI falling -2% today to break key support near the 9,400 level. The Japanese market is off more than 8% from its June 21st peak. The next level of support appears to be the 9,000 level. The Chinese Shanghai index lost more than 1.1% on Wednesday and closed at new lows not seen since April 2009. The Chinese market has broken several support levels and appears to be in free fall. Meanwhile the Hong Kong Hang Seng index lost 0.59% for the session.

Stocks in Europe managed a meager oversold bounce following yesterday's turmoil. Markets were worried that European banks might not be able to pay back the 442 billion euros in emergency loans that come due tomorrow (Thursday). The results from the European Central Bank's short-term three-month loans this morning helped ease concerns. Demand for loans at 1% interest was smaller than expected and light demand suggests banks were not in a cash crunch. News that Moody's put Spain under review for a possible downgrade again did sour investor sentiment. Although one has to wonder why investors would react to this headline. S&P and Fitch have already downgraded Spain's credit rating and the industry has been widely criticized for being late to the party with these evaluations. Looking at the major indices the German DAX index is down 5% from its June 21st peak when it failed at resistance near the 6300 level. The English FTSE has fallen under its May low near 4940. Now that support is broken I don't see any significant support for the FTSE. At the end of the day the DAX gained +0.23% and the FTSE eked out a gain of +0.05%.

Economic data in the U.S. was mixed this morning but the ADP employment numbers overshadowed any growth in the ISM-Chicago report. Economists were expecting the monthly ADP employment report to show a gain of +60,000 jobs in the private sector following last month's reading of +57,000 jobs. Unfortunately ADP said that private companies only added +13,000 jobs in June. This appears to be a very bad omen for Friday's jobs report. Analysts do not have a clear picture for the government's non-farm payroll numbers but the average estimate is for a loss of -110,000 jobs but that includes about -350,000 in lost temporary census jobs. The Friday morning non-farm payrolls report could be a huge surprise either way but odds are growing it will be a big disappointment.

Meanwhile manufacturing in the U.S. is still growing although at a slower pace. The Chicago-area ISM number was released this morning with a drop from 59.7 in May to 59.1 in June. This was in-line with estimates. Figures over 50 indicate growth or expansion and June marked the ninth month of growth in a row. Tomorrow the Institute for Supply Management will release their national ISM figures and economists are predicting a decline toward 59 from 59.7 in May.

Company-specific news was a little sparse today but there were a couple of mergers and earnings report. Biotech firm Celgene (CELG) announced it was buying Abraxis BioScience (ABII) for $2.9 billion in cash and stock. Abraxis' only FDA approved drug is the breast cancer treatment Abraxane but there are hopes this same drug could be used to treat lung, pancreatic, and skin cancers. Shares of CELG fell -4.5% to $50.82 while shares of ABII gapped open higher to close up +21% at $74.20. Elsewhere in the biotech indusry Sanofi-Aventis (SNY) agreed to buy privately held TargeGen for an undisclosed amount.

The Q2 earnings season has not officially begun but we did get results from APOL and SCHN. Apollo Group (APOL) provides educational services for undergraduate, graduate, and doctoral levels. The company reported their Q3 results tonight after the bell and beat estimates. Wall Street was looking for $1.55 a share. APOL delivered $1.74 on revenues that also exceeded expectations. Yet guidance for the next quarter was mixed. Shares are trading lower after hours suggesting the ten-week decline in APOL is not over yet.

It will be interesting to see how the market reacts to Schnitzer Steel's (SCHN) earnings report. The company blew away the estimates. Analysts were looking for a profit of $0.87 a share. SCHN reported $1.43 a share thanks to an +84% jump in revenues. SCHN is heavily involved with recycling scrap metals and steel production. Here's an excerpt from the company's press release: "We delivered our best earnings performance since the downturn began, with improved operating profits in each of our three businesses," said Tamara Lundgren, President and Chief Executive Officer. "Our sales volumes of ferrous metals in the first three quarters of fiscal 2010 have remained near the levels of the boom year of fiscal 2008 and we achieved record third quarter ferrous processing sales volumes, underscoring the long-term strength of the global demand for recycled metals."

Technically the market looks pretty ugly. The last hour sell-off in stocks produced some key breakdowns. The 1040 level was very significant support for the S&P 500 and the index clearly broke this level on Wednesday. Several market pundits are calling this a new sell signal and the herald of a new bear market. Traditionally stocks don't enter a bear market until they're -20% off their highs, for the S&P 500 that would mean a breakdown under 964. The bad news is I think we'll get there!

Chart of the S&P 500 index:

Depending on which method you choose to apply the S&P 500's breakdown today is forecasting a drop toward the 950 area or the 860 level. You will probably hear analysts talk about the bearish head-and-shoulders pattern. This pattern has been building for months and you can find it on several major indices and dozens of stocks. The S&P 500's H&S pattern, now that the neckline is broken, is forecasting a drop toward 860, which is relatively close to the July 2009 lows near 869. This level is also close to the 61.8% Fibonacci retracement of the entire 2009-2010 bounce.

Weekly Chart of the S&P 500 index:

Right now you could easily argue that the S&P 500 is short-term oversold but it can always get more oversold. On a short-term basis we could look for an bounce at 1020 or the 1,000 mark. I suspect the S&P might also bounce near the 950 area since the 50% retracement of the 2009-2010 rally shows up around 942ish. Keep in mind that we will see bounces and they will likely be sharp rebounds but the path of least resistance is down.

The NASDAQ doesn't look much better. The tech-heavy index broke down under its "double bottom" near the 2140 level but there is still potential support at 2100. If that breaks the H&S pattern on the NASDAQ would forecast a drop toward 1700 or lower.

Chart of the NASDAQ index:

The Dow Industrials has fallen toward support near its May 25th low. Odds are this support will not hold. The Dow also has a bearish H&S pattern and a breakdown of the neckline would suggest a drop toward the 8250 area or more likely the July 2009 lows near 8100. A quick glance at the small cap Russell 2000 index shows that small caps have yet to break down under the 600 level but if the trend continues then the Russell 2000 will probably produce a much larger consolidation back toward the 550 area.

Chart of the 10-yr Yield:

Overall investors are in defense-mode. No one wants to own risk. You can see that as money moves into the safety of U.S. bonds. The yield on the 10-year treasury has fallen under 3.0% to close at new 14-month lows. Tomorrow we'll get the National ISM number and unless it's wildly off the mark it shouldn't be much of a market mover. Instead the focus will be on China's PMI number and the PMI data out of Europe. Investors are very concerned that growth has stalled in Europe and that China may have pushed too hard to slow down their economy. If we can get past the rush of PMI data on Thursday then the focus will be on the non-farm payrolls (jobs) report on Friday morning.

Odds are Friday morning will be very volatile and then volume will tail off as traders go home for the long weekend. There is going to be a real temptation for active traders to close their books without any open positions ahead of the three-day holiday since U.S. markets are closed on Monday, July 5th.