Today's events which moved the market lower in an unrelenting fashion. The negative tone began pre-market.
1) Pre-market-ADP employment plunges. The previous print is revised lower; the current print misses consensus by-78%. A 6 month trend of gains in the Goods Producing sector is broken, Manufacturing broke a 7 month trend of gains, the Service sector continued with 17 months of consecutive gains. Construction which has been pointed out in my sector analysis as turning very bearish, completely erased April's gains. Since the 2007 top in construction, the industry has lost over 2.1 million jobs. The horrendous print in ADP cast a very dark cloud over Non-Farm Payrolls.
Pre-Market Wall Street firms move quickly to cut their expectations for Non-Farm Payrolls.
2) Noted economist John Taylor whose work, albeit misunderstood, has been influential in the Fed's economic policy posts his belief that the Fed Funds rate should be 1% and that move should start soon. This would be an increase of 75 to nearly 100 basis points from the current "ZIRP" or nearly 0% to 1/4 % current Fed Funds rate. This is double what the Fed's own Kockerlakota has been floating in speeches over the last few weeks, advocating a 50 basis point hike. Around the same time, GLD (gold) goes parabolic gaining 1% in the next 1.5 hours as inflation fears grow, gold is the natural inflation hedge. Taylor goes on to say there's no rationale for QE3, this certainly put the QE "BTD" crowd on edge and likely contributed to the spike in sell side volume.
3) 10 a.m. Manufacturing ISM is released and drops-6.9 points to print at 53.5, a mere 3.5 points away from contraction in the manufacturing sector. The ISM print is the lowest in 12 months. At the current trajectory, the next Manufacturing ISM looks like it will print sub "50" and likely will throw the economy into recession. Commodity prices are still a major factor in manufacturing, despite a lateral trend in commodity prices (looks very much like a top) there has not been any significant decrease over the reporting period in commodity prices. The ISM today followed yesterday's extremely weak Chicago PMI print which showed the biggest drop since the collapse of Lehman Brothers. Today's ISM was taken more seriously following the extremely weak Chicago PMI yesterday and reduces the "hope" that this was a "transitory" print. Again, the market saw heavy sell side volume on the release of the report.
4) About the same time, Goldman Sachs cuts their estimate for Non-Farm Payrolls; talk about being late to the party. I suppose it's not so bad for the average Joe to miss, but hundreds of millions of dollars in Goldman's research provides little more then a knee-jerk reaction. Between the economic evidence of a double dip recession and the fears over inflation (via actual commodity and tangible inflation plus perceived Fed interest rate hikes) once again, gold being the natural hedge to both inflation and falling equity prices sees a move just shy of all time nominal highs. With jobs falling off a cliff, rising interest rates and prices, the prospect of a stagflation looms large. The Fed hasn't helped as they haven't offered anything in the way of a plan forward and their credibility is near zero since QE1/QE2 and just about everything else they have done has done nothing to dent unemployment or move the economy in a positive direction, they've only managed to create higher inflation especially for every day items.
5) At 12:06 the market saw a pickup in volume on a technical breakdown below support on the SPY around $133.30, a level touched twice yesterday at 10:15 and subsequently at 3:05 forming intraday support. The first support and resistance zones are almost always intraday.
6) While I can't find the actual time, even on Moody's website, judging by the jump in the dollar and the decline in the Euro at 2 p.m., I'm guessing that's about the time Moody's Rating Agency downgraded Greece to Caa1 from B1 with a negative outlook. This puts Greek debt into "junk" status, the downgrade also reflects a 50% chance that Greece will default within the rating's 5 year outlook period. All things considered, that' a pretty optimistic outlook. The ratings action effected the market by weakening the Euro, which previously in the day had been trading higher on concerns here in America; how fast the pendulum swings! Downside volume picked up again about a minute later, if in fact 2 p.m. was the release time which I believe it was. At this point concerns not only swung toward Europe, but more importantly the prospect for a second global recession.
7) Another technical breach occurred on heavy volume at 2:30 p.m. today as the SPY broke the $132.50 level. The two reasons $132.50 was significant is first the human mind's attraction to whole numbers (Think about when you shop and an item is $9.99 rather then $10. Although it's only a cent, the retailers don't want your mind gravitating as it tends to do naturally to $10, which sounds more expensive then $9.99 by a disproportionate amount-I learned that in a 2 week sales seminar, I really got my money's worth!) The second reason is because the level first formed at 1:28 p.m. was one of only a handful of intraday support zones that held a test which occurred at 2:15, making the support level seem like a likely level to hold, stops would have piled at $132.50 for both the psychological reason and because of the earlier successful test. Event #6 likely was the catalyst for event #7.
8) Finally the last significant move was another technical event at 3:42 and onward as what seems to be an insignificant intraday support level gave way, in actuality this level coincided with the support/resistance formed on 5/17's daily candle which was a hammer reversal and also 5/23's closing price (Last Monday, the day the market dumped out of the triangle) which became the daily resistance zone until it was broken on 5/25 starting the 4 day bounce.
As for other observations today:
All 30 Dow stocks closed in the red and while the average itself closed down on lower volume, the internal Price/Volume relationship came in with a dominant P'v relationship of close down/ volume up.
The NASDAQ 100 had 94 decliners and only 5 gainers with one posting a 0% return. While the P/V relationship was not dominant, it was heaviest in close down/ volume up.
The Russell 2000 had 1793 decliners, here we did have a dominant Price/Volume relationship of Close Down/ Volume Down; about 70% higher then the next relationship, close down / volume up.
The S&P-500 had a stunning 10 advancers, obviously there were 490 decliners. There was a semi dominant relationship of Close Down / Volume Up (269 vs 221).
Considering the NFP number was most likely discounted today, there's a decent chance that today created a 1 -day oversold event.
There was very little in the way of obvious short term accumulation today. As I mentioned earlier, the best looking short term 3C chart was in the DIA 5 min followed by the QQQ 5 min.
A for the SPY, there was nothing solid and the best looking of a bunch of bad looking charts was to be found at the 15 min timeframe.
I imagine tomorrow will start with some margin selling; if you subscribe to the, "Buy when blood is flowing in the streets" then today was your day.
As I mentioned earlier after looking at 300+ Cats and Dogs charts, the stocks you'd expect to see some of the worst action in today, I was surprised to see by and large and considering their volatility and BETA, they had fairly strong relative performance vs. the market suggesting the C&D rally may not be over. When it is over, usually the market is finished.
I still find it curious that the CME would lower margins on the E-mini contracts during a period of increased volatility. I wonder what the board was thinking today as they watched the market? I'll go out on a limb here and at least float the idea of the possibility of all of those stops being hit today were potentially accumulated. And what if we were to see some massive long positions in the E-minis overnight? Something is certainly out of order when it comes to that particular move on the part of the CME. Its something to consider as we should as a matter of course consider as many possibilities as we can conceive., but just take a look at the ATR over the last two months and email me how you think the CME could possibly look at this chart and come to the conclusion that volatility has decreased and therefore margin requirements should as well?
While we look at a lot of short term charts during the day, I've tried to keep reminding you of how bad this market truly looks. The anticipated move in the SPY to $135+ is really nothing more then a short term tactic, it has nothing to do with the vitality of the market and even a move to $140 on the SPY would not change that at this point. The only possibility this market has to see higher ground on a sustained basis is the introduction of QE3, which seems unlikely, however we can't rule anything out. The theory among those that expect QE3 or hope for it, is that the market will have to suffer through heavy losses to get Bernanke to react. However I think a compelling case can be made that QE has caused more damage to the market then it has done good. The market averages are not the economy and they can't be counted on as a leading indicator when they have been so heavily manipulated through the QE process.
As for the big picture, it's worth reminding you.
I'd still like to see a move in the SPY up to or above the $135 level, but realistically, the intent would be to inspire confidence in the market again, a move like today would take a very bullish move to overcome the perception. However, if we don't get that nice tactical set up, I also want to remind you of were we are now and today's move didn't cause you to miss the bus in any way.
Tomorrow's a new day, most likely a new surprise-how about NFP beats tonight's consensus? Or the market discounted it enough today to ignore it tomorrow? Who knows, but there's always a game in the works.
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