Economic Concerns Once Again Bear Down on the Indexes
Good day! Wednesday's session was a harsh pill to swallow for the bulls, especially on the heels of Tuesday's post-holiday euphoria. Concerns over the dire circumstances underpinning the U.S. economy was once again brought to the foreground with the latest data. Unlike Tuesday, when the market brushed off weak data, the indexes took a beating on Wednesday in the worst single day of selling that the Dow Jones Ind. Average ($DJI) and S&P 500 ($SPX) have seen since June and April, respectively, of last year.
June is typically a difficult month for the market, but this one was off to an even worse start than usual. Historically, the market is flat or down over 70% of the time in June, and tied with the weak data, this one is going to be a struggle as well. The Institute for Supply Management announced that its manufacturing index fell from 60.4 in April to hit 53.5 in May. This was well below analysts' expectations of a reading of 57.6 and was the largest one-month drop since 1984.
The initial jobs data this week was also discouraging. Although Friday's nonfarm payrolls report on Friday will be the most heavily followed, Tuesday's ADP employment report stated that companies added 38,000 jobs in May. Economists were expecting to see growth to the tune of 170,000 positions.
Dow Jones Industrial Average
In housing news, the Mortgage Bankers Association reported that its index of mortgage applications fell nearly 4% last week. Refinancing fell 5.7%.
Meanwhile, construction spending was up slightly by 0.4%, but was revised lower by 1.3% the previous month from a 1.4% gain to a mere 0.1% gain.
The news abroad also failed to offer much cheer. Talks a mere day earlier on providing Greece with even further bail-out funds did not help prevent Moody's from cutting Greece's bond rating on Wednesday further into junk status. The rating cut to Caa1 was brought about due to the increased risk of restructuring its debt, failure to hit budget reform targets, and strong uncertainty over its ability to grow its economy.
Thursday will kick off with last week's initial jobless claims, followed by factory orders for April.
Then comes the doozy: Friday's jobs data. Nonfarm payrolls are expected to increase 175,000, which is not enough to really get this economy on the roll. The recent gains in jobs so far this year has struggled to keep up with the number of new workers entering the jobs market, let alone been enough to make a dent in the nation's staggering unemployment rate.
Also out on Friday is the Institute for Supply Management's nonmanufacturing index for May.
Wednesday's session, due to its sharp losses, was a really nice one for the intraday trend-trader. The first setup took place nearly right out of the open when initial congestion on 1 minute charts broke to the downside. The remainder of the session was followed with a series of 5 minute bear flags of different lengths, but all held the strong five-minute 20-period moving average resistance level. This continued right into the closing bell before the market hit support at previous lows on the 15 minute time frame.
In a single day the market had reclaimed all of the gains it had striven for in the previous week's worth of trading. The earlier lows did hold well, however, as the market finally exhausted itself into afterhours trade and it will likely continue to hold throughout Thursday as well. Although we should expect a narrower range and greater potential for back and forth trade on the five-minute time frame.
The Dow Jones Industrial Average ($DJI) ended the day with a loss of 279.65 points, or 2.22%, and closed at 12,290.14 on Wednesday. The market's extreme about-face left every one of the Dow's thirty index components in the red on Wednesday. The weakest index performers were Caterpillar (CAT) (-4.31%), Alcoa (AA) (-4.28%), Bank of America (BAC) (-4.26%), and United Technologies (UTX) (-3.95%).
The S&P 500 ($SPX) loss of 30.65 points, or 2.28%, and closed at 1,314.55. Only ten of the stocks in the S&P 500 managed to post a gain. The strongest of the ten were Apollo Group (APOL) (+2.63%), MetroPCS Communications (PCS) (+1.40%), and Medco Health Solutions (MHS) (+0.58%). At the other end of the spectrum were Juniper Networks (JNPR) (-9.94%), Regions Financial Corp. (RF) (-7.37%), Monster Worldwide (MWW) (-6.87%), and Sealed Air Corp. (SEE) (-6.69%).
The Nasdaq Composite ($COMPX) ended the session lower by 66.11 points, or 2.33%, on Wednesday and it closed at 2,769.19. Six index components in the Nasdaq-100 managed to post a gain for the day. The top performers were Apollo Group (APOL) (+2.63%), Alexion Pharmaceuticals (ALXN) (+1.52%), and Check Point Software (CHKP) (+1.38%). The largest decliners were Micron Technology (MU) (-6.37%), Research In Motion (RIMM) (-5.95%), Applied Materials (AMAT) (-5.08%), and Sandisk Corp. (SNDK) (-5.07%).
Unless otherwise stated, the index action described in this article relates to the E-mini futures contracts for the respective indices. Actual index action may differ slightly in terms of pattern formation, although the market bias will remain the same.
Toni Hansen is president and co-founder of the Bastiat Group Inc., DBA Trading From Main Street. Toni is one of the most respected technical analysts and traders in the industry. She has been trading and educating new traders, money managers, professional market analysts and traders throughout the boom and bust of the last decade. She has worked in conjunction with some of the world's top financial exchanges. Learn more about Toni Hansen and the educational services she provides through her website at http://www.tonihansen.com.