Overnight we heard from China that their economy was slowly but steadily starting to improve. Nice news, even if it’s not true, thus, their market went higher allowing our futures to rise in sympathy. Our futures stayed higher by roughly half a percent until the market opened for trading. Once it opened it started to slowly, but gradually, trend higher. All seemed perfect until Mr. Bernanke started to speak. He said that economy was growing slightly, but there were concerns about Europe that could become a real problem over time if not dealt with swiftly but those in charge of the Eurozone. He talked about the drag Europe was causing us here at home. He wasn’t upbeat, and he wasn’t downbeat. He was cautious if not a bit on edge.
I think he’s feeling the heat for his having done QE3. He’s probably wondering what’s left to do next if things go downhill from here. His speech caused the market to pare its gains, allowing the Nasdaq to actually go red midday. The Dow held up best by far as the risk trade was off and the fear trade on. So it’s classic behavior causing the Nasdaq to lag while the large caps did best. Safety, safety, and more safety as the day wore on. In the end it was a mixed day, but nothing terrible technically. For now the uptrend remains in place, but it also continues to chop about. The emotion of it all is helping to unwind sentiment some, and it will be interesting to get those new numbers Wednesday morning.
Let’s talk about manufacturing. The ISM Manufacturing Report came in just thirty minutes into the trading day. It was a drop over 51.0. Not a great number, but it’s better than the number from last month that showed contraction, with a reading in the upper 49’s. The market seemed to exhale once this number was reported. It didn’t seem prepared to deal with, yet, another number showing we’re in recession with a sub 50.0 reading. That moment is when the market took its next step higher only to be hit by the Fed later on. But it was good to see the market respond favorably to a report it was dreading. A lot of other bad manufacturing reports lately have been on the poorer side of things, so today was positive from that perspective. I won’t dare say the United States is out of the woods when it comes to growth, but for one month it got a reprieve.
There is still a problem in the market for the short- term. The financials and some large cap tech are doing just fine, but there are two major areas of concern. The transports and the semiconductors are not doing well. They are massively underperforming when they should be leading. If they continue on this path it may be a sign that things are about to take a turn for the overall market, and not in a positive way at all. This could be a turning point in the near future so we have to be on guard for a trend change. The under performance is not just by a little bit. It’s very powerful, and again, it needs to be watched as a potential major red flag for the stock market. The poor showings in these two sectors has been on going now for quite some time. I’ve been waiting to see the reversal but it hasn’t come to this point. It needs to come soon, or the market is going to take a very bad hit. This needs to be on everyone’s radar in the coming days and weeks.
Support on the S&P 500 comes in at 1416. If we start to lose the 50-day exponential moving average, the bears are starting to take over. So that level is really the line in the sand. It doesn’t mean we can’t breach and then recover. The key is no deep close below on confirming volume, or really, any volume for that matter. You just don’t want to lose that level, although doing so with volume digs the nail in a little stronger for the bears. For now, we watch the future behavior of the semiconductors and the transports along with 1416 on the S&P 500 for clues.
Peace,
Jack
