Largest Weekly Decline Since Nov. 2008!

Friday, August 5, 2011
Stock Market Commentary:

Stocks were smacked in the first week of August as fears spread that the global economy and credit in Europe are contracting. It is important to note that the week’s losses were massive in both size and scope and caused serious technical damage across nearly every “risk” asset. Here is a quick list that describes some of the damage we have seen on Wall Street: The major averages are all in negative territory for the year and have sliced below support of their multi-month bases. In the case of the S&P 500 & DJIA, they both violated the neckline of their rather large and ominous head & shoulders topping pattern. Volume behind the decline has been massive which suggests large institutions, not Aunt Mary and Uncle Bob, are behind the selling. The major averages violated both their 50 and 200 day moving average and more worrisome both moving averages have turned “lower.”

Leading stocks are a mixed bag but even the strongest of the strong (i.e. AAPL, LULU, GOOG, AMZN, IBM, CAT, MCD, etc) are beginning to fall. To be clear, the bears remain in control of this market until the major averages close above their longer term 200 DMA line. All near term levels of support are breached for the major averages and the next level of resistance are their respective 200 DMA lines. It is also disconcerting to see other global equity markets getting smacked. For example, Brazil and Italy’s primary stock market are down -25%, and -20% respectively, in 2011. At the end of July, in our institutional note- we said, “it feels like 2008” and this week’s ominous action clearly confirms that view.

Weekly Losses:

For those of you that are interested: As of Thursday’s close:

1.) The Dow Jones Industrial Average Is Down -698.63 pts or -5.75%

2.) The Nasdaq Composite Plunged: -223.97 pts or -8.13%

3.) The S&P 500 Tanked: -92.90 pts or 7.19%

4.) The Russell 2000 Shed: -82.40 pts or -10.34%

All these losses have occurred on very heavy volume, erased the gains for the year, and sent the major averages plunging below several key technical levels. Trade accordingly.

Monday- Wednesday’s Action: Debt Deal Reached But U.S. Economy and E.U. Credit Sputters

Late Sunday night (7/31/11), President Obama announced a bipartisan deal that resolved the long debt saga. Immediately, futures soared nearly 200 points which set a positive tone for Monday’s session. However, the gains were short lived. On Monday, stocks opened higher but fell hard around 10am EST after July’s ISM manufacturing index slid to 50.9 which was the lowest reading since July 2009. July’s reading was below the Street’s average estimate and below June’s reading of 55.3. On the plus side, the reading came in just above the boom/bust level of 50. The July ISM number is the first piece of economic data for the third quarter which bodes poorly for Q3 GDP especially since Q1 and Q2 GDP were such a disappointment. Q2 GDP only rose +1.3% which was below the+1.8% average estimate and Q1 GDP was revised down from +1.9% to +0.4%. Since then, economists have lowered their second half expectations between 2-2.5%.

Stocks were down sharply on Tuesday as investors across the globe were concerned that the global economic recovery may be in jeopardy and credit contraction from Europe may be spreading to Italy and Portugal. The International Council of Shopping Centers said its weekly measure of same store sales at major retail chains slid -0.3% on a weekly basis but rose +4% vs. the same period last year. Both measures fell short of the Street’s estimate for a gain of +0.3% and +4.2%, respectively. The Commerce Department said both spending and income were soft in June. Spending contracted -0.2% which missed estimates for a +0.1% gain. It was also the largest drop in spending since September 2009. The report also showed that personal income rose +0.1% which also missed estimates for a gain of +0.2%.

Before Wednesday’s open, ADP said private payrolls rose +114,000 in July which topped the Street’s estimate of 100,000. After the open, factory orders and the ISM service index both missed estimates. Factory orders slid -0.8% while the ISM service index fell to 52.7 in July from 53.3 in June. This was the latest in a series of weaker-than-expected economic data which suggests the economy may be heading for a double dip recession, or worse (Depression 2.0). It was also interesting to see Ben Bernanke announce that he will be speaking in late August in Jackson Hole WY. That happens to be the 1 year anniversary from when he announced QE2. Legendary bond investor Bill Gross said he expects QE3 to be announced at some point in the near future.

Thursday-Friday’s Action: Sellers Pound Stocks

Before Thursday’s open, a slew of data from Europe renewed fears of a global economic slowdown and the possibility of the euro falling apart. In Europe, both the European Central Bank (ECB) and Bank of England left rates unchanged which was largely expected. The ECB said it will resume buying bonds from debt-stricken nations to help alleviate the pressure. However, that did little to calm investors’ fears. In the U.S., the Labor Department said weekly jobless claims were little changed, falling by -1,000 to a seasonally adjusted 400,000. This was just below the Street’s estimate of 405,000. Before Friday’s open, the Labor Department said U.S. employers added +117,000 new jobs in July which topped the Street’s estimates for +85,000. The unemployment rate slid to +9.1% which is still high but slightly lower than June’s reading of +9.2%. Late on Friday, the Italian government said they will implement reforms to balance their budget which sent stocks into positive territory. However, they are still down sharply for the week.

Market Outlook- Market In A Correction

The latest action in the major averages suggests the market is back in a correction as all the major averages remain below key technical levels. Our longstanding clients/readers know, we like to filter out the noise and focus on what matters most: market action. That said, the recent action suggests caution is paramount at this stage until all the major averages rally back towards their respective 200 DMA lines. If you are looking for specific help navigating this market, please contact us for more information.

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