Wall Street Market Wrap – Thursday, July 1, 2010

The bad news keeps coming as far as economic reports are concerned and the market responded by dropping for its eighth consecutive trading day.  The Dow Jones Industrial Average lost 41.49 (-0.42%) points to close at 9,732.53 while the S&P 500 lost 3.34 (-0.32%) points to 1,027.37.  The Nasdaq 100 turned in the strongest performance of the day by losing the least, dropping 0.27% (-4.73 points) to 1,734.41.

The bad economic releases for the day started at 7:30 this morning with the Challenger Job-Cut report coming in at 39,358 versus last month’s 38,810 showing a slight increase.  At 8:30 we got the heavyweight number of the day with the weekly initial jobless claims coming in at 472,000 which was above the expected 450,000 and above the range of estimates that were from 445 to 460.

The market actually tried to make a move higher coming out of the open as the past two days large losses of 365 points (DJIA) could be a sign that today’s bad news was already priced in.  At 10 a.m. more bad news erased that theory and started a plunge to a low for the day for the DJIA of 9,622 (-152) by just after 11 a.m.  The Institute for Supply Management’s composite Index was reported at 56.2 at 10 a.m. with the expected number to be at 59.0. 

Also at 10, Construction Spending logged a 0.2% gain and this was good news as a drop of 0.5% was expected.  With the consensus range as wide as -2.0% to +2.7% the variations in this number can be wide.  What hurt this seemingly good news in homes was that at the same time the Pending Home Sales Index came in at 77.6 when the previous month’s level was 110.9.  That is a drop of 30% and bad news for people trying to sell their homes. 

If you are a buyer – you have the deal power and for seller’s the market is still very weak and prices look to be headed lower.  Many attribute this steep drop to the end of the Government’s First Time Home Buyer Tax Credit.  This makes sense to me but as this program causes an economic distortion, the bottom in the market will not be reached, and the recovery will not start, until we let prices go where they need to in order to clear the market.

The DJIA is down almost 7% within the past eight trading days and that means only about 95 trading days until the DJIA hits ZERO (at this rate).  Of course that is a foolish statement so after such a plunge, what stopped the market here?  Looking at the charts, today’s drop was caught by two crossing downtrend lines.  (For more information on how to properly draw trend lines go to www.StockTradingCards.com) 

The thick red line actually dates back to the very top of the market at 14,167 on October 9th of 2007. The thinner red line was drawn from near the peak of the market in 2010.  I run across those that don’t believe in technical analysis and then I see a chart like this and you know why I called to cover short positions I have been recommending for the past eight trading days last night.  It is not a coincidence.  I put out my short covering recommendations late last night and today Bob Pisani and many other of the talking heads on CNBC have been talking about traders short covering today.

The blue line that is rolling over and heading lower is the 50 day exponential moving average with the black line being the 200.  If you have been watching the financial media today they have been calling the crossing of the 50 below the 200 the ‘Death Cross’ but it is really called a ‘Black Cross.’  This is just the media whipping up frenzy with a more ominous name.  If you are a mathematician you know the meaning of the convergence of these two moving averages is that the market is picking up steam to the downside or a ‘second derivative’ of market strength in a sense.  This ‘Black Cross’ has always been viewed as a sign of a bear market and is definitely not good news.  Right now for the DJIA the 50 is at 10,325 and the 200 at 10,229.  Bad news kids, no matter how you slice it.

The two bright spots today came in the Retail sector which actually managed a 1.07% gain and Transportation which gained 0.36%.  The biggest loser was once again finance with Banking losing 1.05% and Insurance dropping 0.72%.  Abercrombie & Fitch (NYSE: ANF) finished second to Ford (NYSE: F) in the S&P 500 with a 3.97% gain to $31.91.  Other top performers in retail were Limited Brands (NYSE: LTD), Ross Stores Inc. (NSDQ: ROST), Family Dollar Stores Inc. (NYSE: FDO) and Urban Outfitters Inc. (NSDQ: URBN).

Gold and gold stocks got hammered as the shiny yellow metal dropped a whopping $45.00 (-3.62%, $1,198.40/ounce, 4:14 p.m.) on strength in the euro.  Traders long gold made a currency move trying to bottom pick a weak euro and sell out of the yellow metal which has run up recently.  While the longer term uptrend line for gold is still intact, today’s drop broke gold down through a shorter term uptrend line and through its 50 day EMA.

Bank of America Corp. (NYSE: BAC) was one of the hardest hit stocks on the market dropping 2.43% to $14.02.  Blockbuster will be de-listed from the New York Stock Exchange as their reverse stock split plan has not been approved.  Speaking of the busting-Block-buster, Netflix Inc. (NSDQ: NFLX) made a nice dragonfly hammer today and is now sitting on top support and the support of its 50 day EMA.  (learn to identify the dragonfly hammer at ww.StockTradingCards.com ) If this market pops tomorrow in reaction to maybe moving too-low-too-fast, Netflix should run higher nicely.

After eight days of selling off and a looming headline Employment Situation number expected before the open tomorrow, is all the bad news priced in?  Estimates are for a loss of 125,000 jobs and the rise from 9.7% to 9.8% for one of the most important numbers in today’s economy.  Has the market been hit hard enough to hold up tomorrow should this number come in above 125 or move higher than 9.8%?

Only time will tell, but I would not be only long stocks – keep some shorts ready and watch your exposure.  It has got ugly and could very easily get a lot worse as all the economic information being released is screaming double-dip.  Heading into a summer holiday weekend I would hope that means a double-dip ice cream cone, but it does not.

July 1, 2010 - 4:30 p.m.