Just as the Dow Jones Industrial Average (DJI) turned positive for the year, reality in the form of a pair of poor economic reports crushed the index as it turned in its worst day in a month.
The report that caused the most disruption was the New York Federal Reserve Bank’s Empire State Manufacturing Index, which declined to -9.41 from -4.55 in May. The report showed that new orders remained weak and shipments declined sharply. That was followed by the National Association of Home Builders housing market index, which in June fell as a direct result of higher mortgage rates.
The U.S. Dollar Index jumped 1.2%, and commodities fell with precious metals and oil being hardest hit. Materials stocks were off 3.5%, steel stocks were pounded for a loss of 4.8%, and metals and mining stocks fell 5.8%.
Profit-taking in the emerging markets drove those markets lower. And Europe and Asia fell sharply following a weekend meeting of the eight global economic powers during which discussions of unwinding the recent fiscal stimuli took center stage.
At the close, the Dow was down 187 points to 8,612, the S&P 500 (SPX) fell 22 points to 924, and Nasdaq (NASD) was down 42 points to 1,816. The NYSE traded 1.1 billion shares, and trading was also light on Nasdaq with just 676 million shares traded. Decliners were ahead of advancers by more than 6-to-1 on both exchanges.
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July crude oil fell $1.42 to $70.62 a barrel, and the Energy Select Sector SPDR (XLE) closed at $52.09, off $1.42. August gold fell $13.20 with the final fix at $927.50, and the PHLX Gold/Silver Index (XAU) fell to $139.90, off $5.22. The loss in both commodities was attributed to a stronger U.S. dollar and optimism about its status as the world’s reserve currency. (Learn how profit no matter which direction the dollar is headed with dollar ETFs.)
What the Markets Are Saying
Yesterday’s selling, though relatively small in terms of total points, could have a negative impact for several weeks. The turning aside from the June highs at around 950 has broken the near-term support at 925, and confirms that the new high on June 11 was a failed breakout. And failed breakouts often lead to reactive sell-offs that can quickly take back all of the gains of the prior short-term advance.
Let’s put some numbers to this: The failed breakout will likely take back not only the advance from 930 to 950, but also the gains made from 880 to 930. The next support is at 880, which is just under the 50-day moving average.
But that’s not the worst of it …
Nasdaq suffered a serious blow as it broke down from a small channel uptrend with such violence that it now rests lower than the close on June 1. Just under yesterday’s close is a breakaway gap at 1,774, which is the beginning of support that ranges down to about 1,675.
It is possible that we could have a reflex rally today following yesterday’s decline. If we get it, use it to unload any recently unprofitable positions. Also, this is quadruple witching week — on Thursday and Friday June options for futures, stocks, commodities and indices all expire, providing an increased level of volatility.
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And, as if to flash a warning of the above, the CBOE Volatility Index (VIX) gapped up 2.66 points to 30.81. This and yesterday’s tape action now provide convincing evidence of a non-confirmation breakout of Nasdaq and the Russell 2000 (RUT), and tell us that more base building is needed before the broad market leaps to new highs.
Today’s Trading Landscape
Earnings to be reported include: Adobe Systems (ADBE), A-Power Energy Generation Systems Ltd. (APWR), Best Buy (BBY), FactSet Research Systems (FDS), MTS Medication Technologies (MTSI) and Smithfield Foods (SFD).
Economic reports due: ICSC chain store sales index for June 13, May housing starts (the consensus expects +4.8%), Redbook Retail Sales Index for June 13, May Producer Price Index (the consensus expects +0.6%), May core PPI, ex-food and energy (the consensus expects +0.1%), May industrial production (the consensus expects -1.1%), May capacity utilization (the consensus expects 68.3%), June 1 API oil industry report, and ABC/Washington Post Consumer Confidence for June 13.
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Sam Collins is a registered, fee-based portfolio manager who may be contacted at samailc@cox.net. You can also check out an archive of his most recent market outlooks.
