Equities were hit hard in early trading on Friday after the July employment report came in well below expectations: The economy lost another 131,000 jobs, worse than the consensus estimate of a 70,000 loss. The bulls decided it was time to pull in their horns and shares plunged.
The S&P 500 was down as much as 1.7%. The Russell 2000 was off by 2.3%. The only asset class that found buyers was gold and bonds, with the Gold SPDR (NYSE: GLD) gaining as much as 1.2%.
Based on short-term technical indicators, the decline came right on schedule.
Breadth continues to narrow as stocks reached overbought territory earlier this week. Various indicators, from price stochastics to the percent of stocks above their 10-day moving average, suggested a brief pullback is in order.
My favored measure of NYSE breadth has formed a negative divergence with price over the last few days — a formation that presaged stock market pullbacks in June and July.
Total volume has also been on the wane, which is a sign of investor complacency normally seen near market tops. Trading activity in the PowerShares Nasdaq QQQ Trust (NASDAQ: QQQQ) has dropped to levels not seen since the Christmas and Thanksgiving holidays. It’s even dropped below the levels seen around the July 4 weekend. In the chart above, you can see how volume dropped to similar levels as the market was topping in mid-April.
Over the medium-term, the situation still looks good. The momentum the stock market has built off of its July low should provide the impetus needed to push through overhead resistance and test the early May highs. So if you have new capital to put to work, hold off for now until we get a short-term oversold condition. I’ll let you know when the time is right. And when the turn happens, look for small cap stocks in the
iShares Russell 2000 (NYSE: IWM) to reassert some relative strength.
26 Broken Stocks to Sell Now. There’s a long list of companies that have jumped off their lows but are still trading at dirt-cheap prices. But BEWARE: these bargain stocks aren’t just cheap, they’re broken. Get their names here or risk losing your shirt.
