With Q2 earnings winding down, investors are focusing on economic reports, so a pair of high-profile reports that missed their targets resulted in a nasty day for stocks. A negative jobless claims report sent stocks sharply lower yesterday, and talk of an extended recession, or “double dip,” was renewed following the worst Philadelphia Fed index reading in more than a year.

Unemployment claims rose 12,000 to 500,000 for the week ended Aug. 14, for the highest reading since Nov. 14, 2009. Claims were expected to come in at minus 4,000, so the big increase was an unexpected blow to the market. 

The August Philly Fed index reading came in at -7.7 instead of an expected 7.5. It was the worst number for the index in more than a year, and added to the already heightened concern, which led to accelerated selling.

Technology stocks, which had been acting poorly earlier in the week, suffered just a mild decline due to the takeover of McAfee, Inc. (NYSE: MFE) by Intel Corporation (NASDAQ: INTC). News of the buyout spurred interest in other software companies, but the buying  appeared to have little impact on other sectors.

Despite the negative economic reports, the U.S. dollar gained versus the euro with the euro at around $1.2817, down from $1.2859. The yield on the 10-year Treasury note fell to 2.58%.

At the close, the Dow Jones Industrial Average fell 144 points to 10,271, the S&P 500 lost 19 points to 1,076, and the Nasdaq was off 37 points to 2,179. 

The NYSE traded just under 1.1 billion shares with decliners ahead of advancers by 3.7-to-1. The Nasdaq exchanged 644 million shares, and decliners there were ahead by over 4-to-1.

Crude oil for September delivery fell 99 cents to $74.43 a barrel, and the Energy Select Sector SPDR (NYSE: XLE) fell 87 cents, closing at $52.84. 

December Gold rose $4 to settle at $1,235.40 an ounce, but the PHLX Gold/Silver Sector Index (NASDAQ: XAU) lost 1.55 points, closing at 179.29.

What the Markets Are Saying

Sellers have again taken charge of the markets since the S&P 500 has been incapable of attacking the psychologically important 1,100 chart line. And yesterday, despite some interest in the tech sector, it even turned down from its 50-day moving average. This double failure means that the bulls are in jeopardy of a total breakdown as a major support zone from 1,040 to 1,057 is now within easy reach.

Yesterday’s selling also turned the internal indicators down just as it looked like they might issue a short-term trading buy signal. Instead, the stochastic turned decidedly away from the signal, and both the momentum and Moving Average Convergence/Divergence, (MACD) indicators fell more deeply into the oversold area. 

The Nasdaq is still the most vulnerable of the major indices even though Tuesday’s rally closed the last of two gaps at 2,198 to 2,205. The other gap at 2,262 to 2,237 remains open and looks suspiciously like a downside breakaway, which may not be immediately closed. In fact, gaps like this one often are the forerunner of a break to new lows. 

With the major indices all below their respective 20-, 50- and 200-day moving averages, and downside volume picking up, the bear case has been made considerably stronger. Even though the trading ranges of the indices are still intact and buyers could hold prices above total breakdown levels, investors would be wise to stand aside and once again wait for Mr. Market to tell you his future direction. This is no time for wild bullish speculation or even for heavy shorting since a major support zone is now very close. The patient investor can gain a huge advantage by doing nothing.

Today’s Trading Landscape

Earnings to be reported before the opening include: Ann Taylor, Corinthian Colleges, Hibbett Sports, Hormel Foods and Kirklands.

There are no significant economic reports due today.

If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.

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