Americans may have been in a festive mood as they looked forward to 4th of July celebrations, but at Broad and Wall streets, home of the NYSE, there could just as well have been black crape hanging rather than red, white and blue.
On Thursday, a very disappointing jobs report that drove the unemployment rate to 9.5% resulted in a sell-off. And even though the volume was the lightest of the year, the S&P 500 (SPX) closed under the psychologically important 900 line.
The loss of 467,000 jobs last month drove the unemployment rate to the highest in 25 years. Analysts had expected no more than 365,000 job losses. On top of that, Reuters reported that a White House spokesman said we can now expect the unemployment rate to climb to 10% in the next two to three months.
Financial stocks were again some of the worst performers following a poor showing on Wednesday. Both financials and energy stocks were off 3.7%, energy being impacted by a fall in the price of crude oil futures.
Even a favorable factory orders report that showed an increase of 1.22% couldn’t overcome the impact of the jobs numbers.
At the close, the Dow Jones Industrial Average (DJI) fell 223 points to 8,280, the S&P 500 lost 27 points to 896, and Nasdaq (NASD) lost 49 points to 1,797.
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Just more than 700 million shares traded on the NYSE, and about 500 million on Nasdaq. On both exchanges decliners were ahead of advancers by 6-to-1.
For the shortened week, the Dow fell 1.9%, the S&P 500 was off 2.4%, and Nasdaq lost 2.3%.
Oil futures fell almost 4% on Thursday, with the August crude oil contract falling $2.58 to $66.73 a barrel. The lack of confidence in the economy was blamed for the tumble, and the Energy Select Sector SPDR (XLE) fell $1.93 to $46.16. The XLE’s fall broke a double-bottom with the next support at $43.
August gold fell $9.80 to $931.50 an ounce, and the PHLX Gold/Silver Index (XAU) closed at $140, off $4.33.
What the Markets Are Saying
With such low volume, I hesitate to call Thursday’s tape action a sell-off. But whatever it was, it put the bulls on the defensive and increases the possibility that the much-discussed head-and-shoulders formation might turn into the real thing.
One of the most important characteristics of this formidable chart formation is volume. Ideally volume should be highest on the left shoulder and lowest on the right.
The left shoulder of the current pattern began on May 4, and during the next 10 trading sessions, volume on the NYSE averaged about 1.8 billion shares. This declined to an average of about 1.55 billion from June 1 to June 12 (the head), to the very low volume numbers in late June, culminating in two of the lowest volume days of the year in the last seven trading sessions (part of a possible right shoulder).
What’s next?
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According to Technical Analysis of Stock Trends by Edwards and Magee, the final part of the puzzle needed to confirm a head-and-shoulders formation is the breaking of a “neckline” by a “decisive margin.” The neckline for the Dow is at 8,260 and the S&P 500 is 888.
We are now at the stage where it will be anticipated by some that the neckline will be broken — but that is a dangerous assumption Even at this stage about 20% of the time the break fails and prices trend sideways for an extended time and then move higher.
A decisive break is a break of about 3% of the price level at the neckline. For the Dow that is 248 points, or 8,012, and for the S&P 500 it is 27 points, or 861. If these breaks occur, the minimum downside targets are Dow 7,620 and S&P 500 820.
Today’s Trading Landscape
There are no significant earnings to be reported today and only one report, the June ISM non-manufacturing sector index (the consensus expects 46).
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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.
