On Friday, the Dow fell for the seventh consecutive day — the longest losing streak since Oct. 10, 2008. It also ended its worst week since the “flash crash” week of May 6, falling 4.5%.

The Dow is now off 31% from its 2007 high and, according to the Wall Street Journal, of 89 nations, the United States (measured by the Dow) ranks 40th, Japan is ranked 65th, and the UK is 36th. The best-performing developed market is Canada, which is still 22% below its high, and is helped by demand for investment exposed to natural resources. Only Venezuela, Columbia and Chile are above their 2007 highs.

A sour jobs report is blamed for Friday’s decline. The headline unemployment rate eased back to 9.5% from 9.7%, but that was due to a contraction in the labor force. Non-farm payrolls for June fell by 125,000 where 100,000 was expected. 

Anxiety over the economy has been the chief reason for the market’s decline, and the jobs numbers, plus a fall in factory orders, added to the fear factor. Factory orders for May fell 1.4% versus an expected decline of 1%.

The U.S. economic numbers benefited the euro, which rose to $1.2550 against the dollar versus $1.2386 the week before. 

At the close, the Dow Jones Industrial Average was off 46 points to 9,686, the S&P 500 fell 5 points to 1,023, and the Nasdaq was off 10 points to 2,092. 

The NYSE traded 1.1 billion shares, and decliners led advancers by 1.4-to-1. The Nasdaq traded 516 million shares with decliners ahead by 1.76-to-1.

Also on Friday, crude oil for August delivery fell 81 cents to $72.14 a barrel, and the Energy Select Sector SPDR (NYSE: XLE) closed at $49.38, off 12 cents. On Monday, July 5, the August crude oil contract traded 22 cents higher at $72.36 a barrel. 

On Friday, August gold rose $1 to settle at $1,207.70 per ounce, and the PHLX Gold/Silver Sector Index (NASDAQ: XAU) fell 12 points to 169.76. 

What the Markets Are Saying

For those who may have missed Friday’s Daily Market Outlook due to the holiday, it may be helpful to briefly review the evidence of a change in the long-term trend of the stock market to bearish:

1. The broad-based NYSE Composite has executed a death cross (50-day moving average crossing down through the 200-day moving average).

2. The other major indices are just a session or two away from the same signal. And many are forming a “horn” or “broadening top” — an unusual but highly accurate formation most often seen at market tops (source: Technical Analysis of Stock Trends by Edwards and Magee).

3. The Dow Industrials, Dow Transports and Dow Utilities have a pattern of lower highs and lower lows for a Dow bear market confirmation.

4. Finally, the S&P 12-month moving average has been decisively penetrated by June’s falling prices, which was triggered on the final day of the month.

On Friday, the S&P 500 executed a “death cross” as the 50-day moving average closed at 1,111.64 which is lower than the 200-day moving average at 1,112.18. Even though the index has not yet met its head-and-shoulders trigger of 3% at 1,009, the death cross is enough to conclude that it is in a downtrend. A further move below 1,009 only serves to provide a mark from which we can calculate a target for the breakdown. And the current target is 860 to 883, or about 14.8% lower than Friday’s close. 

The sentiment indicators, like the AAII Sentiment Survey with bulls at just 24.68%, are now oversold. And the internal indicators are oversold, as well. There is little purpose in listing each, but the assessment is that virtually all of our indicators, both internal and sentiment, are grossly oversold and are telling us that despite the gloomy outlook, the market is due for a reaction rally or “dead-cat bounce.”  

Traders should be cautious going into short positions at this level. And those who still have stocks to sell will want to wait for a technical bounce before offloading more shares. A strong reactive bounce could take the S&P up just under its 20-day moving average now at 1,077, but the immediate target is the breakdown line at 1,040.

Tomorrow we’ll discuss the length of time of the average bear market and why this bear could expire as a cub.

Today’s Trading Landscape

There are no earnings to be reported today.

Economic report due: ISM non-manufacturing index (the consensus expects 55).

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

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