Sam Collins

Bears are Back

by Sam Collins   09/05/08

For the past couple of days, the reason for the market's selling was faltering foreign economies and inflation.

But yesterday, the concern turned to the domestic markets when, before the opening, the American Data Processing (ADP) Employment Report showed that August payrolls fell by 33,000. That figure was 3,000 more than expected, and was preceded by a report from Boeing (BA) that a strike against the big aerospace company was imminent.

A profit warning from farm equipment maker Terex (TEX), off 19.65%, drove the much larger firm Caterpillar (CAT) down 5.6%.

Financial stocks also weakened on reports that Merrill Lynch (MER), down 21.99%, and Lehman Bros. (LEH), off 10.45%, were having trouble selling assets because of arguments over the correct prices. The financials were among the worst performers as a group, off 2.4%.

Stocks had a mini-rally just after the Institute for Supply Management's (ISM) report that the nonmanufacturing index rose to 50.6% from 49.5%, and the Labor Department's report that the productivity of U.S. nonfarm businesses was revised higher in Q2 to 4.3% from 2.2%.

But following the release of lower sales by the retail group, stocks headed down for the worst day since July. Limited Brands (LTD), Pacific Sunwear (PSUN), Abercrombie & Fitch (ANF) and Gap (GPS) all had substantial declines in August same-store sales. Even a positive report from giant retailer Wal-Mart (WMT) failed to turn the tide.

At the close, the Dow Jones Industrial Average (DJI) was down 345 points at 11,188, the S&P 500 (SPX) fell 38 points to 1,237 and the Nasdaq (NASD) lost 75 points, closing at 2,259.

Volume on the New York Stock Exchange topped 1.3 billion shares, with decliners ahead of advancers by 5-to-1. The Nasdaq traded 960 million shares, with decliners there ahead by slightly less than 5-to-1.

October crude oil fell $1.46 to $107.89, and the Amex Energy SPDR (XLE) fell $1.58, closing at $68.70.

The December gold contract fell $5 to close at $803.20 following an earlier run-up to $819.50 which flashed another reversal for gold. The PHLX Gold Silver Index (XAU) closed at $128.83, down $5.63.

What the Markets Are Saying

After almost two months of trading in a very narrow range, the major indices broke in a frenzy of selling. This is the test of the lows that we've been waiting for and, this time, it looks like the momentum is in favor of the bears.

Several key indices broke to new bear-market lows yesterday, including the important NYSE Composite (NYA) and the Philly Semiconductor Index (SOX). Even the vaunted Dow Jones Utility Index (DJU) fell to a new intraday and closing low.

Regarding the Dow Utilities: The breakdown appears to confirm a head-and-shoulders formation with an objective of 460, which would take the index all the way back to prices not seen since 2005.

But I say "appears to confirm" because a clear hike in volume would be more convincing than the sub-1.4 billion-share days in the past six weeks, and yesterday's close is so close to the neckline as to be problematic. We should know very soon if the selling in these major indices will attract the volume necessary to confirm that a major breakdown has occurred.

The sentiment indicators are telling us little as the Association of American Individual Investors (AAII) Sentiment Survey is now neutral, with 37.04% bullish and 43.21% bearish.

Other sentiment numbers are becoming more bearish but not extremely so. Further, the CBOE Volatility Index (VIX) is heading back up, closing yesterday at 23.97, up from under 19 just six days ago. At the low of July 15, it registered above 30.

Virtually all of our internal indicators are now slightly oversold and in negative territory which means that they could go lower.

On Wednesday, I said that the defense is on the field again. That means that no new long positions (except in some energy stocks and a few high-yielding financials -- something I'll explain in-depth next week) should be initiated.

Long-term investors should be increasing their cash levels, and traders can jump on shorts or Exchange-Traded Contra-Funds (ETFs).

Today's Trading Landscape

Earnings to be reported today include Aceto (ACET), National Semiconductor (NSM) and Sycamore Networks (SCMR).

With regard to economic reports, the August nonfarm payrolls (the consensus expects negative 75,000) and the August unemployment rate (the consensus expects 5.8%) are due today.

Today the focus will be on the jobs report -- a positive surprise could lead to a rally but if the report is worse, look for another round of selling.

---

Get Sam Collins' Daily Trader's Alert e-mailed straight to your inbox each morning before the opening bell absolutely FREE!

In addition to getting instant access to his Daily Market Outlook, you'll also receive, in the same e-mail, his Trade of the Day so you can start your day off right by positioning yourself for profits!

Click here today to sign up today for Sam's FREE Daily Trader's Alert!

Sam Collins can be reached directly at samailc@cox.net. You can also check out an archive of some of his most recent market outlooks by clicking here.