- A week where the market tries to catch up with the 5 months of weaker economic data.
- Administration says the jobs report is just a bump on the road of recovery. Actually, jobs, already weak, are now just coming back into line with a double dipping economy.
- Indices closing in on bottom range support as individual leaders hold up just fine.
- Financial stocks suggest more financial woes ahead.
- Two big selloffs tip the balance toward the sellers, but even so the indices are still in their ranges.
- Focus is on the bottom of the range this week. A bounce from here?  A further selloff and then a bounce?  No bounce?  There are only so many possibilities, right?

MARKET SUMMARY

No, Virginia, the weak ADP survey had not built in enough downside for the jobs report.

The sellers in fact did not use up all of their ammo on the Wednesday collapse.  There was not enough selling that day to absorb a second bad jobs report for the week.  When the paltry 54,000 jobs and 9.1% unemployment in May hit the tape there was instantaneous futures selling.  It did not get much better after the open either.  Stocks managed to climb out of the early gap into the noon hour, but never scared positive numbers or even the flat line before they rolled over and closed near session lows with NASDAQ and SP500 just starting to tickle important support.

NASDAQ -1.46%; SP500 -0.97%; DJ30 -0.79%; SP600 -1.56%; SOX -1.85%

The week saw two big downside sessions after a sharp upside move to start the week.  Those two sessions washed away the entirety of the prior week’s gains.  The trigger appeared to be the realization following the ADP report that the economy was in real trouble. 

Five months of ignoring steadily, and of late, rapidly eroding economic data suddenly flashed before investors’ eyes.  The scales fell away and they saw the housing market in a double dip, manufacturing falling towards flat and even negative growth, consumer sentiment diving back to recession levels, weekly jobless claims sporting 400K+ gains the past two months, and yes, monthly jobs reports starting to follow the economic trend back down.  It is as if they tried to get all of the selling they missed out on when they ignored the data decline done this past week. 

Of course, the selling stated long before this week.  Stocks broke to a new rally high in late April, tested, broke upside again, but failed.  No worries.  They set up an ABCD consolidation and started higher with a good bounce.  Just as they got going, that first downside selloff gapped into the picture on 5/23.  Nonplussed, the indices rebounded right back up through Tuesday . . . only to get buzz-sawed Wednesday on the ADP report.  In short, stocks were already managing to snatch defeat from the jaws of victory, not once, not twice, not three times, but now count them at four times in just 5 weeks. 

Even with the quartet of failures capped by Fridays’ gap lower, the indices are still rather easily inside their ranges.  NASDAQ and SP500 are closer, but they still have significant breathing room between the Friday close and good support near the trading range lows.  Moreover, looking at many leadership stocks, they are holding up very nicely given the Wednesday to Friday overall market plunge. 

Some sectors, e.g. small energy stocks and various healthcare sectors, are holding up very well, actually looking good and ready to bounce.   Defensive yes, but growth areas as well and those can make us money.  We have naturally migrated our holdings toward those areas and thus Friday our positions overall held up very well.

There is still the matter of the indices holding their trading ranges, and that is the focus next week.  The sellers are making their play, pushing the indices toward the bottom of their ranges.  The buyers now will show their commitment or lack thereof as the indices test the lower support of their ranges.

MONDAY

The next chapter, more or less, starts Monday.  Stocks spent May and the first week of June selling, or more appropriately, failing in breakouts.  A pair of big downside sessions stalled the last two upside moves and suddenly the indices are down the last five weeks.  Down for over a month but still holding their trading ranges.

Now the indices are near the trading range lows.  There is no question the sellers took charge.  The next big issue is whether they are strong enough to push the indices through support.  Will there be a bounce, a further selloff and bounce, no bounce at all? 

Typically after such a harsh selloff there is a reflex move that bounces stocks back up for at least a test.  Whether it occurs from the Friday close or lower may not make a difference, but from my standpoint a further selloff that scares everyone and even undercuts that February and April intraday low and reverses is the best action.  I really like those false breakdowns.  In any event the indices are close to the bottom of the range, and it is incumbent upon us to be patient and let it show what it is going to do off of that level.  It has been an important fulcrum during the past three months and that makes it important on this test as well.

So what do you do while waiting?  Try as little as possible as long as your positions hold their relative positions, at least with respect to support if there is more selling.  On an undercut of the old support watch for a recovery by the close.  Even if there is a close below the lows there could also be a rebound after that, the old false breakdown.  That is the part where you watch the test of the breakdown: does it stall, is there follow through to the downside?  Too many people jump on the first break.  Rarely is it just a day that makes the difference.  The reaction to that day is often the move that tells the tale.

As noted in the Leadership section, there are many stocks that are still holding up very nicely, using the selling to work on pullbacks and/or bases.  While the overall market doesn’t look great and the pressure is downside, the indices are still in their ranges.  If they hold and bounce whether breaking lower first or not, these more defensive plays can give us upside plays.

After the sharp selling there won’t be many downside plays for now; they have to set up again after the bottom of the range is tested and yields a bounce, or a breakdown and a test of that break fails.

Overall the market is worrisome given the decline in economic data.  That makes this test of the range one of the most important since the bottom of the bear market selling in March 2009.