The Real Reason for Selling

SUMMARY:
- Pundits pick from the reasons causing the selling as the market falls back in its trading range.
- Financial station misdirection: Gold sold because of a possible budget deal. Stocks sold because no possible budget deal. Any wonder why there is confusion out there?
- Durable Goods Orders flop, business purchases as well.
- Fed Beige Book a picture of growing weakness.
- Real reason for selling: pathetically weak economic data and a strong technical pattern.
- What does Wednesday, despite all the hyperbole show?  The stock market is, after all the talk, still in a trading range.

MARKET SUMMARY

Selling continues as indices pretty much give up on a trading range breakout bid, at least on this round.

Futures started lower on word out of the EU that German inflation jumped 2.6%, well more than expected.  Of and of course, earnings here in the US.  Earnings helped jump the indices off of their tests back from the top of the range in early July.  Strong results from IBM, AAPL and others surged stocks right back up near the top of the range, making higher lows and opening the door for a possible breakout from the trading ranges.

That changed this week as earnings turned markedly mixed with as many big misses as big beats.  The mojo was lost and the higher low bounce lost its momentum.  That is not unusual.  At this stage in earnings investors typically ‘get it’ and the news is no longer new.  Stocks lose their momentum, and then it only takes a negative story or two to start them selling.

The negative stories?  Well, there are many possibilities and the popular news media and some on the financial stations are blaming the obvious reason, or should I say, the obvious diversionary reason, the debt debate in DC.  Just today on one station said the reason gold was off today was due to news out of DC that a budget deal was near.  Ten minutes later on the same station we heard that the reason stocks were down Wednesday was because the lack of any substantive budget deal near term in DC.  The irony drips, but so does the BS.

The budget issue definitely garnered more airspace as many pundits that were sanguine about the budget issue suddenly pulled 180′s.  One well-known ‘ranter’ completely switched his position overnight, apparently having talked to someone with a different spin from what he had heard to that point.  This fellow has a history of about faces, explaining them by saying intelligence allows for change.  Of course that presupposes intelligence. . .

Was it a sudden realization that August 2 was next week or that August 2 actually meant something or that there would actually be a default (something the Obama administration has been assuring our creditors would not happen . . . obviously we are going to pay are creditors no matter what happens)?  No.  it was the same story that has kept the market in a trading range since February: the end of the economic ‘recovery’ and the prospect that the US falls back in recession, or as one of my bankers said today, as if we ever really grew out of the great recession.

The real story.

Economic news was terrible once more with durable goods flopping and the Fed Beige Book discussing ‘slowing growth’ in 8 of 12 regions.  The Fed noted that Q2 GDP could ‘compare with’ the 1.9% from Q1.  That is Fed-speak for ‘be ready because the GDP number is lower than Q1.’  It is economics that drive the market because economics drive earnings that drive share prices.  The ONLY reasons the stock market is so high are liquidity from the Fed and the dollar devastation that benefits the large multinationals that export.

The reason unemployment is painfully and seemingly unendingly high and job creation so low is that small businesses are totally neglected, no, actively abused, by the federal government.  A statistic released this week shows that virtually all of the new jobs created since 1977 were from businesses classified as small businesses by the US government.  Not shocking, and thus the poor jobs creation and economic performance here in the US is not shocking either.

Thus, after a nice relief rally in late June to early July, a rally that went further than we thought it would, after stocks bounced in relief on the first round of solid earnings, stocks are selling off once more.  The trading range that has locked stocks up for 6 months still holds sway because the economic activity is still struggling with just part of the economy performing well and enjoying gains.  That is a recipe for a downturn once more in the trading range.  Just look at the small cap SP600 index; it was slaughtered Wednesday.

Indeed most of the indices suffered impressive losses.  Why so heavy? Programs kicked in midday when the indices were unable to rebound through key levels.  When they took over the indices blew out the bottom, resulting in quite significant single-day losses.

NASDAQ -75.17, -2.65%; SP500 -27.05, -2.03%; DJ30 -198.75, -1.59%; SP600 -2.88%; SOX -3.77%.

A real, old-fashioned tail kicking.

THURSDAY

More earnings, more economic data (jobless claims, Pending Home Sales).  The economic data is a warm up for Friday and the first read on Q2 GDP and an important look at Midwest manufacturing (Chicago PMI).  Once again everyone predicted a recovery in manufacturing just in time to see a weak Richmond Fed, the one that started the negative numbers three months back.

Debt discussions, earnings, and more economic data provide fodder for what is mostly a technical move.  Really, say some?  Yes.  The indices bounce nicely in June and early July.  They tested, put in a higher low at the 50 day EMA, and surged upside as earnings started hitting the wire.  The indices put in a good showing but could not reach the top of the range, much more make the breakout.  Now the earnings season is a known quantity, and the economic data has muscled itself back to the fore with some more terrible numbers.  The ‘stimulus’ from earnings is now gone.  That leaves the technical patterns in place to resume.  They are doing just that.

Thus the market is trading back down in its trading range after a failed breakout attempt that started off a higher low.  Add on the intrigue and hype of the debt ceiling and you get some hefty downside prices and volume.  After such a vicious downside session (four in a row on DJ30, three on SP500) it may be ready to try a bounce.  That will not, however change the action as the indices seek the 200 day SMA and likely the bottom of the trading ranges once more.  Then the next test will occur, i.e. if the range can hold in light of all of the negative economic data.

The wild card: a debt deal.  That won’t cure the economic ills but it will provide a positive respite as did the initial earnings from IBM, AAPL, etc.  The market can bounce significantly on that news but the odds of it being a game-changer are low.  Why?  Because it has played a small role until basically the Wednesday session.  Thus as soon as the deal is done and a bounce occurs, it fizzles and the indices are again banging around in their ranges, trying to figure out if the economic data is just good enough to help the exporters and thus keep the indices inside the ranges.

Jon Johnson
Stock Splits & IH Alerts, Editor
InvestmentHouse.com