- Soft open gives buyers a shot, but the few who venture in are overrun by the sellers.
- Debt deal was playing defense, not offense.
- Geithner admits to a slower economy, doubts a double dip recession.
- Moody’s: US will keep its AAA rating but downgraded on the outlook as more cuts are needed.
- Personal income in line but spending contracts.
- SP500 hits a new post-April low, NASDAQ and DJ30 crash the 200 day SMA
- Seven sessions down, breaking support: ripe for a false breakdown reversal IF investors believe Bernanke will come riding to the rescue.

MARKET SUMMARY

SP500 heads straight to the range bottom. Now it is breakdown in anticipation of a new (or continued?) recession or a rebound in anticipation of or as a result of more Fed stimulus.

I could use a lot of euphemisms and sayings such as “The market sure got a butt-kicking today,” but that does not help too much. I want to cut to the chase and talk about what is going on. There has been a continual parade of bad news. Personal Income and Spending was not as hoped. Spending was down 0.2% versus an anticipated gain. That is just one example in a litany of bad economic news of late.

We are at a crossroads right now. The market has sold seven of the last seven days. SP500 has broken through its June lows and its March closing low. It is down to the bottom of its range. Two things might happen here there could be a third, but it is just a subset of one of the options. There is a fairly well-defined trading range after a solid run from August of 2010. We will either have a breakdown, or this will be a false breakdown that rebounds back up into the range. As for the subset, you have a bounce back up after seven days of selling that rolls back over and sells off. Why are we here? Didn’t we just have a debt deal? That was supposed to calm the markets and make everyone happy. Shouldn’t we be preparing for Santa Claus and bounty to come? No. The debt deal was about playing defense not offense. There was no notion that this would really make the economy turn.

The deficit has not been making the economy go down. It is just a very dangerous, lurking thing that is causing us problems and will continue to grow worse for us. We have to get rid of it, but near term it is not the bogeyman. The bogeyman is the economy, and it is terrible right now. We are heading toward a second recession if you can even say we got out of the first one. There were sure a lot of smoke and mirrors thrown up by the Treasury Department and the Fed. Lots of liquidity pumping up the financial markets, attempting to make everyone feel wealthier.

If the economy is going into a second recession, then the market will start pricing that in. It has been trading in a trading range over the past six months, consolidating the gains accrued from August 2010 through late April/early May 2011. This trading range has a ‘toppier’ look than the base that formed in 2010. There was a selloff, an inverted head and shoulders, and a nice rally. The rally commenced with the Federal Reserve Jackson Hole decision to go with QE3. The market is now at the crossroads because it will either price in a recession or it will believe in a rescue by QE3 now that a debt deal is in.

There is no money for fiscal stimulus from the congressional and executive side of the government. It would be up to the Fed and monetary stimulus in the form of more Quantitative Easing to provide any further stimulative effect to the financial markets. That is what the market has anticipated for the past six months. It did not show up on Tuesday. Rationally, investors were not thinking it would be announced. As the day wore on and the selling became more and more intense, however, (particularly in the last hour) there was more talk about if and when the Fed would show up Quantitative Easing. If it does, the market can likely turn back up and rally into its range and maybe set off a new run to the upside.

That money will be put into the financial markets because there is really no lending ongoing outside of refinancing homes and some high-end commercial lending. That money will go back into the commodities markets and, we will see them run higher and of course inflate all of our prices more. Hopefully the Fed thinks it will inflate our wealth more than prices, we will feel wealthier, spend more, and we will have some demand-driven economic gains. It does not really happen that way in history, but that is where the Fed is.

We have no choice but to let things fall and talk our medicine or try once again to prop things up. That is it in a nutshell. Two choices: The breakdown pricing in another recession/the continuation of the current recession (however I you want to look at it), or a rebound on the anticipation of or the announcement of some sort of QE3 or other Fed stimulus that the market believes will have some net positive effect.

Even though SP500 broke below its March closing low, you still have to watch for that old faithful false breakdown. It has become a staple in the market over the past couple of years. Just when it looks like the market has rolled over and died, the market turns back up. All of us here in the office hated selling positions today after seven days to the downside and this massive day lower on Tuesday. We all hated doing that because we will most likely get a rebound. It will either be a false breakdown and rebound that runs back up to the top of the range or close to it, or it will bounce up toward maybe the June lows or the 200 day EMA, stall, and roll over.

In any event, you get a bounce. It is one of those situations where if the market is pricing in another recession, this seven-day decline might look like nothing. Just as we have seen the December through late-February run. That was an impressive move that took almost three months to take place. We can see selling straight back down to that level without taking one breather. You cannot just wait for the next bounce. When we saw this happening and saw key stocks breaking support and not recovering it, we had to bite the bullet on some of these and take them off. We had to take some positions we have had for quite some time and that were still doing fairly well. We just did not want to get burned on them and have them turn over completely. As loathe as we were to do it, we had to close positions on a day where the market broke its prior low, knowing that it could the operative word is “could” show us a false breakdown and reverse.

I am not looking at too many downside plays for tomorrow’s session. We are letting the ones we have run such as SDS and LLL. After this kind of decline, it is not a great risk/reward to enter new downside plays. We are going to look at other upside plays to maybe take advantage of a potential false breakdown that reverses back to the upside.

There was not a lot of great news on the day. Personal income was in line at 0.1%, which was less than the 0.2% gain in May. That was revised down from 0.3%. Personal spending was the one that scared everybody at -0.2%. That was the biggest decline in two years. 0.1% gain was expected, and the prior month was revised to +0.1% from flat. It was a big disappointment to see spending declining. People are saving a bit more. It is not from some great belief that they should be saving; it is because they are damn scared and don’t want to spend money. That is what confidence, the consumer credit reports, and this spending report are telling us.

On Good Morning America, or some other equally ridiculous morning show, Treasury Secretary Timothy Giethner admitted that the economy was slower than they had thought. He said that confidence was damaged by the “spectacle” in Washington. That really was not a spectacle; that is just the way we have always done things. We talk it out. Each side makes its statements and comments and impassioned pleas, and then we ultimately have to make a deal. Everyone gets pushed to the wall. He did say we can be sure of a double-dip recession when he was questioned on it. While the textbooks might say we got out of the recession, most people in the small business area feel we never left the first recession.

Adding to the angst, on top of everything else there was a downgrade of Wal-Mart. Things have to be tough in a recession and when the economy is declining for seven months if you feel the need to downgrade Wal-Mart. It is the king of the discount retailers. It does not look good in its channel checks. I know there are not that many people going out to Tiffany’s and other high-end stores that are taking away from Wal-Mart. Things must really be bad out there if Wal-Mart is getting pinched. All of this led to an ugly selloff in the stock market.

NASDAQ, -2.75%; SP500, -2.56%; Dow, -2.2%; SP600, -3%; SOX,-3%; NASDAQ 100, -2.6%.

They tried to rally early. The buyers stepped into a softer open, but then they were overrun, and it was a steady stream of lower highs and lower lows that crescendoed in the last hour of the day. That crescendo lower had the smell of a capitulation selloff. Again, we were loathe to get out of our positions, but you just have to get out when they are breaking down and not recovering. We could double these losses in a week if the market believes we are going into another recession.

WEDNESDAY

Wednesday will be a big day as far as economic data (among other reasons). You will have Challenger jobs report and ADP employment change. You will also get factory orders and the ISM services. ISM manufacturing came in at just over 50, so people are wondering what the service sector will do now. We will have to see. Things have not been peachy.

We are still struggling mightily. Anything the economic numbers can throw up will be appreciated, but with the bad numbers seen, I do not know if it will be able to change the deal. What changes the deal? Some kind of Quantitative Easing. We will not get any stimulus out on the government. As a matter of fact, not only are we not getting any stimulus, the administration is saying we will likely going to have tax increases. At least that is what their debt commission has come up with. They will not give up on the tax increases. They will never give up on that because that is just their theory of how things work. Tax, tax, tax. At least we know where they are coming from.

Moody’s said the U.S. will keep its AAA credit rating for now, but it downgraded the outlook. We are following the path of some of the European countries. We will have to do more and that is where the administration gets its talk about taxes. It is thinking that if we tax more, we will be able to close our deficit. We will not. If we tax more and get more revenue, we spend it. Why did we raise the debt level? We are not bringing in enough money because we spent it all, and our policies have killed off the golden goose that always made us so strong. That is why they say we have to tax more. Austerity and more taxes. You are not going to grow your way out of your problems if you are taxing and devaluing your citizen’s assets.

What are we looking for? As already discussed, we need to look for the false breakdown. You have to do that simply because that is where the market is right now. You have those two or three options. There is the continued selloff which is just out-and-out pricing in a deepening recession. Then you have a rebound that fails at the next resistance and sell us off, which tells you the same thing. Or you have a rebound that holds and probably will need the aid of something from the Fed called QE3.

After the session most everyone was bearish. Some savvy traders are saying you have to be ready; if opportunity comes to the upside, you have to take advantage of it. There is a lot of fear in the market at the end of the day so be ready if it reverses. We will be ready for that, but you also have to be ready for the fear. Everyone does fear a meltdown. If it continues, then it continues. We have been taking stuff off the table, and we will keep doing that. It is not a great place to short right now. We will let our shorts run if it continues lower.

If it does continue lower in the morning, we will definitely be watching for a reversal. You do not want to buy into that one on the eighth day to the downside. We will see if we can get a reversal off of that that we could buy into and make at least a trade to the upside, and hopefully some kind of rally back up in the range. If we get Quantitative Easing, it will build into a more sustainable move. If it continues to sell, we have to close up positions.

If we get an early selloff, do not panic. Let everyone else do that, and we will see if we get a reversal. If we do, then we can make a play and make some money to upside again. Then we will see if it pauses or stalls at some other resistance point where we can maybe load up some more to the downside and make some money that way.