A substatial decline...so...what's next ?

Today was a rather important day. (more about it later). Bolstered by positive earnings stocks opened stronger across the board and the Dow was up by more than 1 % early on. The early advance did not last and stocks turned south within the first 30 minutes. From there multiple waves of selling took the market down throughout the day. We saw some light buying during the last 20 minutes and at the end the Dow closed - 1.19 % or minus 101 points.

The bigger story for the day is the weakness in technology and small cap stocks. Both sectors were the main driver of the 9 week old rally and the sudden weakness of both sectors relative to the overall market suggests that there is more to come. The smart money (the money which has been pushing the recent rally) has been leaving the market now for the 2nd day in a row...potentially setting the trend for additional losses. (Nasdaq was down - 2.44 % and the Russel Index - 2.36 %)

To top it all of...today's price action did some damage to the "makeup" of the market. The failure of the market to hold onto gains and reversing in the manner it did indicates that, at least for the time being, we are done with pressing the upside.

Economic news was, for the most part, pretty good. Earnings were decent with Cisco, Target and Walmart coming in above expectations. Weekly jobless claims came in slightly better than expected. The reported number was for initial claims of 601 thsd versus consensus forecast of 635 thsd.

Some commentators were citing the lower than expected jobless number as a positive and at least initially stocks actually rallied against the number. My opinion is different...we are producing first time unemployed workers at an alarming rate. The fact that the number is a "measly" 30thsd better than expected does not mean much to me.

Unless we are getting a much smaller number (around 400 thsd), together with higher job creation numbers , we continue to loose jobs in this economy.

The other piece of news was the FED auction of treasuries. Without getting to technical...it wasn't good. The 30 year Bonds had to increase their yield by 10 basis points (0.1%) above where the market was trading them in order to be sold.

I have talked about this issue before. Despite the FED buying government debt to the tune of now more than 90 billion in May alone yields are increasing. If the market continues to push yields higher it will become a real problem for the FED. It is the declared intent of the FED to control long term yields and to, if necessary, buy government debt to accomplish this.

The concept of economic recovery hinges to a large degree on cheap money from here on out. If the FED, despite employing some very extraordinary measures, fails to do so...then we are in real trouble.

It is to early to tell but I will keep an eye on it !

I remain short term neutral/bearish stocks and expect some type of continued pullback. Unless the Dow takes out today's high I would rather be short than long.

Tomorrow should be interesting. Stress test results are released today after the close and tomorrow morning the unemployment report will be released. Might make for an interesting day.

See you tomorrow,

Steve Benger