Another Down Day...

The market opened stronger and tried for the first two hours of the day to add to its opening gains but finally failed to do so. It was the third hour of the session which led the market lower and led to a broad based decline of prices throughout the day.

Some short covering lifted prices during the final hour but just barely. The Dow closed the day with a loss off 107.84 (-1.25 %) points and the S&P closed at a loss of 11.75 points or - 1.27 %.

The major economic report for the day was the Producer Price Index (PPI) for the month of May. Economists had expected an increase in prices of 0.6 % but the actual number came in at 0.2 %. Perhaps more important, once the volatile energy and food component are backed out the so called core PPI was only + 0.1 %.

The PPI is widely viewed as the very first indicator which signals if inflation is about to raise its ugly head. The idea is that Producers have to feel inflation first before it will materialize in the end prices to the consumer.

As such today's number was good news. The limited increase makes clear that inflation is no threat at all and at the same time the increase, albeit small, eliminates at least for the moment the fear of deflation.

The market though didn't really pay much attention to the numbers. Instead it was trading on its own and adding onto the losses from yesterday.

Fortunately today's decline was more orderly and limited then the sell off we saw yesterday. Never the less we now are sitting on the biggest 2 day decline since April 20th. As such the 15 week old up trend might truly be coming to an end now.

We are coming down to the 8400 support level in the DOW and the current decline should stop around this area. If not we might be at the beginning of a more substantial decline which could easily add another 5 to 7 % in losses to current levels.

We also have option expiration coming up on Friday which might add quite a bit of volatility to the next couple of days.

I am neutral now in my outlook (not positive anymore) and will wait till later this week to issue another market call.

See you tomorrow,

Steve Benger