Market Analysis – Don’t Let This Pullback Scare You

Stocks were hit hard yesterday because of worse-than-expected manufacturing data and concerns that today’s jobs report will be lower than expected. Stocks started off on the downside and never recovered, with selling picking up into the close.

News that the International Monetary Fund raised its forecast of 2010 global growth from 2.5% to 3.1% had no impact. Instead investors seemed focused only on the jobless claims. Initial claims climbed 17,000 to 551,000, and continuing claims came in at 6.09 million.

This all backed the ugly ADP numbers on Wednesday, and set the stage for a nasty non-farm payroll report today.

The Wall Street Journal noted, “The market found the Institute for Supply Management’s monthly index of U.S. manufacturing activity particularly worrying. The measure fell to 52.6 in September from 52.9 in August.”

The Nasdaq (NASD) was hit hardest of all the indices, off more than 3%, as technology stocks were pummeled and the U.S. dollar was stronger again, indicating that a turn higher may be occurring.

Along with stocks, basic commodities were weak all day. The Dollar Index was up nearly 0.7%.

At the close, the Dow Jones Industrial Average (DJI) was off 203 points to 9,509, the S&P 500 (SPX) fell 27 points to 1,030, and the Nasdaq lost 65 points to 2,057.

The NYSE traded 1.6 billion shares with decliners ahead of advancers by 5-to-1. On the Nasdaq 844 million shares traded with decliners there ahead by more than 5-to-1.

November crude oil gained 21 cents, closing at $70.82 a barrel, and the Energy Select Sector SPDR (XLE) closed at $52.24, down $1.68.

December gold fell $8.60 to $1,000.70 an ounce. The PHLX Gold/Silver Index (XAU) lost $7.61, closing at $157.80.

What the Markets Are Saying

Despite yesterday’s broad selling, the major indices are still trading within the bull channel that began several months ago. After such a dramatic rally we might expect at least a mild correction, and we appear to be getting that now.

Following a reversal on Sept. 23, the S&P 500 has fallen almost 5%, but is still above the next level of support, a conjunction of the support line of the bullish channel and the 50-day moving average — both now at 1,020.

Chart-wise the next band of support is at 980 to 1,010. This is a strong support zone with the month of August providing most of the trading. Note, too, that the Relative Strength Index (RSI) has fallen from over 70 in August to 46. Thus, the chances of a breakdown from the next support zone are slim, barring some unforeseen calamity.

Bull markets, especially in their early phase two stages, are known for quick and shocking rounds of profit-taking. Smart buyers will use a pullback like this to buy stocks that they have been eyeing for weeks, while weak holders will run for cover.

The jobs numbers this morning could result in some selling and then a reversal up. You must have conviction to climb the “wall of worry” — and this appears to be just another brick in that wall.

Today’s Trading Landscape

There are no significant earnings to be reported today, but the following economic reports are due: non-farm payrolls (the consensus expects -170,000), unemployment rate (the consensus expects 9.8%), and factory orders (the consensus expects 1%).

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