Wednesday, August 03, 2011

Stocks Struggle To Muster A Bounce

The stocks market is struggling to muster even a bounce after yesterday's sharp selloff. Some asked why the market sold off so hard yesterday, given we had a deal on the debt ceiling. As I have said for some time, the debt ceiling was more of a sideshow, and the real underlying concern for global investors was the deteriorating conditions in Europe and the economic slowdown here in the U.S.

This morning, the ADP Employment report showed private payrolls grew more than expected in July, adding 114,000 jobs. This sparked a bit of enthusiasm and the markets staged a small bounce into positive territory. But after the ISM Services Index came out below expectations at 52.7 (down from 53.3 last month), the market began to selloff.

News that bond yields were rising in Italy exacerbated the selling. Investors are worried about the spreading contagion in Europe. It's one thing to bailout a small country like Greece, but if the debt problems spread to Italy and Spain investors worry that the ECB and IMF don't have enough reserves to bailout everyone.

Investors are fleeing into Treasuries, which has pushed yields on the 10-year down to 2.57%. Also, gold prices have hit new highs near $1671. Don't forget that oil prices are now down near $92, and lower oil prices will help out consumers if this continues.

As for the VIX, it is currently -4% lower, and has yet to surpass Friday's high of 26 this week.

Trading comment: I showed this chart below the other day. As you can see, the break of the 200-day average opened the door for more selling. But if you squint to look at the RSI index in the top window of the chart, you can see that we are now more oversold than we have been all year. So the setup for a short-term bounce is in place. If you have been thinking about lightening up, I would wait for an upcoming bounce to sell into. That's how we are playing it, as we wait for a more solid buy signal down the road.


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