(By Rich Bieglmeier) So much for that feel good post Memorial Day rally. Wednesday followed through with a thud. It sure appeared as the equity indexes were going to make a run for their breakdown borders, but Spain's woes became Wall Street's oh no.
The thing we have to watch now is where does the selloff pivot, and how high it runs afterwards. A downdraft that takes the NASDAQ, Dow, and S&P to closes below May 18th's lows of 2,778, 12,369.38, and 1,295, respectively, would confirm the downtrend.
On the other hand, if the slide stops higher than the mid-May bottom, and the threesome rally beyond their Tuesday closes, then the outline of a new uptrend could start to take form.
[Related -The S&P 500’s Worrisome Downturn In Drawdown]
iStock can see the indexes possibly moving a maximum of two standard deviations below their 20-day averages. That would put the NASDAQ at 2757, the Dow at 12,182 and the S&P at 1282. Any lower than that and the Spanish stuff really hit the fan; although, that doesn't seem so farfetched.
With Tuesday's gains wiped clean by Wednesday's losses, iStock's momentum model shows down arrows on every level. Down, Down, Down, usually means stocks aren't going to regroup right away, and more red tape is coming.
The really scary part is that NONE of our under bought measuring sticks is anywhere near a bottom reading. The indexes' relative strength readings have plenty of room to drop, VIX is at 24.14, when iStock looks a fear reading closer to 35, and more than 1,000 NYSE listed stocks need to move below their 10-day moving averages before pound the table buy signals start pounding tables.
[Related -Deflation Warning: The Next Wave]
The next two days of economic news will give Wall Street all the weight or lift it needs to pick a direction. The street expects Jobless Claims to remain static at 370,000, the ADP Jobs report to show a gain of 154,000, and first quarter GDP to be revised down to 1.9% from its initial reading of 2.2%.
Unless GDP comes in way under 1.9%, the ADP report will likely get the most attention as a precursor to Friday's Employment Situation report. iStock believes a miss to the downside could be in store for both the ADP and Employment Situation announcements.
Intuit Inc. reported that small business hiring slowed to 40,000 in May, following an advance of 60,000 jobs in April. The fall off is not an encouraging sign. We hope that we are wrong, but a substantial jobs disappointment might be all it takes to test our pivot point and 2 standard deviations of downside notions.
We will have more on Friday's ISM Manufacturing Report and Personal Income & Outlays in tomorrow's market brief.