The markets got rocked today as two very important economic reports came in much weaker than expected. The Institute for Supply Management’s (ISM) gauge of manufacturing activity fell to 53.5 in May from 60.4 in the prior month, less than estimates of 57.7. The major black eye on the markets today though is the ADP employment report. Expectations were for an increase of 175,000 jobs yet the report showed an increase of a paltry 38,000.
Personally, we’re happy to see the market react to such bad news with a sell off. It shows us that the market is acting rationally. The last few days we have had very bearish economic reports yet the market has rallied. Such action led us to believe the market is expecting “help,” be it from the government, the Federal Reserve, or both. An attitude like that is a dangerous one to have, because what if the “help” doesn’t come? We don’t know what might happen but we do know we don’t want to be caught trading in an erratic and irrational market.
So far, 1,330 is holding as support on the S&P500 as the markets continue to bounce around in a range of 1,310-1,350. A positive we do draw from the recent rally in the market is that a upward sloping trend line can now be drawn connecting the 5/25 & 5/26 lows. Watch for this trend line (currently around 1,325) to potentially provide support in the coming days. Another positive is that the S&P500 was able to get above a down trend line that had been drawn from the early May highs. Please see our chart below for an annotation of what we are referring to.
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