Market Analysis for Jul 31st, 2003

Thursday was a pretty amazing day on Wall Street. You had stronger-than-expected economic data this morning that totally whipped the market back and forth. The Chicago Purchasing Managers was a big surprise in its strength. Jobless claims, too, were stronger than expected, and second-quarter GDP, which no one thought anyone would care about, came in at 2.4%. What was expected was about 1.5%, with the first quarter being at 1.4%. So 2.4% certainly was greater than anybody expected.

So the day started with a bang, as to traders and investors it seemed that finally we're getting the growth that should emerge from all the monetary and fiscal stimulus that's been pumped into the system for the last two years. The S&P 500 during the session went from the low 980s up through 1000 to 1004. That was the highest level we've been at since mid-June, and it looked like for a little while there we were going to test the high end of the range at 1014-15.

Meanwhile, the bond market was getting crushed. The yield went all the way up 4.52%. Remember that six weeks ago the yield was at 3.07% on the 10-Year, so we've had an enormous move up in a very short period of time. Whether or not the elevation of interest rates was a major factor in stock indexes and stocks in general stalling towards the latter part of the session, I'm not sure. What I know is that stocks ran out of gas, and with the bond market tanking, stocks reversed in a vicious way and ended the day only slightly higher.

In the end, today's settlement for stock indexes was right in the middle of the trading ranges the markets have been in for the last three months. This morning it looked like we were breaking out to the upside, and it failed. Think back to last Friday when the market looked like it was breaking down and reversed like crazy to the upside. That move last Friday preserved the bottom of the three-month trading range. Today's move, failing to break through, preserved the top, and now you're back in the middle again.

Tomorrow you have unemployment and a slew of other data that could have a major impact on market direction. With unemployment being the key feature, we'll have to see if there's an enough of an improvement or deterioration in the employment figures to shake this market and have it go one direction and stay there.

As a parameter, on the E-Mini S&P you need to get back over 1004 to really get things going on the upside. On the other hand, if the employment data show that labor is still a real problem and jobs are just not being created and in fact are being cut, then on the low side, 975-70 on the S&P, will be a critical support area. A break of that level, and I think you can pretty much stick a fork in the market for a while. It'll be cooked, and will suggest it'll go much lower in the ensuing months as interest rates continue to rise.