Manufacturing Hits The Global Markets

The market futures were up a bit early last night. The S&P 500 was up about six points, while the Nasdaq was flashing upward action by fifteen points. A nice way to start the new year after a poor 2015. The last two days of the year 2015 were nasty, thus, the bulls were looking for something positive to break the chain of poor-trading action. The good news didn't last long as China reported news on their manufacturing front, and it was ugly to say the least. Ugly to the tune of being down between seven and eight percent. The equivalent of us seeing the Dow down 1,500 points. Our futures reacted instantly to the down side. Slowly at first, but acceleration as the evening wore on ultimately led them to a strong down opening. The bulls still held out hope, however, we had our own manufacturing report to deal with thirty minutes in to the trading day. It was a good number, or a real surprise, meaning a number over 50.0 would surely wipe away the losses, or at least most of them. The number came in at 48.2. Lower than expected, and, thus, no dream reversal for the frothing bulls. The market didn't collapse on that news, but finding sustainable upside became impossible for the rest of the day. A very nasty day for the bulls, but one that had the bears smiling from ear to ear.

It seems the market has finally found the type of news on a global basis that won't allow anything that Yellen does to cure its ills. The market is finally giving it up with some force behind it. Not the most tremendous volume to verify price, but clearly an increase worth noting as those moving averages started to vanish. Based on what happened in China, and then our own very bad news, it's amazing the market held up as well as it did, even though the losses were quite significant. Folks, it could have been a lot worse. The U.S. market always seems to hold up better than the rest of world when things go badly. That said, it's not as if today was a winning day for the bulls. It needs to be respected for the message it sent, which clearly is to tread slowly in a very dangerous environment. Cash seems to be an evil word to traders, but it's a lot better than taking completely unnecessary losses, because you don't have the patience needed to be appropriate. Today was a massive gap in a series of gap downs, which means nothing will be easy for the bulls, even if we rally off of oversold, short-term conditions. There are lots of moving averages and gaps to get through, and with today's increase in volume, it'll be that much harder to trend higher short-term unless something completely unexpected hits. While that can always happen, there's enough damage here to make things really tough on the bulls, at least for the short-term.

I believe in both the technical side and the fundamental side of the equation when studying the markets, although the fundamental side rarely plays in to how things move. Bad fundamentals are often ignored in a non-going, bull market. They're out there, but they just don't get the respect they deserve. The frothing bulls keep wanting more and more. I keep those fundamentals in the back of my mind, but you have to wonder what it takes to get the market to act according to the truth of things rather than the Disneyland it usually lives under. There's never an easy answer for that. It seems as if the world took notice today when China threw in the towel. Our own bad report added to the acceptance that things really are bad out there. If the U.S. is doing fine, and the rest of the world is not, it seems as if the markets will hold up. It requires a global acceptance of bad news to get us moving lower.

Remember that markets love to go higher most of the time, and that's why bad news can be ignored. An excuse can be tied to bad news, such as, well, at least rates will stay low, etc. It all gets tougher when bad news on a fundamental basis gets tied in with bad technical news, and, no doubt, we have that with the monthly charts no matter where you look. Powerful negative divergences abound. I believe those monthly charts have held back the bulls over the past year plus. Now the fundamental news is eroding and the combination was simply too much today. It's hard to get markets to move lower folks. It takes a long time to turn it as well and that's if we're indeed turning. The market still hasn't sent the bulls out to pasture officially. Maybe the weakening fundamentals, along with poor technicals, is starting the process on its way. That's still not totally clear.

Let's look at longer-term, key-support levels below 1993. A nice gap exists at 1951/1954 on the S&P 500. There's weekly, trend-line support at 1925, and there's also horizontal support a bit lower at 1872. Beyond pure-technical levels we also need to try and understand the role of pessimism. Under normal circumstances I would think it's very hard to get a real rip-roaring, bear market started with the bull-bear spread at roughly 10%. With today being the new year's, first-trading day this will take a big hit downward. If the spread gets to, let's say, minus 10%, it's hard to imagine it going too much lower from there, so maybe only a correction is possible short-term. It's unclear, since the Fed Yellen has taken unprecedented action over an incredibly long period of time. Maybe that would allow the spread to get never-before-seen negative readings. It's just too unclear for now. Normally anything double digits below zero would stop the selling. If we get there it'll be very interesting to see what things look like.

Sentiment is definitely on the side of the bulls from here, but can definitely go appreciably lower before we have to wonder when it's too negative for continued down-side action. In an environment such as this it's definitely best to be heavily involved with cash. The market needs to show a lot more before we fully understand the short to medium term message. I don't know what catalyst can come along and blast this market higher, but you never know. When you have the Fed and the Government on your side there's always hope, but without interference or possibly even with it, the market doesn't look very good for the bulls right now. A very interesting time to be sure. Staying safe is best by not over playing. Do what feels right to you, of course.