The focus shifted Monday from emerging markets to stateside economic growth, as a large downside surprise in the monthly purchasing managers' survey saddled the Nasdaq Composite with its worst loss in 20 months.
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Of note was the increased range in the major averages and the heaviest volume on a down day in the Nasdaq in over seven months. The index has booked five major distribution days in the past eight sessions, a high number.
As noted here Thursday, in a bull market, as an average begins to decline, it is normally preferable for volume to recede. This is an indication that profit-taking is not serious. However, once a pullback is of 5% depth, it is better to see volume become heavy on down days, and the more of it, the better. A series of drops on heavy volume can increase the chance of a selling climax and an end to the decline.
Along these lines, in order for a durable low to have some sustainability, market participants should be at, or near, a throw-in-the-towel level of sentiment. The level of fear increases until everyone who cannot stand the heat in the kitchen decides to sell and get out. Good lows are not made by buyers, they are made by sellers. That throw-in-the-towel mind set is what creates a durable low.
As the Nasdaq has corrected as much as 6% from its intraday high, Monday, then, was a step in the right direction due to the increased range and the extraordinary volume.
Apart from the technical, the action was particularly disconcerting, as the latest ISM survey of purchasing managers showed a sizable downside surprise. Unlike the monthly nonfarm payrolls report, the ISM number is viewed as one of the best forward-looking indicators of economic growth extant.
This now sets the table for the January employment report this Friday, one of the more pivotal releases in some time in light of December's soft number of 74,000 vs. the consensus forecast of 196,000.
Retail spending comprises about one-third of economic activity. Retail shares are considered early cycle issues, and tend to perform better during the first half of a bull market. Since '09, the performance of the retail sector has been key to this column's ability to look past market participants' concerns over the wherewithal of the economy to grow.
But while retail stocks cannot be expected to outperform late in a bull market, the sharp underperformance vs. the S&P 500 since Jan. 1 is cause for concern. The message appears to be a consumer spending slowdown isin our midst.
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Chart created using MarketSmith .©2014 MarketSmith Incorporated. All rights reserved .
The above notwithstanding, this column's general market analysis takes its cues from the price/volume behavior of the major averages and the action of the leading stocks. Sector performance, such as that of the retailers above, is considered secondary. It is used more as a gauge of overall health and as a long-term signpost for the averages than anything else.
At the same time, the market's reaction to economic reports like the ISM survey discussed above is used as a sentiment gauge.
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