February 5, 2008 Stock Market Recap

The ISM Services report really threw the market for a loop today. When services make up some 90% of the economy you really don't want to see weakness there. What we saw today was simply recession fears:

Signs of a recession. Both the 41.9 business activity reading and the 44.6 summary number represent the second lowest growth figures on record, trailing only the October 2001 reading after the Sept. 11 attacks. It's a sign that the service sector - which has carried the economy through a downturn in manufacturing - has followed that troubled sector into decline.

The enormous drop in business activity has intensified some economists' fears.

"We don't have plunges like this unless we're coming into or [are] in a recession," said Sam Bullard, economist at Wachovia. "Until we see two consecutive monthly declines, it's hard to definitively say we're in a recession, but these numbers make you think."

The service sector encompasses the retail, transportation and health care sectors. It also includes sectors that have been hit hard by problems in the economy, including finance, real estate and construction.

"The service sector is a much larger component of the economy [than manufacturing], and this is very much a recession reading," said Keith Hembre, chief economist for First American Funds, who now believes the U.S. economy has fallen into recession.

The selling caused the charts to do what I said I was expecting -- the short-term uptrends ran into the headwinds of the longer term trends and got turned around. Given the 3% selloffs in the indices I was surprised that volume higher today. I'm not reading too much into that though -- 3% down is enough to convince me that this was a very bad day.

The Nasdaq had a smaller percentage loss than the S&P 500 today but its chart looks worse to me. It looks ready to retest the lows set on Jan. 22^nd and 23^rd.

There's still hope for support on the S&P at 1,322 which is the low from January 28.

James asked for a chart of iShares FTSE/Xinhua China 25 Index (FXI). It's trying hard to hang around its 200-day moving average and hold on to its late summer breakout to new highs. If I were trading this I'd be working the downward sloping blue channel -- buy near the bottom and sell near the top and repeat until it stops working.

Everything is down again.