It was quite an unpleasant day for the bulls. Volume was light but after the spike up on the ISM report, the action dripped steadily lower with every sector in the red. There was no place to hide and even precious metals were moribund at best.
No one should be too surprised by this action. The technical setup was obviously problematic. After a very nasty breakdown in early August, the market bounced into resistance on low volume -- and anyone with recent gains has to be thinking about protecting them. It is a classic setup for a pullback after an oversold rally.
To add to the negatives, the main fundamental argument for the bulls lately has been that things are so bad that the Fed is sure to come up with some sort of encore to QE2 at its meeting later this month. That may well be the case, but it isn’t a source of great comfort given how ineffective both fiscal and monetary policy has been for three years now. If the best argument we have is that the Fed has to bail us out again, it is tough to be very optimistic.
The action today creates an interesting backdrop for the monthly jobs report that is due to be released tomorrow morning at 8.30 am EDT. A number of economists, including those at Goldman Sachs and Societe General, dropped their predictions for the jobs number today, so expectations are going to be low. The big questions are how much bad news is already priced in and is bad news a good thing because it will give us a more aggressive Fed? Unfortunately, we also still have little clarity out of Europe so that will continue to keep the action contained.