Market Ends the Week on a Sour Note

The market was hit hard again on Friday following the latest in a slew of disappointing economic data that has been overwhelming that market over the past year. An hour ahead of the open on Friday the latest non-farm payroll data and unemployment rate data was released. The index futures were trading relatively unchanged from the prior day's close heading into this data, and once it came out the initial reaction was a sharp pop higher. Apparently this was before the significance of the news came full force.

The Labor Department reported that the U.S. economy lost 524,000 jobs in December. This wraps up the worst year for job losses since World War II. In the past quarter the economy has lost 1.5 million jobs, bringing the year-end total to a loss of almost 2.6 million in 2008. Meanwhile, the unemployment rate hit a 16-year high of 7.2%, bringing the total to approximately 11.1 million. This amounts to a 2.3% increase for the year of 2008 and an increase of 3.6 million unemployed, while another 3.4 million went from full-time work to part-time.

This latest data is putting additional pressure on the government to come up with some sort of stimulus package. If history has taught us anything, however, it is that in situations such as this, recoveries take a great deal more time that everyone hopes for. The general public has lost confidence, seeing their home equity and retirement funds evaporating before their eyes. Instead of spending more, those who can will tend to resort to saving and paying down debts as opposed to investing, thus prolonging economic recovery. Somehow, those in Washington are going to need to find a way to deal with this protectionist tendency if they hope to avoid the mistakes of the past.

Nasdaq Composite ($COMPX)


This seemed to be a fear that manifested itself rather quickly into the opening bell on Friday. The indices dropped sharply with share prices falling like lemmings off a cliff in action that eerily resembled that of late September and into the middle of October on the daily time frame. On the daily charts the sharp drop was followed by a new test of lows and a slightly lower low into the end of the month of October. This was also the case intraday on Friday when the market slid back into lows for a new slightly lower low into 10:35 am ET. This type of double bottom with a slightly lower low is called a 2B and it is quite common following extremely sharper than average downside moves.

At this point, however, the indices diverged on their daily pattern compared to intraday. While the indices slid to yet lower lows in November, the market held the second low intraday at 10:35 am ET and fell into a trading range. This trading range continued throughout most of the remainder of the day. The market did attempt to push higher out of the 14:00 ET correction period in the afternoon after hugging the 15 minute 20 period simple moving averages intraday, but the attempt lacked volume confirmation and the market merely stepped higher before turning over once again into the final hour of trade.

S&P 500 ($SPX)


The Dow Jones Industrial Average ($DJI) closed lower by 143 points, or 1.6% on Friday at 8,599. The S&P 500 ($SPX) posted an even greater loss of 19 points, or 2.1%, to close at 890. The Nasdaq Composite ($COMPX), which had been the area of greatest strength for the year thus far, posted the largest losses on Friday. It fell 45 points, or 2.8%, and closed at 1,572. For the week as a whole the Dow dropped 4.8%, while the S&Ps fell 4.5%, and the Nasdaq lost 3.7%.

Dow Jones Industrial Average ($DJI)


Despite the slight difference with the lower low in November, the current daily action in the indices could very easily be comparable to the action coming out of noon on Friday and could easily lead to similar follow-though over the next several months. This would mean another wave of downside on the daily time frame, followed by a modest reversal or correction off this year's lows going into summer. This leaves the door wide open for another sharp breakdown similar to what we saw into the close and afterhours on Friday showing up on the larger weekly time frames.

The pace of the moves within this daily correction will help serve as a guide from this point, but I'm sticking to shorter term investments and daytrading. I see a lot of people trying to move back into many of the former powerhouse names in the S&Ps and Dow and this concerns me. Whenever a security falls at a substantially sharper-than-average pace, it is extremely unusual to see any rapid and lasting recovery. Even when there are sharp upside moves, they are brief and followed by longer periods of congestion and it will be next to impossible for the market to recover last year's losses at anywhere even remotely close to the same rate at which it lost them.