Stocks had rallied sharply on Tuesday after rumors floated around Wall Street of an upcoming strong May employment report, which is due out Friday.  But on Wednesday we got the ADP Employment report, which is generated from a payroll processing firm, and it showed private-sector job growth fell to just 38,000, its lowest level in eight months.  The expected growth was 170,000 - hence the selling.

The weak economic data sent stocks and bond yields reeling as Treasury yields fell below 3 percent for the first time this year.

The chart of the S&P 500 is back in a less than bullish position as the 20 and 50-day EMA's have been broken again, and the bull flag breakout was apparently a fake-out.  If there's any good news it is that the previously open gap near 1313 acted as the bottom of yesterday's sell-off.
                        
                        Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

I have been encouraged by the excessive bearishness we have been seeing, and no doubt yesterday's sell-off will exasperate that.  Many of the other indicators are slightly bullish or slightly  bearish so I don't have much to go but sentiment and the charts.

I don't generally look at the S&P 500 Participation Index, but once in a while I see something out of the ordinary in an indicator that is worth mentioning. 

From DecisionPoint.com:

"The Participation Index (PI) measures short-term price trends and tracks the percentage of stocks pushing the upper and lower edge of the short-term trend envelope. Specifically we track participation of each stock in a given index. We can see how UP participation, the number of stocks actually driving the up move expands as the market moves higher, then contracts prior to ST market tops. A similar thing can happen with DOWN participation as the market is about to bottom. Bottom Line: A trend needs a strong plurality of participation to be maintained."

The push down toward 65 on downside is a pretty extreme reading, and may be considered a capitulation type reading.  In the last year the market seemed to find support when the down index hit this level. 
                       
                        Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

The dollar reversed to the upside yesterday after more bad news out of Greece when their currency bond ratings were cut yet again by Moody's.  Weakness in Europe tends to help the U.S. dollar, but not U.S. stocks.
           
                      
                                  Chart provided courtesy of www.sentimentrader.com

From a technical viewpoint, we had an outside reversal day in the dollar, but the upside action filled an open gap so we'll have to see if it has any follow-through in it, or if the downside will resume after peaking last week.

As we talked about last week, it is not unusual to see pre-holiday moves in the indices reverse after the holiday.  Tuesday happened to be the last day in May so that rally could have been the result of some window dressing from money managers, but now that all of the pre-holiday gains are gone, we'll have to see if the bulls or the bears want to take charge.  As of today, the bears are holding the ball.

As I mentioned, The May jobs report will be announced on Friday morning and after yesterday's ADP report, the estimates have been lowered from +220,000 jobs to +170,000.  The unemployment rate estimate is still 9.0%.  Obviously expectations are now low as the economy is all be confirming a double dip recession, but any upside surprises could still trigger a rally, particularly with so many investors back in bearish mode. 

Thanks for reading!  We'll see you back here tomorrow.