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The ISM kills morning rally

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Stocks opened sharply higher yesterday and it looked like we were getting a Turnaround Tuesday and a new direction for October, as we talked about yesterday, but a weaker than expected ISM Manufacturing report changed things quickly, and we ended the day with a negative outside reversal on many of the charts. The Dow lost 344-points while the Transports and small caps lagged.

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The ISM is normally such a non-event for the market although it is major indicator of economic conditions, but it doesn't tend to move the market like a jobs report might. Yesterday, it did. It took a strong opening gain away and the selling continued into the close with hardly a bounce.

Was this just a final straw that tipped the trade war and impeachment inquiry into an all out fear of a recession? Perhaps, but the good news is, the S&P 500 finally filled that gap that we had hoped would get filled. That could be the end of it, although the bad news is, there is another small open gap on the chart as you'll see below.

On Friday we'll get the September jobs report. Expectation are for a gain of about 150,000 jobs, and an unemployment rate of 3.7%. After the ISM report, you better believe that all eyes will be on that jobs report for confirmation, or lack there of, of economic data that suggests any recessionary issues.

The S&P 500 (C-fund) opened higher but tanked after the ISM report and before the day was done we finally got that open gap filled near 2940 after a month of sitting open. Many times just filling the gap will satisfy a down turn, but the S&P fell below the 50-day EMA, plus there is another mall open gap near 2920 so it's not so clear which way this may want to go at this point. With the jobs report just a couple of days away, it may not be ready to run back up so quickly with investors perhaps wanting some assurances that the economy isn't doing as badly as the ISM may have suggested.

The S-fund were hit hard with the weak economic data. Like the Transports, the small caps are very sensitive to shifts in the economy.

As we mentioned on Monday, the Dow Transportation Index was showing signs of trouble when it could not bounce off of the 50 / 200 day EMA, and then formed a bear flag while the 50-day EMA started to rollover again. And here's what we got...

The EFA (I-fund) remains in its bull flag, but we just saw the bull flag on the S&P 500 fail, and with the open gap down by 64.0, the I-fund may have some more room to fall. That said, the dollar was down sharply helping the I-fund to a less painful loss than the U.S. indices.

AGG (bonds) was down slightly but they reversed up from some big early losses. It remains in that rising trading channel, and above all of the major moving averages so bonds still have a bullish bias.

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

Tom Crowley

Posted daily at

The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.

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SPY (C Fund) (delayed)

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DWCPF (S Fund) (delayed)

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EFA (I Fund) (delayed)

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AGG (F Fund) (delayed)

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