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Another ISM triggers sell-off, but stocks bounce back

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Stocks were up early on Thursday, and then another ISM report came out - the non manufacturing ISM - which was light, and the market reacted, and probably overreacted, on the downside because the Dow quickly erased a over 300-point loss, and then it rallied to close up 122-points, making for a wild ride. You can tell investors are getting very sensitive to the economic data as recession concerns escalate, as the early fear on Thursday was palpable.

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That was a big reversal, but are we out of the woods? Probably not. It wouldn't surprise me if we chop around for a while similar to what we saw in August where we traded between the 50 and 200-day averages most of the month, because I can't see a "V" bottom at this point. Of course I thought that last January and I was wrong, so I'll take it day by day.

I expected investors to be a little more nervous heading into the close with this morning's jobs report on deck. This week's ISM reports could have put them on guard, but instead we did see a close near the highs, which is encouraging.

Estimates for the September report are looking for a gain of about 120,000* jobs (revised down recently), and an unemployment rate of 3.7%. Just a reminder that last month's report was a disappointment at +96,000*, so I think people may be expecting the worst after those ISM's, which may open the door for a better than expected number. Otherwise, we'd likely go down again.

*Correction: That should have been 150K estimated and +130K in August. 120K and +96K were the estimates for private sector jobs only. Sorry!

The S&P 500 (C-fund) opened higher but fell sharply right after the release of the ISM non-manufacturing report, causing a little bit of panic selling, which seemed overdone pretty quickly. The 200-day EMA held on a closing basis again, and that's a pretty good looking positive reversal pattern. The jobs report could help that reversal follow-through, or it could do the opposite, obviously, if it's a poor report. I mentioned the 50/200 day EMA trading range above, and that's what I'll be watching, especially if that open gap gets filled. We'll see if the bulls keep it up like they did at the December lows last year, or if they start to fade like back in August under similar circumstances.

The S-fund is in worse shape being below that 200-day EMA for 3 straight closes and 4 in the last 5 days, but some rising support is trying to hold. Any relief rally up to the 200-day EMA would actually be a decent gain if you're looking for a hit and run, if yesterday' positive reversal can follow through for a few days.

The EFA (I-fund) is in a similar situation as the S-fund being below the 200-day EMA. It has that large open gap above it but the 200-day EMA is in the way and could be a problem, but the 50-day EMA is at the top of the open gap and that will be a tougher test if it can get that high.

The Volatility Index was down 7% yesterday and that's two negative reversals in a row, which tells me we could be starting a little pullback to the top of the big flag, or even the 200-day EMA, but at that point volatility may pick up again. Of course the jobs report could also create some volatility - or it could be what initially pushes it sown to those support levels.

AGG (bonds) rallied strongly breaking above some key resistance, but now it is approaching a double top, which didn't work out so well for the S&P 500 last month.

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Thanks for reading. Have a great weekend!

Tom Crowley

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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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