Wall Street Uncertainty Increases after Disappointing ISM Data

By David Becker

(eToro Blog) U.S. equity markets experienced a short-lived relief rally prior to the release of the Institute of Supply Management PMI report which thoroughly deflated Wall Street sentiment. The worse than expected number sank stock prices and pushed investors back into the safe haven assets.

During the weekend, Democrats and Republicans announced that a framework for a debt ceiling deal was agreed upon and both houses would attempt to vote on the bill prior to the deadline. The deal, aimed at trimming the burgeoning deficit by at least $2.1 trillion over 10 years, was expected to pass the Senate but was expected to face a very close vote in the U.S. House of Representatives, where both conservatives and liberals were unhappy about the plan.

The agreement in its current form would increase the debt ceiling by at least $2.1 trillion in two stages and provide initially for $917 billion in spending cuts over 10 years. A special committee of Congress would be charged with finding another $1.5 trillion in deficit reduction.

Despite the good feeling that permeated Wall Street in the pre-market hours, economic concerns became the dominant force once the ISM Manufacturing report was released on Monday. The ISM's manufacturing PMI fell to 50.9 in July from 55.3 in June, while economists surveyed had expected the July data to slip to 54.6.

The ISM's new-orders index dropped to 49.2 from 51.6 in July, while the production index slipped to 52.3 from 54.5. The factory-employment index fell to 53.5 from 59.9.  The inventory index declined to 49.3 last month from 54.1 in June. Price pressures eased with the prices index falling to 59.0 in July from 68.0 in the prior month. While the manufacturing sector has steadily weakened over the past two months, most economists still point to the Japanese supply chain disruptions as the ultimate cause.

Also in economic news, June construction spending rose 0.2% to an annual rate of $772.32 billion according to the Commerce Department, while a consensus of economists surveyed had expected the data to rise only 0.1%. The gain was the 3^rd consecutive gain; spending climbed 0.3% during May upwardly revised from a previously estimated decline of 0.6%.

Health-care stocks were the markets weakest performers after Medicare said it would cut payment rates to skilled nursing facilities by 11.1% next year. That decision follows what the Centers for Medicare & Medicaid Services calls an unexpected rise in nursing-home payments. Kindred Healthcare slumped 30% while Sun Healthcare Group plunged 52% and Skilled Healthcare Group lost 42%.

Although the luster was taken off of riskier assets, equities were able to bounce off of support levels and close above the lows of the day.  The S&P 500 Index bounced off of the 200-day moving average near 1283, after opening close to the 50-day moving average at 1308.  A close above or below either average is likely to create momentum for further upside or downside movements.

The Dow Industrials opened higher, but were down more than triple digits mid-day.  As with the S&P 500 Index the Dow held the 200-day moving average near 11,982.  Resistance is seen near the 50-day moving average near 12,311.  The RSI on the Dow Industrials moved below 40, and is now moving closer to an oversold level.  The 5-day moving average of the Dow Industrials, pushed below the 50-day moving average, which could accelerate downward momentum.

The NASDAQ 100 edged lower, bouncing off of support levels near the 50-day moving average near 2319.  Further support is seen near the 200-day moving average near 2282.  Resistance on the tech heavy index is seen near 2420.

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