Turn of the Screw? Markets Start Higher, End Lower

After yesterday's extraordinary move forward, there was a sense - by the end of the session - that the rally had finally reached a turning point. Early on Thursday, however, not everyone was convinced as employment data seemed to indicate a further strengthening in the economy. But, even though first-time claims were lower, they were still at extreme levels. 631,000 Americans filed for unemployment insurance in the most recent week.

As much as anyone wanted to call that number "improvement," long-time market watchers and economists warned against extended confidence. Additionally, the failure of Chrysler to secure a merger with Fiat without heading to bankruptcy court first, sent shivers through the markets.

Shortly after 11:00 am, the bloom was off the rose. The Dow peaked above 8300 briefly, but sold off for the remainder of the day with the other major indices suffering similar fates. By the end of the day, only the NASDAQ was showing a positive result.

Dow 8,168.12, -17.61 (0.22%)
NASDAQ 1,717.30, +5.36 (0.31%)
S&P 500 872.81, -0.83 (0.10%)
NYSE Composite 5,513.36, -2.78 (0.05%)

While the losses were marginal, the turn in sentiment was noticeable, especially after weeks of gains. Anybody entering the market on the long side today was hoping against reality that the economy would continue to improve and stocks would not slide back to depressed levels.

The Chrysler story topped even the growing concern over the swine flu pandemic, which spread to more states and more countries as the day wore on. With closures of schools in Texas and elsewhere, residents in the heartland are more concerned over the future of their employment. Chrysler's demise and involuntary bankruptcy may cost tens of thousands of auto workers their jobs and ripple throughout the already weakened economy.

By the end of the session, advancing issues - thanks largely to the relative strength of small caps on the NYSE - beat decliners, 3485-3027. New lows once more finished ahead of new highs, 99-50. It was the highest number of new lows in more than a week, and the trend of more new lows than highs on a daily basis continued unabated for what now has become a span of 19 consecutive months, dating back to October, 2007. Trading volume was elevated, though not extreme.

NYSE Volume 1,740,450,000
NASDAQ Volume 2,845,180,000

Commodity markets felt the pain as well. Oil was down 24 cents, to $50.88. Gold fell $9.30, to $891.20, while silver slid 45 cents to $12.33. There was not much to get excited over, either in stocks or commodities. Chrysler's demise has cast a new pallor over the entire economy.

Stocks have been pushing the limits of this rally in recent days and it now appears certain to all but the most optimistic that further deterioration to the economy is dead ahead. Most of the companies which beat street estimates were beating lowered expectations and many of those same companies have slashed dividends or didn't supply them in the first place. Chrysler's condition is almost certain to result in more layoffs, which can only erode the economic landscape further.

After first quarter GDP was reported at a loss of 6.1% on Wednesday, some investors took that as a sign of improvement, since the 4th quarter of '08 checked in with a loss of 6.3%. While the most recent figures are subject to revision, there's every chance that the economy could have retrenched by an even larger amount.

In this kind of economic climate, it has been difficult to watch stocks gain so rapidly, armed with knowledge instead of hope and the cheerleading of the noise-machine at CNBC and Fox Financial Network (FNN). It finally appears that more reasonable expectations are going to have a hearing. In the course of the past two months, stocks have gone from falling off the planet to an overbought condition. With the consideration that this recession could still turn worse, into a full-fledged depression, the rapidity of investors bailing out of stocks could surprise many.

The US economy has suffered severe structural damage. It is still unclear whether the nation's largest banks are insolvent or otherwise incapable of leading the country out of this corrective period. Further, the will of the American people has been sorely tested and they are not in any kind of mood for more bank bailouts while workers are idled and state and municipal budgets are stressed.

We may be facing a real paradigm change in how much faith we will place in institutions going forward.