WEAK JOB REPORT PUSHES MAJOR INDEXES TO NEW 2004 LOWS -- DOWNSIDE TARGETS FOR NASDAQ AND S&P -- CYCLICAL AND VALUE STOCKS FINALLY FALL -- DROP IN BOND YIELDS HURT DOLLAR, HELP GOLD -- REVIEW OF EARLIER SECTOR ROTATION WARNINGS

DOW AND S&P 500 BREAK MAY LOWS... With the Nasdaq market having already fallen to a new for the year, it was just a matter of time until the Dow and the S&P 500 did the same. They did that on Friday -- and on rising volume. A shockingly weak July job report was the final nail in the stock market coffin. By week's end, every major stock index that we follow had fallen to a new 2004 low. Once again, small caps and growth stocks led the way lower. By week's end, even value stocks succumbed to downside pressure. Economically-sensitive cyclicals and transports were pulled lower by the weak employment figures. Two of the big winners were bonds and gold. Bond prices soared as yields tumbled. That pushed the dollar 2% lower and gold 2% higher to close back over $400. All in all, it was an ugly week.

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DOWNSIDE TARGETS FOR NASDAQ AND S&P 500... I call your attention to my July 24 Market Message, which included the headline "Cash is King", and which offered some downside targets for the Nasdaq and the S&P 500 based on Fibonacci retracement levels. The charts used in that earlier message are updated below, but the downside targets are the same (see horizontal lines). As indicated on July 24, the S&P will probably retrace 38% to 50% of its 2003 advance, which would put it in the 1025-975 region. Since the Nasdaq has already broken its 38% line, it should fall anywhere from 50% to 62%. That would put it in the 1700-1600 region.

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CYCLICALS BREAK 200-DAY AVERAGE... A weak retail group has been weighing heavily on consumer stocks. Chart 5 shows the Morgan Stanley Consumer Index breaking its 200-day line two weeks ago and falling under its March low on Friday. Economically-sensitive cyclical stocks had been faring somewhat better -- until this week. Chart 6 shows the MS Cyclicals Index falling under its 200-day line on Friday after release of the weak job report. That's the market's way of saying that it has turned more negative on prospects for the economy. Another cyclical group -- the transports -- fell hard on Friday. Chart 7 shows the Dow Transports breaking their 50-day average and closing just above their 200-day line. The fuel-sensitive airlines tumbled to a new low for the year. Most of the new selling in the transports came from the economically sensitive rails and truckers. Another sign of economic pessimism.

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LOSING VALUE ... A week ago I compared the relative performance of growth and value stocks. I showed that growth stocks had fallen to new 2004 lows which was a sign of market bearishness (See chart 9). I also showed that value stocks were holding up much better than growth stocks. At the time, the S&P 500 Large Cap Value Index was managing to hold over its 200-day moving average. That's no longer the case. Chart 8 shows the value index tumbling to a three-month low on Friday and breaking its 200-day line in the process. The relative strength line is still rising. The drop in value stocks is another sign of bearishness and shows that, in a falling market, relative strength can coincide with absolute weakness.

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DROP IN BOND YIELDS HURTS DOLLAR, HELPS GOLD... Bond prices surged on Friday's weak job report. As a result, the yield on the 10-Year Treasury note tumbled to a four-month low and ended below its 200-day moving average (Chart 10). The sharp drop in U.S. rates pushed the dollar into a 2% decline. Chart 11 shows the dollar failing at its March high and ending under its 200-day line as well. The drop in the dollar pushed gold $7.30 higher and back over $400. Gold is also back over its 200-day average. That made gold stocks one of Friday's few winners. [The only other winners were rate-sensitive homebuilders and utilities].

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EARLY 2004 SECTOR ROTATION WARNINGS... In my Thursday update, I chastised economists for missing the threat from rising oil prices earlier in the year, and made reference to earlier warnings that I had published on the subject. I thought it might be useful to list a few of those earlier messages, which discuss early sector rotation warnings. Two themes you will see repeated over and over is that leadership by energy stocks and underperformance by technology is a bad combination for the market. I've repeated those same warnings in recent messages. Those negative signs were written about as early as January and February. You can access those Market Messages by clicking on "More Archived Updates" in my Market Message section: --January 27: "Loss of Leadership From SOX Index May Be Bad Omen for Nasdaq" --January 29: "Tech Continues to Lead Market Lower -- Market Rotates to Consumer Staples" --February 4: "Loss of Nasdaq Leadership Could be Bad for Market" --February 10: "Rising Oil Is A Threat to Market" --March 10: "Sector Rotations Are Similar to Spring of 2000 -- Why Energy and Consumer Staple Leadership Isn't Good"