It was noted across dozens of outlets over the weekend that the third quarter of 2011 was the worst for U.S. stocks since the fourth quarter of 2008. Well, the fourth quarter of 2011 is off to a savage start as the Dow Jones Industrial Average looked on Monday with 2.4% loss. That is good by comparison to the loss of nearly 3% for the S&P 500 and the loss of more than 3% for the Nasdaq. The Russell 2000 plunged 5.4%.

Stats Table #1

A combination of recession and Greek default fears gripped the market today, but there were actually a couple of decent economic reports out here in the U.S. The Commerce Department said construction spending climbed 1.4% in August following a 1.4% drop in July. Private construction increased 0.4% in August while residential building jumped 0.7%.

The banner report, sort of, was the September reading on the Institute for Supply Management's factory index, rose to 51.6 last month from 50.6 in August. Economists expected a September reading of 50.5. New orders were flat, but employment inched higher, so this was arguably a good news/bad news report. Still, readings above 50 signal expansion, but stocks acted as if the ISM number was zero.

ISM Table

About the only thing that worked from the long side today was gold. Silver followed suit as well. Gold futures climbed for a second straight session as Greece's woes once again spurred demand. September was the worst month for gold since October 2008, but if any asset class can be counted on to bounce higher from an oversold condition these days, it would be gold.

On Sept. 30, holdings in gold-backed exchange-traded products rose 0.2 percent, the first increase in a week, to 2,213.6 metric tons, according to data compiled by Bloomberg. That is a relevant anecdote, but what should accompany that is the fact that ETFs backed by physical gold saw little in the way of outflows during the yellow metal's September correction. Translation: It was hedge funds and other speculators selling gold futures contracts to cover bad bets elsewhere that drove gold prices, not a fundamental change in the gold story. Gold Chart

Talk about not flying the friendly skies. Shares of AMR Corp. (AMR), the parent company of American Airlines, the third-largest U.S. carrier, plunged 33.1% on volume that was more than six times the daily average on speculation the company is burning through cash at alarming rate and may need to seek bankruptcy protection. AMR expected to end the third quarter with a cash and short-term investment balance of about $4.7 billion, including $475 million in restricted cash, Bloomberg News reported, citing an AMR filing.

The decline in AMR shares is made even more stunning by the fact that the stock was already down 62% for the year before the opening bell today. This is also the lowest the stock has been since May 2003 when it touched $2.10, the post-Sept. 11th low. American's stock is the worst-performer among the major U.S. airlines this year, not surprising given the company lost $286 million in the second quarter while most airlines were profitable.

Much is made of fuel costs as they pertain to airlines and there is no getting around the fact that fuel is number one operating cost for any airline. Logically, airlines benefit when oil prices fall, which they have been doing recently. This scenario underscores some major problems in American's business model because the U.S. Oil Fund (USO) was down 20% in the past three months before the start of trading today. Over the same time, AMR shares were down 45%.

Labor is still a major problem for airlines and as Barron's reported, American pilots are departing quickly because they want to lock in their pensions, which would be vulnerable in the event of a bankruptcy. The reality is compensation is another 800-pound gorilla for American and if the U.S. really is a free market economy, Uncle Sam would do well to stay out of this mess and let AMR rise or fall on its own merits.

AMR Chart

For one day at least, shares of Internet search provider Yahoo (YHOO) looked better compared to the broader market after Jack Ma, founder and CEO of Chinese e-commerce giant Alibaba, said his company would be interested in buying Yahoo. All of Yahoo, Ma said, not just the 40% stake in Alibaba currently owns.

Yahoo and Alibaba have a relationship that goes back to 2005, but what was normally a cordial affair became strained under former Yahoo CEO Carol Bartz. Bartz refused to oblige Ma when he wanted to repurchase some of the Alibaba shares owned by Yahoo. Bartz is no long a problem for Ma and the latter may be smelling blood in the water. Still, Yahoo founder Jerry Yang reportedly said last month the company is not for sale. After Yang blew the deal with Microsoft (MSFT) several years ago, he may not have the luxury or the board's support in eschewing another takeover offer.

Yahoo Chart

Not surprisingly, Monday's action was a bloodbath for commodities as recession fears sent crude oil tumbling to its lowest closing price in a year. Coal is another commodity that has not been immune to the ''risk off'' trade. In fact, coal, which I admit I was bullish on a few months ago, has been infected with a commodities flu.

Last Friday after the close, Arch Coal (ACI) sneaked in a profit warning that did not go unnoticed today. The company said it will post a full-year adjusted profit of no more than $1.40 a share. That is well below the $1.75 the company previously forecast and the $2.01 Wall Street was expecting.

Missouri-based Arch lost 9.3% on volume that was better than double the daily average. The glum news from Arch sent the Market Vectors Coal ETF (KOL) down 5.5% on above average turnover. In the past couple of weeks, Alpha Natural Resources (ANR), Walter Energy (WLT) and Arch have issued production or profit warnings. Those three stocks stocks combine for roughly 14% of KOL's weight. No wonder the chart is so ugly.

Coal ETF Chart

Looking at the charts, I am afraid I do not have good news. The S&P 500 failed to hold support at 1120 and round number support at 1100 was also violated. The close below 1100 sets the S&P 500 up for a return to the 1050-1060 area. From there, 1025 is the next off ramp. Should that area not hold, and perish the thought, but a return to 860 is not out of the question.

S&P 500 Chart

Selling pressure was intense on the Dow today with 29 of 30 components finishing the day in the red. Wal-Mart was the lone Dow stock to close high. Support at 10,600 was not tested today, though this seems to be a formality. XOM and CVX were a mess today while CAT lost nearly 4.5% and Bank of America (BAC) shed nearly 10%. Assuming 10,600 does not hold, and I do not think it will, the Dow is probably headed back to 10,000.

Dow Chart

Things are not much better concerning the Nasdaq. After Friday's big loss, 2340 should have been next support, but the next closed about five points below there today. More closes below 2340 probably send the Nasdaq to 2210 and then to 2100. And yes, I say that knowing that the fourth quarter is supposed to be good for tech stocks. AAPL, AMZN and BIDU were all down a tad less than 2% today while GOOG was whacked to the tune of nearly 5%.

Nasdaq Chart

The decline on the Russell 2000 was breathtaking today. With a plunge of almost 5.4%, the small-cap index seems destined to retest critical support at 590. I want to say that an ETF like the ProShares UltraShort Russell 2000 (SRTY) makes sense here, but this decline has been so hard and fast that I am a little worried about messing with an ETF as volatile as this one. With the Russell 2000 just 19 points from critical support, SRTY offers $3-$4 of upside assuming the declines stop at 590.


This is clearly a fear-driven market as evidenced by the fact that we are sitting at the lows for the year. Economic numbers have not been bad over the past few days and it would appear that the U.S. and China will dodge another significant recession next year, but until the jobs number, which comes up Friday, starts showing real signs of life, buyers have plenty of reasons to stay on the sidelines. Earnings season is fast-approaching, but I would not be betting on enough positive surprises there to get the S&P 500 back to 1350 before year-end. At this point, even 1300 looks very tricky.

Todd Shriber