Well that was exciting wasn't it? I'm referring to the plunge in the markets last week. It was an impressive worldwide sell-off. The January correction has pushed the Chinese Shanghai to a 10% decline, the Hong Kong Hang Seng to a 12% decline, Germany is off 10%, England is off 8.6%, and the S&P 500 finally hit a 10% correction on Friday afternoon. I have been predicting that the S&P 500 would fall into the 1050-1035 zone. The index hit 1044, which is almost a perfect test of its 38.2% Fibonacci retracement of its July-January rally.

How convenient that a rumor showed up right as the S&P 500 was testing significant support. The rumor suggested that Greece might receive an aid package over the weekend. No one wanted to be short if Greece gets a bailout and stocks gap open higher on Monday. Bail out or not this debt problem in Europe is going to be an issue for quite a while. I mentioned last week that not only is Greece at risk of a default but Portugal, Spain, Italy and Ireland are all in trouble. Portugal was a big problem last week and was the real culprit behind Thursday's declines.

Wednesday night (or Thursday morning) the country of Portugal tried to raise cash by selling debt. Portugal wanted 500 million euros. They were only able to secure 300 million euros. This is what you call a "failed auction". Investors were not willing to hold Portugal's debt for fear of not getting paid back. Fortunately, neither Greece nor Portugal are very big countries or economies but they do pose a serious risk to the future of the euro-zone. There are rules about debt limits to belong to the euro-zone and if these countries don't comply they will either need a bail out or get kicked out. That threatens the concept of the euro-zone and the value of the euro currency is plunging.

Chart of the FXE euro ETF:

This weakness in the euro is lifting the dollar and will probably keep the dollar strong for a while. This has crushed commodities, which is actually a good thing since it should help keep a lid on inflation. Of course no one is worried about inflation when the big concern is jobs. the January jobs report was a disappointment. The Labor Department said the U.S. lost 20,000 jobs versus estimates for -5,000 to +15,000. There were several very significant revisions. December's job losses were revised down from -85,000 to -150,000. The number of jobs lost to this recession was revised from 7.2 million to 8.4 million

Oddly enough the unemployment fell. Economists were expecting unemployment to tick up from 10.0% to 10.1%. Instead the rate fell to 9.7%. Sadly this was due to the massive number of workers who have given up looking for jobs and are no longer counted as part of the workforce. The jobs problem is not going away any time soon. The U.S. needs about 150,000 new jobs a month just to stay even. If you consider the under-employed rate then almost 20% of the U.S. workforce needs a job. We're talking millions and millions of new jobs need to get back to "normal".

It starts to make sense when you hear analysts talking about a "new normal" where business is slow and jobs remain scarce. You have heard it before. Consumer spending accounts for nearly 70% of the U.S. economy. Consumers are going to cut back on spending if they have lost their job or if they are worried about losing their job. Meanwhile businesses are not going to hire anyone if consumers aren't spending. It's a vicious cycle.

On a short-term basis stocks look poised to bounce. Yet the bullish reversal pattern created on Friday actually needs to see confirmation first. I do think it will be confirmed and stocks will rebound. With the volatility spiking and the S&P starting to bounce from "support" there were lots of traders selling puts thinking this was a bottom. If stocks don't bounce then there could be a HUGE rush to sell and buy back those puts.

Now that stocks look poised to rebound what's the plan? I would expect the bounce to struggle when the S&P 500 rises toward potential resistance near 1100 or the 1120 levels. Rarely are corrections this "clean" with a perfect bounce so close to -10%. I strongly suspect that we'll see this bounce roll over and the S&P 500 will either retest last week's low or dip toward the 1,000 level and/or its rising 200-dma. Thus we will see another opportunity to buy LEAPS on a dip. Be patient.

Chart of the S&P 500 Index:

Weekly Chart of the S&P 500 Index:

LONGER TERM OUTLOOK

Previous Comments on my Long-Term Outlook:

My long-term outlook has not changed. I still expect the economy to see a double-dip, "W"-shaped rebound with the second dip in 2010 (some analysts are predicting it will not show up until 2011). Lousy consumer spending, rising foreclosures, and lagging job growth will be the main culprits. Several weeks ago there were some comments out of the U.S. Treasury concerning foreclosures. The Obama administration's HAMP loan modification program can only help a certain number of homeowners and one official said that even if the HAMP program was a total success we should still expect millions of new foreclosures. This only reinforces my own belief that we will see another tidal wave of foreclosed homes in 2010 and 2011. Some analysts are forecasting upwards of six million foreclosures in the next three years. What is that going to do to consumer confidence and consumer spending? It's not going to help! You can review my long-term outlook here. It's the second half our my "Two Months Left" commentary.

~ James Brown