Market Stats

Following last week's very strong decline, the selling merely accelerated today. By one measure, declining issues vs. advancing issues (69:1), it's the most lopsided selling we've ever seen. On the NYSE there were 3033 shares down and just 44 up, making it the worst day by far going back as far as 1984. Even the worst part of the 1987 crash produced "only" a 57:1 down:up ratio. And the selling is probably not complete although admittedly we should be close to getting at least a bounce. Today's volume was the highest since June 25, 2010, which ended up as a doji day as opposed to today's nearly all selling volume.

As I've often said that a market crash comes out of oversold and clearly the market has been oversold for more than a few days now. The decline we're currently experiencing is stronger than we saw in May 2010 and the strongest we've seen since November/December 2008. There's little doubt in my mind at this point that it's the kickoff to the next bear market cycle for the stock market.

The headline at the end of the day, "DOW Loses 635 Points -- Worst Drop Since December 2008", will certainly catch people's attention and not in a good way. Each big down day simply scares more people into selling their stock. But there are hints of a slowing in the selling momentum so we might not be far from at least a bounce. How high and long is the big question mark. I guess some of it will depend on how aggressive Standard & Poor's remains in their downgrading campaign.

In a battle of the titans, it's Standard & Poor's in one corner of the ring and Warren Buffet in the other. This morning Buffet came out and said there's no question that the U.S.'s debt is still AAA and that he's not changing his mind about Treasuries based on S&P's downgrade. He added that "If anything, it may change my opinion on S&P." Not to be outdone, S&P downgraded Berkshire Hathaway's outlook from stable to negative. It seems the little children don't know how to play nice together in the sandbox.

S&P was busy today following up on their downgrade of U.S. debt and not surprisingly, they downgraded the senior issue ratings for Fannie Mae and Freddie Mac from AAA to AA+, citing their reliance on the Federal government for support. It maintained an 'A' rating on its subordinated debt and a 'C' rating on the preferred stock. They also downgraded the remaining 10 of the 12 Federal Home Loan Banks from AAA to AA+ (Chicago and Seattle had been previously downgraded to AA+). The banking indexes took a major hit today, on top of the huge losses from last week.

S&P was not only defending its analysis today but insisted that the U.S. is not likely get its AAA credit rating back anytime soon. David Beers, S&P's head of global sovereign ratings, said today, "Given the nature of the debate currently in the country and the polarization of views around fiscal policies right now, we don't see anything immediately on the horizon that would make an upgrade back to AAA again the most likely scenario." Another official noted that the average length of time for a country to get its AAA rating back was nine years.

S&P is warning the government leaders, who are arguing vehemently with S&P over this issue, that another downgrade is likely if Congress does not accept the suggested budget cuts that come out of a new bipartisan committee that is scheduled to produce a new list of budget cuts later this year. That was basically a poke back at Geithner, who has been particularly vocal against the S&P, with S&P saying they not only stand behind their analysis but are ready to keep cutting U.S.'s debt rating until they see some fiscal discipline in government (this last budget deal continues to let the debt increase at a faster pace). As painful as the stock market selloff is, I say kudos to S&P for developing a spine, even if their analysis is flawed.

Having said that, how can S&P downgrade U.S. debt and keep France at a AAA? Really? They insisted in today's teleconference with reporters that major European economies have a much better debt outlook than the U.S. Hmm, call me confused but I thought their sovereign debt issues were far worse than ours. The PIIGS alone will be a severe problem for the European financial system if the dominoes start to go.

But the U.S. government's argument and analysis is assuming we'll see economic growth rates that we had before the last recession. S&P argues otherwise and I side with S&P here. Here's a list of things S&P is very likely considering (thanks to Agora Financial for providing the information for this list):
-- our economy is burdened by debt loads far greater today than before 2000
-- an economy dealing with debt contraction, the process for which we've started (and consumers have been doing for some time) barely grows at all
-- the addition of more spending stimulus and creating more cash doesn't work in a debt-reduction environment
-- the U.S. has a very expensive burden of trying to maintain world peace through our military, something each empire before us learned was not the way towards prosperity
-- the increasing debt burden is requiring us to take on more debt simply to service the existing debt

Putting the last item in perspective, about $500B in Treasuries is scheduled to mature in August, which means the U.S. Treasury will need to sell that much just to roll over the existing debt this month. On top of that there is an anticipated $159 deficit that will need to be funded, so we've got about $660B in debt that needs to be funded this month alone. That's more than the entire QE2 program that last over six months. The U.S. is using debt to pay for debt; it's like consumers using their credit cards to pay their mortgages (and yes, a lot of people have been doing that as a desperate measure in an attempt to keep their house. The government is no less desperate and S&P is calling them on it.

Granted, the U.S. can print whatever money it needs to pay for that debt, not something individual European countries can do (so I ask again, why is France still AAA?). But it doesn't remove the risk of that debt eventually being repaid. And speaking of the European countries, most of the remaining countries with AAA-rated CDS (Credit Default Swap) reside in the European Union:
United Kingdom
New Zealand

Here's a picture of countries and their credit rating. Other than the resource-rich countries like Canada and Australia, most of the AAA-rated countries are in Europe.

Standard & Poor's country credit ratings, chart courtesy

What's interesting about France in particular, not to beat up them, is that their CDS rates have skyrocketed recently to nearly 150 basis points and almost triple the rates for U.S. debt. So it seems a little strange to me that S&P is picking on the U.S.

Tonight's chart reviews will be mostly with weekly charts. Using daily charts for this carnage doesn't help -- it's just a straight line down and bashing through support levels that go back to last fall. On the weekly chart SPX hit a potentially important support level at the highs in June and August 2010, which at the time was being viewed as the neckline of an inverse H&S pattern (labeled QE2 neckline since Bernanke's announcement is what helped break the neckline). The weekly close will be interesting because of the 200-week MA nearing 1155. This MA stopped the rally in April 2010, was broken in early November 2010 and then acted as support on a retest at the end of November. It's a higher-odds play to see an important support level like this hold on its first test since November. It doesn't mean it can't break for a day or two but the weekly close should see this level hold, currently at 1155.84. If it doesn't hold then the market will be speaking to us loud and clear.

S&P 500, SPX, Weekly chart

Assuming SPX is able to hold above 1155 by Friday's close, the pattern is set up for a bounce correction of the leg down from July 27th. It could be a sloppy choppy sideways/up correction that eats up more time than price or we might get a high bounce. For now I'm projecting a bounce to the 1150-1170 area over the next week or two and then another leg down to the 1040 area to create a 5-wave move down from July, perhaps finishing in late September/early October. That would then set up an end-of-year rally, potentially back up to the 1200 area. It's the kind of rally that would get the majority very bullish again, thinking we've put the worst behind us. Nothing could be further from the truth if the bearish wave count is correct -- after the end-of-year rally we'd be due an even stronger decline in early 2012. You can see how that kind of bounce into the end of the year would create a very large H&S topping pattern, with a big downside move to follow the break of the neckline.

The price pattern for the decline from July's highs would look best with a stair-step pattern lower as depicted on its daily chart below. But that might be trying to get too cute with the wave count since the waves could be buried in the quick intraday spikes. But if were to play out somewhat as depicted into September it would set up a larger bounce from the 1050 area.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1260
- bearish below 1200

Looking at the DOW's weekly chart, with all the price action since the 2007 high, it shows the 3-wave form of the bounce off the 2009 low and the clear and hard break of the uptrend line from March 2009. It might find support near 10738 and its 200-week MA. I show a small bounce (a week or two) followed by a new low into September, perhaps to the 38% retracement near 10429, and then a stronger bounce into the end of the year.

Dow Industrials, INDU, Weekly chart

Key Levels for DOW:
- bullish above 11,800
- stay bearish below 11,500

The same view of NDX as the DOW chart above shows a decline not nearly as dramatic. It has broken its uptrend line from March 2009 - August 2010, which it was trying to hold onto on Friday, and also its 50-week MA. The next trend line, price level, Fib and 200-wma all reside in the 1800-1900 area but I think we'll see a decent bounce before that (famous last words). The decline from the July high looks like a 1st wave down which calls for a high bounce for a correction, perhaps back up to the 2300 area before rolling over again.

Nasdaq-100, NDX, Weekly chart

Key Levels for NDX:
- bullish above 2300
- stay bearish below 22000

The RUT is no different -- it has clearly broken support at its uptrend line from March 2009 and just another indication that the 2009-2011 rally has finished. A resumption of the bear market is upon us. The RUT marginally broke potential support at its 200-week MA but you can see it's regularly broken. The decline from July looks like it needs a bounce/consolidation followed by another leg down into September, perhaps to the 600 area before setting up a bigger end-of-year rally (and then down hard in 2012).

Russell-2000, RUT, Weekly chart

Key Levels for RUT:
- bullish above 750
- stay bearish below 700

The S&P downgrade was on U.S. debt, which is the Treasury debt. Normally a downgrade causes the prices of government bonds to tank and interest rates to spike higher. The S&P downgrade elicited a yawning response from bond holders who seemed more interested in buying more rather than sell what they had. As a consequence of all the fear of a downgrade TNX, the 10-year yield, broke through support today, which follows a very strong decline since bouncing back up to its broken 50-dma near 3.00%. From there to today's low at 2.33%, which is a test of its October 2010 low, TNX has dropped 67 basis points (-22%). Since February's high at 3.67% the 10-year yield has dropped by more than a third (-36%). That's a phenomenal move and the break below 2.5% now has TNX targeting a downside projection at 2.06% for two equal legs down from its June 2009 high, as shown on the weekly chart. The price pattern is now questionable and I see lots of different possibilities. For now 2.5% is resistance while 2.06% is potential support. One thing's for certain, the bullish side of bonds is now a very crowded trade -- 98% bullish sentiment (ripe for a reversal).

10-year yield, TNX, Weekly chart

Fear has finally begun to ring the bell in this market. For much of the beginning of the decline, since July 7th and then July 21st, there was a high level of complacency with a sure-bet attitude that the market would be heading higher into the end of the year. Last week and today finally registered and today's climb resulted in a 50% increase, closing at its high at 48. This is a higher close than the previous closing high on May 20, 2010 at 45.79. That spike in the VIX was a result of the "flash crash" back on May 6, 2010 and then into a lower low on May 24th. And that brings up a point about using the VIX from here -- if we bounce and then get a new low for SPX in the next week or more, and it's without a new high for the VIX, it will be a bullish divergence, as it was in May 2010.

Volatility index, VIX, Weekly chart

Even though Bernanke already told the banks they don't need to change their reserve requirements based on the S&P downgrade (thumbing his nose at S&P in the process), the banks got hit hard today. BAC got smacked down from 8.15 on Friday to 6.52 today (-20%). It has dropped from $10 last Monday. C and others got hit hard as well. The banking indexes have been weak to begin with and last week's selling along with today's put an exclamation point on BKX's break of its uptrend line from the July 2009 pullback low. It broken that trend line in June, retested it in early July, gave it a kiss goodbye and has now confirmed the break by dropping below August and November 2010 lows.

KBW Bank index, BKX, Weekly chart

After forming a rising wedge pattern for it’s a-B-C bounce from March 2009 the TRAN decisively broke down from the wedge last week. It might be completing the 1st wave of its decline from July as it touches its 200-week MA near 4334, which calls for a strong bounce back up before rolling over again. Or it might get a little bounce over the next week or two, followed by a new low and then the bigger bounce. Once we get a bounce started I'll have a better idea what to expect next. This straight down move is leaving all kinds of question marks as to what to expect next.

Transportation Index, TRAN, Daily chart

One index that also looks done is the REIT index, DJR. Its weekly chart is showing an A-B-C bounce correction to the 2007-2009 decline, retracing 62% of its decline before breaking lower from a rising wedge pattern. Like several other indexes, it could find temporary support at its 200-week MA at 202.37 (today's low was 200) as long as the weekly close is at or above it. That could be followed by a bounce for perhaps a couple of weeks and then head lower into September. You can play the short side of the real estate market with SRS but first let SRS pull back some.

DJ Equity REIT index, DJR, Weekly chart

The dollar was up today and has been relatively strong considering the turmoil in the financial markets, especially with the downgrade. It has a very choppy pattern to the bounce since the July 27th low, which has it looking like just a correction, but it remains potentially bullish if it can stay above 73.85 the low on August 3rd. A rally above Friday's high at 75.38 would keep it bullish.

U.S. Dollar contract, DX, Daily chart

Gold has pushed above the top of its parallel up-channel from 2008, currently near 1700. It's either a bullish breakout (I want to see it close above 1700 for the weekly close) or just a throw-over above the top of its channel. Without silver showing better support for gold (silver charts next) I'm reluctant to believe in the breakout yet. But clearly the gold bulls haven't done anything wrong yet. However, bullish sentiment on gold is sitting at 95%, the same level as at previous price highs in the past two years, so a contrarian could be forgiven for looking at gold as a shorting opportunity once it rolls back over. A drop back below 1640 would suggest the top is in.

Gold continuous contract, GC, Weekly chart

Silver looks like it finished a 3-wave bounce off its May low, retracing a little more than 50% of its May decline (quite a difference from gold). Thursday's sharp decline looks like the kickoff to the next big leg down and today's bounce is likely just a correction to the decline from Thursday's high. A break below Friday's low at 38.32 should usher in stronger selling that should quickly break below the May low near $32.

Silver continuous contract, GC, Daily chart

Looking at silver with the same weekly perspective I showed gold, you can clearly see the little 3-wave bounce from May's low and the next leg down should target its 200-week MA, probably near $20 by the time it gets there. I expect lower over time but that's a good initial target.

Silver continuous contract, GC, Weekly chart

In what is a similar pattern now, and supporting the idea that oil trades more in synch with the stock market than not, oil's weekly chart (WTI) shows an a-b-c bounce that retraced more than 62% of the 2008 decline, with two equal legs up for the bounce at 114.99 (missed by pennies). That has since been followed by a breakdown from its parallel up-channel (bear flag) last week and now below its June low. It could find some support at its 200-week MA at 83.96 (it broke it today but the weekly close will be important). It could get a bounce back up to the $90 area before turning back over to much lower lows.

Oil continuous contract, CL, Daily chart

There were no major economic reports today (not that the market would have cared anyway) and tomorrow's will not be market movers either. The one exception is the FOMC rate decision if only Bernanke is able to say something the market wants to hear, such as more free money for the market.

Economic reports, summary and Key Trading Levels

The market is crashing and we don't know where the bottom is. Bounces in a severely sold market can be very strong as the shorts start covering and that remains a possibility at any time. But trying to figure out where and when that will start is a fool's game. I've already tried a couple of times and have the knife slices to prove it. Let this move down play out and start a bounce. Only then will we be able to get some clues as to what kind of bounce to expect and where we'll want to get short for the next leg down. This decline has not finished so trade short-term to the long side until we have another longer-term shorting opportunity.

Good luck in this wild market and I'll be back with you on Wednesday.

Key Levels for SPX:
- bullish above 1260
- bearish below 1200

Key Levels for DOW:
- bullish above 11,800
- bearish below 11,500

Key Levels for NDX:
- bullish above 2300
- stay bearish below 22000

Key Levels for RUT:
- bullish above 750
- stay bearish below 700

Keene H. Little, CMT