You have heard the phrase "Don't tug on Superman's cape." We can add "Don't p*ss off Bernanke" to the list.

Market Statistics

I reported on Tuesday that President Obama threw Bernanke under the bus last weekend when he essentially fired him in a televised interview with Charlie Rose. I won't recap those comments other than it was clear there was no love lost between Obama and Bernanke and the chairman would not be asked to serve another term.

Fast forward to the Wednesday press conference and Bernanke began working on his legacy by saying the FOMC would begin tapering later this year and end QE by the middle of 2014. When asked if that was the official policy position of the committee he said no but that is what would happen if the data continued improving. Basically, as chairman of the FOMC, he appeared to make policy on the spot and that is what took down the markets. This could be part of Bernanke assuring his legacy. He wants to make sure that QE is winding down before his term ends in January so he can't be blamed on leaving a big mess for his successor.

Bernanke actually said the FOMC committee "deputized" him to detail a more specific plan for the end of QE in his press conference. I would like to have been a fly on the wall in that conference room when that was being discussed. Did Bernanke instigate it as a result of the Obama comments or did the committee direct him to be the sacrificial lamb? Why didn't they just spell it out in the FOMC statement 30 minutes earlier? Enquiring minds want to know.

Once QE is in a downtrend it will be very hard for the FOMC to resurrect it. The committee would almost have to admit they made a mistake in ending it early in order to raise it again. This is not likely to happen without a sudden downturn in the economy. By telling the world that QE will slow later this year, consensus is for an announcement at the September meeting, he has locked the Fed into the process assuming there is no significant downward change in the data.

Here is where it starts to fall apart. China's HSBC flash PMI for June declined from 49.2 in May to 48.3 and well into contraction territory. That was a nine month low and there was a significant drop in orders and backorders. China is imploding. Several major analysts have suggested China could actually be growing at only a +4.5% GDP compared to their target at 7.5%. This would be a major hiccup for the global economy and could drag on the U.S. economy later this year.

The Fed said "downside risks to the economy have diminished since fall" but they did not say they had ended. This shows Bernanke took a risk in announcing the plans on QE. He knew it would impact the market and interest rates by going public with a stronger version of the expectations.

The Dow may have dropped -500 points over the last three days but the big move was in the treasury market. The yield on the ten-year rocketed to close at 2.51% on Friday. Yields rose +3.9% on Friday alone. It appears investors thinking QE would continue well into 2014 without any changes were caught flat footed and they are now running for the exits.

Yields on the five-year rose +37% for the week. That is the worst week for treasuries in more than 50 years according to Bloomberg.

This will have lasting ramifications. The housing market is going to slow as mortgage rates spike. Banks holding treasuries are going to take a big hit on their mark to market valuations for the end of the quarter. However, a sharp rise in interest rates will eventually help banks because they will begin collecting more interest from customers than what they paid for the money. The net interest margin (NIM) will rise in future quarters.

Ten-Year Treasury Yield Chart

Treasuries are being sold but corporate bonds are being sold harder. The high yield bond ETF (HYG) is crashing as investors race for the exits. The fear of rapidly rising rates is misplaced as far as Fed action is concerned but reaching extreme levels as far as investors are concerned. It is not a question of where are they going to put the money but only to go immediately to cash to avoid losing money in bonds.

Lipper said for the week that $4.6 billion flowed out of funds that track high yield corporate bonds. $1.5 billion came out of high yield ETFs.

High Yield ETF Chart

The potential for higher interest rates sent the dollar on a rocket ride higher. A strong dollar is good if you believe the propaganda but corporations will be losing money on international sales.

Dollar Index Chart

The decline in China's economics plus the sharply rising dollar combined to crush commodity prices. Bernanke's QE ending comments implied the economy was recovering faster than previously thought. That hastened the end of the Armageddon trade and pushed gold prices to a three year low. The actual Fed forecast continued to show a very slow growth economy but the verbal damage had already been done.

After hitting a nine month high of $99 on Middle East worries on Wednesday crude oil fell to close at $93.95 on Friday thanks to Bernanke.

Gold recovered +$11 on Friday but still closed under $1300 after hitting $1268 on Thursday with a single day decline of -$90. Silver collapsed -9% to $19.31 before rebounding slightly to $20 on Friday. Copper declined to strong support at $3.02 on the weak China news more than the rising dollar.

Do you remember when silver was rocketing higher back in April 2011? Do you remember what killed the rally? The CME raised the margin on futures contracts 3 times in 3 weeks. I don't remember exactly but at the time it was unheard of and it completely killed the rally. Silver fell from $49 to $33 in six days. They are back! The CME announced on Thursday they were raising the futures margin on gold contracts by 25% to $8,800 per contract. Take that you evil gold speculators! This will definitely slow speculation in gold for a few weeks until the shock wears off.

Crude Oil Chart

Gold Chart

Silver Chart

Copper Chart

I believe Bernanke wanted to burst the rally bubble. Did you happen to notice that the taper talk increased significantly beginning on May 23rd, the day after the market set new highs? Do you recall an uptick in "equity bubble" headlines in mid May? I believe the Obama interview probably cemented Bernanke's fate. Typically presidents keep important decisions secret until the last minute so they can always change their mind. Bernanke said he and Obama had talked briefly about his future but there was nothing to report from those talks. When Obama threw him under the bus in the Charlie Rose interview and basically talked about Bernanke in the past tense that was probably news to Bernanke. Therefore with only six months left to create his legacy he decided not to waste any more time. Let's end the QE and burst all the bubbles now while I still have time to manage the events and expectations. Waiting to announce a change in QE in Q4 would not give him time to manage the transition before the new Fed chairman takes over in January.

Bernanke has never shied away from blaming the administration and Congress for the fiscal drag on the economy. He repeated it again last week in the FOMC statement and in his personal comments. He wants to make sure that is a part of the overall picture when historians look back at his reign. I am sure he feels like he overcame some substantial obstacles in the financial crisis as well as a continuing weight on the economy from the government. The sequestration is expected to subtract 1.5 to 1.9 points from the GDP in Q2 and Q3. That is a stiff headwind when the economy is only growing at a 2% rate. It makes you wonder if ending QE is really the right move. That is where the "data dependent" conditions will come into play. Bernanke may want to close the door on QE as he exits but the data will have to cooperate.

Q2 GDP is expected to decline below +2% and inflation is heading for less than 1%. St Louis Fed president James Bullard dissented in the "no change" FOMC statement saying inflation was too low and suggesting the Fed should actually increase QE purchases. Bullard issued his own press release later saying Bernanke's tapering announcement was bad timing and contained flawed logic. Bullard said Bernanke should have waited for more tangible signs of economic growth before making such an announcement.

On Friday night I went back and read several commentaries on the FOMC announcement and what Bernanke was expected to say. Almost nobody expected him to be so specific in his taper comments. While the consensus opinion was for a change in the FOMC statement in September and the end of QE in mid 2014 NOBODY actually expected the Fed or Bernanke to spell it out. They expected the Fed to remain non committal in order to reduce the impact on interest rates and the equity market. You know Bernanke knew this is what the market expected but he dropped the bomb anyway and the rest as they say is history.


The economic calendar for Friday was light with Regional Employment and Mass Layoffs both of which were lagging reports for May. Regional employment was fractionally better at +0.1% for the nine regions. A total of 33 states saw employment increase. Forty states reported a decline in unemployment. This was for the May period so this hiring was already seen in the Nonfarm Payroll report.

Mass layoffs for May increased from 1,199 events in April to 1,301 events in May. The number of workers impacted rose from 116,849 to 127,821. Manufacturing accounted for 33,527 of the layoffs.

The Mass Layoff report is going to be a casualty of the Sequestration. The BLS has to cut its budget by -30% so this is one of the reports they will no longer be producing. I doubt it will be missed.

While on the topic of jobs I was reminded of a Gallup poll completed last week on Obamacare and hiring. The surveyed more than 600 businesses and more than 41% of those surveyed said they had frozen hiring because of Obamacare. More than 19% said they had reduced the number of employees as a result of Obamacare planning while another 18% had reduced hours to part time to avoid being forced to supply insurance. Another 38% said they had scaled back on plans to expand their business because of the regulations. Only 9% of business owners surveyed were positive about the new program and 48% said it would increase their costs. Under the healthcare program all companies with 50 or more employees will have to offer medical insurance or face a fine of $2,000 per year for every full time worker over 30. This is a huge drag on the economy and especially on small businesses where the majority of jobs are created.

The calendar for next week is pretty busy. Because of the focus on the Fed outlook I added all the speeches by Fed presidents and governors for next week. They may try to calm the markets after the Bernanke bombshell so it will be interesting to see if they are successful. Richard Fisher speaks twice and he is strongly in favor of halting QE so he will be the one most likely to make waves.

There are two major regional manufacturing reports from the Fed. The Chicago report on Monday covers the nation. Friday has the Chicago ISM report.

The final GDP revision for Q1 is on Wednesday and it is expected to come in around +2.5%. The Q1 report has an abnormally high inventory component that is holding it up. The Q2 number will not have that and we could see something closer to +1.0%. That Q2 number will not appear until July 31st.

New home sales and pending home sales could produce some market movement because traders will be worried the rise in interest rates will harm future sales. This makes the current sales patterns more important. Lennar reports earnings on Tuesday and KB Home on Thursday so their guidance will be critical.

Economic Calendar

Oracle (ORCL) was the big news in stocks on Friday. After reporting earnings and weak guidance after the close on Thursday it was the weakest S&P-500 stock and the weakest Nasdaq stock on Friday. Oracle also announced it was moving from the Nasdaq to the NYSE in July.

Oracle reported flat revenues at $10.9 billion and missed estimates by -$170 million. Oracle blamed weakness in overseas markets for the weak licensing revenue. Customers are also moving to the cloud for their applications and that hurts Oracle's per server license fees. Instead of having multiple servers in different locations companies are putting the database in the cloud and paying only one license fee. Oracle said it was going to make a "startling series of announcements" next week about new partnerships with Microsoft (MSFT), (CRM) and Netsuite (N). Analysts believe it will be a cloud distribution agreement. Oracle already has its own cloud program and CEO Mark Hurd said they added 500 cloud computing customers last quarter. Several analysts thought Oracle was gaining speed in the cloud computing application business and the new partnerships could aid in that acceleration.

Oracle shares lost -9% to close at $30. You may remember my comments last weekend about Oracle. "The only person that makes any real money from Oracle shares is Larry Ellison. Everyone else just gets whipsawed around in the chop until they get tired and sell it." You just saw one more whipsaw where hopes were dashed. In Q1 the stock dropped from $36 to $31 after earnings. You would think investors would learn. Meanwhile mister ego, Larry Ellison, is thinking about buying another Hawaiian island and an airline. Maybe he should concentrate on actually producing a profit for his shareholders.

Oracle Chart

I mentioned China in passing in the discussion about the Fed. It deserves a little more coverage since it has the potential to be a game changer. When you think about it the world economy has relied on two things for the last four years. That was QE or easy money from the central banks in the range of about $12 trillion and the voracious economic appetite of China. It appears that appetite may be dwindling.

A slowdown in China from the +9% growth rates in recent years is a good thing long term. However, that is like saying "Hold still, this root canal will only hurt for a little while but long term you will be better off." Everybody wants the long term benefit but nobody wants the short term pain.

China's new leadership is squeezing credit by the most in a decade in an effort to slow the real estate market and reduce leverage by the banks. Some of the regional banks are rumored to be levered at more than 100:1 thanks to the roaring demand for credit. China's private debt spiked to 168% of GDP in Q3-2012. It was only 119% three years ago. They are facing what could be a record number of nonperforming loans. We don't really know because many banks hide them to avoid the regulatory repercussions.

Liquidity dried up to the extent last week that the overnight repo rate reached 13.1% That is the highest since Reuters began capturing this data decades ago. The interbank market close was delayed by 30 minutes on Thursday to allow all the banks sufficient time to complete their overnight borrowing so they could open on Friday. The SHIBOR rates, similar to LIBOR, spiked to levels similar to what happened in the U.S. when Lehman failed. If the Chinese government does not step in and handle the problem it could cause widespread bank failures. How many banks can afford to pay 13% for an overnight repo?

Credit rating agency Fitch said China's shadow banking system is out of control and the credit bubble is unprecedented in modern world history. "The credit-driven growth model is clearly falling apart. This could feed into the potential for a Japanese style deflation. There is no transparency in the system and systemic risk is rising." Bank Everbright defaulted on an interbank loan the prior week as overnight lending dried up. Chinese banks typically offload loans into trusts, wealth management funds and offshore vehicles to stay under regulatory limits even though they are still liable for the loans. Fitch said we have no idea who the borrowers are or who the lenders are because of the rapid offloading of the balance sheets into the shadow banking system. Fitch believes there is more than $2 trillion in off balance sheet loans, many of them non-performing. Fitch said this collapse could be as bad as Lehman when it comes. Investors are worried. The China Securities Journal said withdrawals from Chinese equity funds were the highest since 2008 and withdrawals from Hong Kong funds were the highest in a decade for the week ended June 5th. Hard landing anyone?

Shibor Chart

Apparently the new leadership is going to force a stronger than expected slowdown if that is what it takes to shift to long term growth. If China is going to slow significantly the countries that export to China are going to be hurt. Mostly that is commodities to fuel the manufacturing but there are other items as well. Countries that could be hurt by the slowdown are Brazil, Australia, South Africa and many others. Mining companies were crushed by the dual hit of falling commodity prices and the decline in China's PMI. Asian neighbors depend on China to buy about 25% of their exports. That means a slowdown in China is a slowdown for all of Asia.

I have always said we should look to China as a barometer of global growth rather than the leader in global growth. China is not going to manufacture products to export overseas unless somebody ordered them. If China is not getting the orders they won't make the products. The HSBC flash PMI showed a sharp drop in orders and backorders. This would suggest the world economy is slowing and China's manufacturing decline is the proof of that slowing.

Either way the weakness in China is going to be a drag on the U.S., Europe, Latin America and Asia. Couple that with a decline in QE liquidity and we may have some growing pains of our own. Now be still, it will only hurt for a little while.

The U.S. markets declined about -2% for the week but that was only a blip compared to the emerging markets that depend on China. Brazil declined -7.7% and Thailand -6.4% to lead the list. China declined -4.9%. Turkey, which has problems other than China, fell -8.9%.


This was a quadruple witching option expiration as well as the quarterly rebalancing of the S&P-500, S&P-400 Midcap and the S&P 600 Small Cap indexes. This produced a mountain of volume with more than 10.6 billion shares traded. This exceeded the 9.28 billion on Thursday, which was a result of the massive market drop, margin selling, expiration and rebalance all rolled into one.

On Thursday more than 32 million option contract were traded. That was the fifth largest volume day ever. Heck, I can still remember when the CBOE broke one-million contracts in a day.

On Thursday there were 674 advancers compared to 6,135 decliners. There were 8.43 billion shares of down volume compared to 804 million shares of up volume. Thursday was what we call a 90% day where 90% of the volume is in a single direction. This is typically the sign of a washout or a capitulation day. Everybody throws in the towel and runs for the exits. Typically it is a turning point in the market where a rebound begins. Coming the day before the quadruple witching and index rebalance it is hard to know if Friday's rebound was real or just the result of short covering and expiration settlement.

Next week should see some positive influences. It is the last week of the month, quarter and half. This is the week when window dressing should be at its peak. Fund managers will want to dress up their portfolios with winners to show investors how smart they are. However, the last week of June does not have a very good record.

Art Cashin alerted me to the following scenario. Despite the quadruple witching and index rebalancing at the June expiration and the Russell index rebalancing at the end of June, the overall performance over the last 12 years has been dismal. The June FOMC meeting is typically around the 19th to the 22nd and in expiration week. In almost every one of the last 12 years the last week of June has been negative with the first week of July slightly positive on average. I told Arthur I would research it but I can't find an obvious common thread. The only two years when the last few days of June were positive is when the Fed announced the massive QE program in June 2009 and then when they announced another extension in June of 2011.

About the only realistic causation for the dip at the end of June is the FOMC curse. Over the last 15 years I have written numerous times about the post meeting dip. Typically, when there is a Fed meeting on the calendar the markets run up slightly ahead of the meeting unless there is a rate increase expected. Regardless of what the Fed says the market tends to sell off in the week after the meeting. Obviously announcing massive QE programs or rate cuts tends to kill the scenario for that one meeting but the post meeting decline in any month has been a common event for the last decade. I did not have the time to go back and do the chart analysis for every Fed meeting for the last ten years but I have written about it enough to know it to be true.

I believe the post June meeting dip is probably more pronounced because of the annual Russell index rebalancing the following week and the July 4th weekend. When an index is rebalanced with stocks removed and others added it typically produces a negative market bias. Traders know which stocks are going to be removed so they short them ahead of the rebalance in hopes of profiting from the index fund selling. They also buy the stocks being added for the same reason but since they are not currently in the index it has no impact on the index. However, the shorting of stocks that will be dropped does have a negative impact because they are still in that index at the time.

The July 4th weekend is typically a long holiday for traders and one that nobody misses. For instance this year July 4th is on a Thursday so volume on the half day of trading on July 3rd and the full day on July 5th will be extremely low. Traders will lighten up on positions ahead of July 4th and then start rebuilding positions for Q2 earnings when they return from the holiday on Monday July 8th. They will not want to be long over the nonfarm payrolls on July 5th while they are at the lake.

Obviously other macro factors would enter into the equation beginning in July so you can't simply blindly buy on July 5th in anticipation of a rally. If you look at the charts below the July rally is not as regular as the decline in the last week of June.

However, I did find it interesting that there was one constant in every year. That was a sharp increase in volatility between the FOMC meeting and the middle of July. As you can see in the chart slices below there was a lot of directionality as well as sharp reversals.

Dow Charts June-July 2001-2006

Dow Charts June-July 2007-2012

For the last six months analysts have been telling everyone to buy the dip, stocks are going higher. They moaned about the fact there had not been a decent correction since November but should one appear it would be a "buying opportunity." Ok, we got the dip but now they seem to be almost unanimous in warning there is more to come. It seems they are suddenly afraid of what they were telling you to buy.

Multiple analysts pointed to the lack of a rebound in the Dow Transports. The transports declined -3.1% for the week and closed at a six-week low below the 50 and 100 day averages.

The transports were weak because of China. FedEx and UPS fell hard on the China news. Both had previously warned on slower shipments out of Asia. Railroads crashed because of lower demand expectations for mine output and metals like steel and aluminum and building materials for homes.

The transport index closed at 6,100 but has risk to 5,900. Without the transports confirming any Dow gains the theory suggests the Dow will also slip.

Dow Transports Chart

Lipper said $38 billion flowed out of bond funds over the last month. That does not count the last two days so you can imagine how much higher that number is going to be given the spike in yields.

That money did not flow into stocks. The rebound in stocks was minimal at best. The S&P declined to 1,577.70 at the open on Friday. The 100-day average was 1,577.74. The rebound off that 100-day average added +14 points to close at 1,592. You would think that a textbook rebound off support would have garnered more buyers but the quadruple witching and S&P rebalance may have been too much volume to allow buyers to swim upstream.

Monday will be a critical market day. Many analysts believe we will retest that 1,577 level if not lower. If we do break the 100-day we could go a lot lower.

Carter Worth said of the last 205 corrections that declined more than 5% the average decline was between 8.2% and 12.3%. The 8.2% is the average decline while the 12.3% is the median decline. Whatever you call it the chance of a larger decline is fairly good. The S&P was -6.2% off its highs at the Friday low. He was projecting a decline to 1,540.

The support at the 50-day average failed and the longer term uptrend also failed. When major support levels fail it is rare that the first bounce holds. It is simply an oversold bounce where traders reload for the continuation of the decline. You buy a dip to primary support but you fade the first big drop below that support.

Nobody knows if that 100-day average is going to hold. It has not been tested since December so traders will want to see another successful test before they commit a lot of money to the market. This is the summer when markets are typically weak and they now have a new paradigm from the Fed and China. Everything has to be digested in context and people will want to see someone else buying the dip first.

S&P Chart - Daily

The Dow chart is similar to the S&P only the Dow did not reach the 100-day average at 14,646. The low was 14,688 and that was weak support from late April. The Dow has risk to 14,500 and possibly 14,400. Any further decline breaks the longer term uptrend and sets up the potential for an ugly summer.

With the dollar soaring the international companies in the Dow are losing money on currency conversions from overseas sales but it may not hit them too hard in Q2 since there is only a week left. However, the dollar was a lot higher in mid May so that skeleton is still lurking in the earnings closet.

Dow component Boeing typically sells off after the Paris air show currently in progress. IBM could also see weakness as a result of the weak guidance from Oracle. Alcoa and Caterpillar should also see weakness as a result of the slowing economy in China and the impact on the rest of Asia. Microsoft should get a bump from the Oracle announcement next week.

Dow Chart

The Nasdaq had not been reactive to the 50-day average so the violation of that line was not that big of a deal except that is corresponded with the round number support at 3400. The Nasdaq Composite declined to 3326 at the open on Friday and rebounded +30 points at the close. This was more than likely short covering after the S&P broke key support by 4 cents and then rebounded. There are a lot of tech stocks in the S&P so that helped produce an uptick in the Nasdaq and trigger follow on buying.

The Nasdaq has not been reactive to any averages in recent months so the 100-day at 3300 is only slightly less important than the uptrend support and round number support at that level. There are three levels of converging support at 3300 and I would expect that to hold on the first test.

Nasdaq Winners & Sinners

Nasdaq Chart - Daily

On Tuesday I noted the Russell 2000 closed at a historic high of 999.99. Round number resistance at 1,000 was too tough to crack. I said at the time that a new high close ahead of the FOMC meeting and the potential for a disruptive market event was somewhat bullish. It appeared fund managers were not concerned and I said "it was amazingly bullish. Foolish maybe, but still bullish." Obviously anyone that was buying small caps the day before the FOMC meeting is seriously rethinking that game plan today.

The Russell declined -49 points to the low on Friday of 951. That was a serious hit of roughly -5% in three days. The dip took the Russell down to uptrend support at 954 where it came to a screeching halt. The Russell did not break that support and despite the big decline is still a better chart than the large caps.

However, any future decline below 950 is sure to trigger a lot of sell stops so I would be very cautious about buying this dip even if it is the best chart in the crowd. The 100-day average at 946 would be my stop loss on any longs. I would probably put my stop at 945 to trigger on a break of that support. A breakdown below the 100-day average targets 900.

Russell 2000 Chart - Daily

Random Thoughts

Remember Cyprus? The country agreed to confiscate bank deposits in exchange for a 10 billion euro loan from the Troika. The "bail in" was a shock to the entire European banking system. Last week the president of Cyprus, Nicos Anastasiades, sent a letter to the Troika asking to completely reverse the program and return everything to the way it was before the event. Unfortunately that genie is not going back into the bottle.

He said the application of the bail-in was implemented without careful consideration and preparation. The structure of the bail-in amounted to a significant loss of working capital for businesses and now they are failing and unemployment is skyrocketing because they can't pay their employees.

Nicos said they underestimated the impact on the economy and the capital flight out of the country. Duh! Take people's life savings overnight and you think those with money left are simply going to leave it in the bank until you do it again?

The amount of capital leaving the country is accelerating despite restrictions on how much can be withdrawn at any given time. At the present rate there will be no deposits left in slightly more than a year. The entire banking system is collapsing. Cyprus is falling deeper into recession and Nicos warned they will not be able to meet the original rescue terms because of the spiraling economy. He is asking for another 10 billion euro loan, which will not happen since Cyprus is bankrupt.

Greece has not recovered despite being out of the headlines. They announced last week they found a previously undiscovered budget shortfall of 1.2 billion euros in the country's biggest healthcare provider, EOPYY. They have less than a month to plug the hole or that service is going to collapse. Hello, Troika, send more money.

Italy's recession is deepening. The retail association Confesercenti said 134 retail outlets close in Italy every day. More than 224,000 have closed since the start of the crisis. That is a lot of stores no longer buying imported goods from China.

The problems in Europe plus the Bernanke induced decline in the U.S. knocked the European markets for a -3.75% loss based on the Bloomberg Europe 500 index. That was the fifth consecutive week of losses. Italy and Spain both lost nearly -5%.

The economic damage and unrest is not confined to Europe or the Middle East. Brazil is in meltdown mode. The unrest has been growing for weeks and the stock market is down -22% year to date. Inflation is soaring but wages are not. Over the last ten years bus fares are up +180%, healthcare +175%, food +165%, education +145%, rents and taxes +125% and worst of all soccer tickets +245%. Raise my bus fare but not my sports tickets! The riots started out complaining about the higher bus fares but have now moved into complaints about inflation in general. The bus fares are higher because of crowded busses due to higher fuel costs. More people are giving up on the rising costs of private transportation and riding the bus.

The yield on the one-year bond has risen to more than 10%. This is Brazil, not Greece, but this shows how wide spread the global unrest and contagion has become. The growth rate in Brazil has declined from the +7.5% in 2010 to +2.7% today.

Brazilian one year bond yield chart - Source SoberLook


Don't try to apply too much logic to the big market drop. First, it was not big. Thursday's decline of -2.34% was the 675th worst day in the market according to Markets go up and when they have gone up too far they come down. When investors are ready to take profits they will always find an excuse. After a seven month rally of +16% any excuse would have worked and the Bernanke comments were simply the tipping point. Markets take the stairs up, one step at a time and the elevator down.

In theory the massive outflow of cash from bonds would be headed for the equity market. That may not happen until the market shows some signs of stability. We could just as easily see a new leg down next week or some dip buying from the window dressers. The outlook is definitely cloudy. If you don't have to be in the market it might be worthwhile to take the week off, let the post FOMC curse evaporate and come back after the July 4th holiday. With nonfarm payrolls on Friday July 5th the following week should be a lot easier to predict.

Enter passively and exit aggressively!

Jim Brown

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