First Sign of Tears

Charts: The S&P 500 closed at 980, down 2.4%. The 982 support level was violated. This is the breakout point for the second leg of the rally. Next support is 869, the July low. Secondary indicators were ugly today. If 869 is violated and the secondary indicators go along for the ride, then the market will be in a correction. If we look at the long term picture and consider this rally’s resemblance to past bear market bounces, it becomes apparent that a retracement to 667 is possible in the event of a correction.

Fundamentals: Japanese GDP came in weaker than expected. This triggered a global stock sell-off. Digging inside the Japanese numbers reveals an ugly picture. What growth there was came from exports to China and revisions in inventories. Economists have been warning that recent global manufacturing gains have been coming simply from restocking, not genuine consumer demand. Chinese steel prices are now falling as certain parts of China’s stimulus package expire, an indication that the screeching growth in parts of emerging Asia may be due solely to China’s government spending, which is slowly wearing off. The possibility of the recovery/rally ending in tears is now more likely. And the tears will be the kind that really mess up your mascara.

Geopolitics: In Russia, 20 civilians were killed by a suicide bomber in a province near Chechnya. The Chechnya Islamic flare-up is gaining intensity. In Nigeria, Islamic radical group Boko Haram has announced a new leader. He promises a wide spread terror campaign in the coming months. There is a 1930s style run on Nigerian banks going on. A collapse in Nigeria’s economy would be good news for the bad guys. In Niger (country just north of Nigeria), 1500 paramilitary troopers raided an Islamic camp in a surprise attack and expelled 3500 people. The Niger government says that the camp had links to Boko Haram. In Pakistan, Taliban on Taliban fighting is raging throughout North and South Waziristan, killing large numbers of good-bad-guys and bad guys. In Yemen, the government is keeping media away from the fighting in the north, which appears to be continuing. An Iranian news station says that Saudi jets are strafing bad guy positions in the rugged border region. The Saudi government refuses to comment on the report. In Afghanistan, the coming election will be a pivotal moment in the global war. It looks as though NATO does not have enough troops in the war torn country to pull off a smooth election. If this proves to be the case it may bolster bad guys everywhere.