Technical Leadership Problem

Charts: The S&P 500 closed at 994, down 1.3%. Support at 996 was breached, next support is 982, and then 869. If both were breached in big volume and our secondary indicators (XLF and CAF) went along for the ride it would signal a correction. Resistance is at 1010. For the time being we have lost leadership from emerging markets as Chinese shares continue to trade lower and the downdraft has spread first to India, then the rest of emerging Asia, and now to Brazil. Last week as China broke down the S&P 500 was led by financials, not tech, so we have a leadership problem. XLF was down 3.85% today.

Fundamentals: Productivity came in higher than expected today. Throughout this recession productivity has increased. This has never happened before. It is helping corporate profitability and keeping inflation tame. However, it means that companies will higher fewer new workers as the recovery sets in because existing workers are becoming extremely efficient. And labor data shows as much. Existing staff is no longer getting fired but new hiring isn’t occurring.

Geopolitics: America’s top General in Afghanistan, Stanley McChrystal, will make a report to the White House in a few weeks assessing the entire war effort. In that report he is likely to request extra troops. He needs at least 40,000 more but will probably ask for half as many. McChrystal is aware that he probably won’t get any reinforcements so he is making a major effort to create an entirely new force of tribal fighters much like the Awakening Council in Iraq. A series of Pentagon officials are making public comments about the situation being tougher in Afghanistan than anybody thought previously. Recent polls show that 64% of Americans favor leaving the troops in Afghanistan until the job is done; but the European public wants to bring troops home immediately. The recent big uptick of Al Qaeda bombings in Iraq highlight how challenging it is to get native troops to fight at the level of NATO soldiers so there probably will have to be a second American surge of at least 40,000 troops, more if European allies bail.
It looks like there wasn’t a shoot-out among top Taliban leaders after the death of Mehsud. Or there was a shoot-out and the very top leaders weren’t hurt because the two top bad guys appeared in public, unscratched. They both claim that Mehsud is alive and only his wife was killed in the drone attack. They say that Mehsud is very sick and will appear in public once he heals up.