Charts: The S&P 500 closed at 998. Down a scary 2.2%. The broad index broke through several key support levels and is not in a discernible trading channel. Our only technical hope is for consolidation in a tight trading channel, as I’ve been saying ad nauseam, and that has not happened for more than a few days in a row. We need months of sideways movement for a true bull market to emerge. CAF (our proxy for the Shanghai index) has broken down below the vital level of 31, raising the possibility of a resumption of the bear market in China. AIG was down 20% and Fannie Mae down 18%, highlighting what I was saying last week about low quality leadership.
Fundamentals: Manufacturing data continues to come in stronger than expected. The National ISM survey is now above 50, indicating expansion in overall industrial activity and more evidence that the recession is over. New orders were way up. Yesterday the key Chicago ISM survey tells the same story. The price of oil is way down over the past two days and interest rates are also coming down. Good fundamentals news! The market, however, is responding to bad geopolitical news.
Geopolitics: The Paki Army killed 45 bad guys yesterday, which is a relief because the Taliban had been mopping up the good guys lately. General McChrystal’s big report is out and it doesn’t contain any surprises. We already know that his new strategy is to spend as much energy defending Afghani citizens against bad guys as actually killing bad guys. This new strategy requires lots of troops. And there is not yet any word on his troop request. All we know is that soon he will make his request and it may or may not be granted. Standard counter-insurgency doctrine tells us that there should be 500,000 troops in Afghanistan, not 68,000. Therefore it is a no-brainer that he needs at least 40,000 more troops for a total of 108,000. If he doesn’t get them, then the bear market will resume, it’s as simple as that.
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