Charts: The S&P 500 plunged to 1029, down a whopping 2.6%. The index smashed through 3 support levels. Next support is 1018, the breakout point for the third rally leg. If that is violated we are in a correction if we aren’t in one already. Volume patterns in the last few days show bigger volume on down days than up days, a sign that institutional investors are selling. Emerging markets were clobbered today so there is little hope that a weakening US market won’t drag down all global indexes like there was yesterday.
Fundamentals: The National Purchasing Manager Survey came in worse than expected today, further proof of the restocking theory (scroll down to yesterday’s blog). Weekly jobless claims came in worse than expected. Yesterday the ADP private sector jobs report came in worse than expected. Besides restocking, we could also be seeing the effects of stimulus wearing off. Clunkers is over and the first time home buyers tax credit is fading, a double whammy.
Geopolitics: What I was calling the Petraeus Plan yesterday should actually be called the Gates Plan. It appears that McChrystal, Chairmen of the Joint Chiefs Mullen, and Petraeus are 100% behind the McChrystal Plan, so that is the Pentagon Plan. Troops are coming out of Iraq on the behest of the Pentagon, not the Whitehouse, and are slated for the second Afghan surge. Neither the Gates Plan nor the Pentagon Plan has won out yet. Either one could still be implemented.
Let’s assume that the Gates Plan goes forward and ignore the other one. Congress just tripled foreign aid to Pakistan; this is part of the Gates plan; the opening move in an effort to peel the Paki Army off the Indian frontier and pour tens of thousands of fresh troops into the theatre. To make progress here the ISI’s pet terrorist group (LET) has to be offered up to the Indian government, to get India to peel its army off the frontier. An LET leader was just killed in a battle with the Paki Army, so step one seems to be going pretty well. ISI is the Paki CIA, and it is key to this entire dynamic. The CIA is now working hand in glove with the ISI in finding and destroying drone targets in Pakistan. ISI wants its own drone fleet. CIA says no but may let ISI continue partnering when the expansion of drone sorties into Afghanistan occurs.
All of this is in the very early stage and a lot has to go right to make it work. India is not yet pulling troops of the frontier. Pakistan is not yet able to tap the military horsepower sitting dormant on the frontier.
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