Stocks Crushed

On the heels of a bad week, global stock markets were crushed on Tuesday. The selling actually started on Monday with an afternoon slide, carried over into a sharp drop in China, and more weakness in Europe, leading to a gap down when US trading opened. The SPX reached new lows for the year on closing and intraday basis. Only a tiny late rally saved the index from closing below the 1040 level, while the dow finished well beneath the 10,000 mark.

Volume picked up, though it was less than Friday, and breadth was terrible. The SPX is now back to levels last seen in October, as the 50 day SMA is plunging and could soon cross the 200 day. We can feel safe in saying that the nascent rally off the May-June correction has been put down by the bears. Head and shoulder top patterns have appeared on the charts of a number of indexes and sectors, and several major foreign markets look weak from a technical viewpoint.

It was only a few days ago that I posted my chart study of the long bond ETF, suggesting it looked vulnerable technically. In the panicked flight from risk, Treasury bonds are simply in their own world, with a 2 handle on the 10 year yield. That is something we haven’t seen in more than a year – when the markets were pricing in an end of civilization scenario. Just amazing. Looking out at the long term, this appears to be crazy, but that’s where the market is, and telling the market it’s wrong is a method for losing capital.

What now? Be defensive. Regular readers know I have been leaning bearish since March, but went long the attempted June rally, and while it worked out for a week or so, all those positions are now under water. There is a chance we could get a little bit of a bounce on Wednesday, being the end of a quarter, but the equity and commodity markets are very weak. If we can’t muster any kind of strength at that point, I will have to throw in the towel.

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