REPLAY OF LATE FEBRUARY -- BANKS, BROKERS, AND HOMEBUILDERS LEAD STOCK SELLOFF ON SUBPRIME CONCERNS -- MARKET MAY BE STARTING SECOND DOWNLEG AS VOLATILITY SURGES

MORE OF THE SAME ... I posted a market message earlier today to the effect that the same global intermarket problems that started exactly two weeks ago are re-surfacing. The sequence includes falling Chinese stocks, falling emerging markets, falling global stocks, a flight to safety into Treasury bonds, buying of Japanese yen (and the unwinding of the carry trade). All of those negative trends started on Tuesday, February 27. Our headline that day read: "China Leads Global Stock Decline as Bonds and Yen Rise". A March 1 article headlined "Why Rising Yen Poses a Global Threat -- Unwinding the Carry Trade". The March 5 headline was "Mortgage Concerns Continue to Plague Market". On Monday, February 26 (the day before the Chinese market plunged), I wrote "Why Loss of Broker Leadership Isn't Good For Market". I mention these earlier messsages to remind newer readers (and some not so new) that all of my market messages are available to you. Under "Recent Updates" on the John Murphy page, you'll see headlines for the last four messages. By clicking on any date, you can read the entire message with accompanying charts. Click on "More Archived Updates" below those four and you'll see all of my recent market messages. Many of the recent questions I've received on such things as the "yen carry trade" can be found in those archives. I also refer you back to those articles so that I don't have to repeat all of the material already covered. I call your attention in particular to the two articles on subprime mortage problems and the continuing drop in brokerage stocks. Those two earlier stories pretty much sum up today's market headlines. In other words, nothing new or surprising happened today. Just a continuation of the same problems that started two weeks ago that haven't gone away. And just as it started with a drop in China two weeks ago (first arrow in Chart 1), today's 3.34% drop on rising volume threatens more of the same (second arrow).

Chart 1

FIRST THE GOOD NEWS ... I recently suggested that two places where money was likely to be made in the week's ahead were Treasury bonds and the Japanese yen. After a modest setback in both markets (as the stock marked experienced a "dead cat" bounce), Treasuries and the yen rose today as stocks sold off. Chart 2 shows the 7-10 Year Treasury Bond iShares (IEF) closing at a new recovery high as interest rates fell sharply. That weakened the dollar and boosted foreign currencies. The Japanese yen, however, was the strongest currency of the day. That means that the yen is rising again versus other major currencies. Chart 3 shows the yen gaining 1% today against the dollar and trading back over its 200-day line. That will raise new fears of unwinding of the carry trade. A third place I suggested to ride out a possible market downturn was a Nasdaq short fund. Chart 5 shows the ProShares Ultra Short QQQ rising 3% today on heavy volume. The QID had recently broken out to a new four-month high on rising volume (as the Nasdaq broke chart support at 2400). The recent pullback held over chart support near 55 before today's upturn. That's good for the QID, but bad for the Nasdaq.

Chart 2

Chart 3

Chart 4

BANKS AND BROKERS TUMBLE ... It seems hard to imagine that Wall Street actually believed that the virtual meltdown in the subprime mortgage market wouldn't hurt the bottom line of major banks and brokerage stocks. The fall in both groups starting a couple of weeks ago told us otherwise. With subprime defaults now spiking to a four-year high, banks and brokers suffered large losses today. Banks fell 3.26% while brokers lost 4.42%. The latter made brokers the day's weakest group. The type of technical damage done is shown in the next two charts. Bear Stearns tumbled 6% and closed below its 200-day moving average on huge volume. Citigroup closed below its 200-day line on rising volume as well. Since financial stocks are considered to be leading indicators for the rest of the market, today's breakdown is cause for more concern.

Chart 5

Chart 6

HOMEBUILDERS TUMBLE ... Those on Wall Street who keep talking about a stronger housing market might want to look at a few homebuilding charts. They're not a pretty sight (unless you've shorted them). The entire housing group has been hit especially hard since the subprime problems surfaced a few weeks ago. One of today's biggest losers was Pulte Homes which tumbled 5% on heavy volume (Chart 7). The stock is now threatening its summer low. What's so troubling about the homebuilding collapse is that the Fed is banking on a stronger housing market to hold the economy up this year. Bond bulls are already factoring in a Fed ease sometime this year. They know that sooner or later someone is going to show Mr. Bernanke a chart. Let's hope he knows how to read it.

Chart 7

DOWNTREND IS RESUMING ... The "dead cat bounce" that lasted a little more than week appears to have ended. Chart 7 shows the Dow Diamonds (DIA) having recovered half of its prior downturn (the middle line near 124) before losing 1.7% today. Downside volume was noticeable heavier than last week's upside volume. That's what happens in downtrends. Chart 9 shows a slightly longer range version of the S&P 500 SPDRS (SPY). But the conclusion is the same. The SPY fell near nearly 2% today on heavy volume. The 14-day RSI line failed below the 50 line which is now resistance (top arrow). The daily MACD lines stayed negative throughout the recent bounce. The S&P appears to be starting a second downleg which should take it to its 200-day moving average (red arrow).

Chart 8

Chart 9

VOLATILITY IS BACK ... I was watching TV yesterday and heard some Wall Street analysts bragging about how the recent spike in volatility was just a short-term phenomenon and nothing to be concerned about. The anchor seconded those sentiments. [That type of cheerleading is what we've come to expect from TV]. Today's 29% spike in the CBOE Volatility (VIX) Index strongly suggests that the renewed volatility that started two weeks ago is still with us. And it's probably going to get worse. Unfortuntely, that's bad news for the stock market. Cheerleading is okay at sporting events. It's dangerous in the financial markets.

Chart 10