WEAK FINANCIALS PULL MARKET LOWER -- S&P 500 CLOSES BELOW 5O-DAY LINE FOR SECOND DAY -- JUNE LOW MAY BE RETESTED --BONDS BOUNCE ON FLIGHT TO QUALITY BUYING -- RISING VIX NEARS QUARTERLY HIGH
FINANCIALS SPDR FALLS BELOW 200-DAY LINE ... A mid-day market rally fell apart on more mortgage concerns and another sharp drop in financial shares. Chart 1 shows the Financials Select SPDR (XLF) ending the day beneath its 200-day moving average. Downside volume has been especially heavy over the last two trading days. The day's biggest financial losses took place among brokerage firms. Chart 2 shows the Broker/Dealer Index closing below its 50-day moving average for the first time in two months. Goldman Sachs did the same on rising volume (Chart 3). Bear Stearns had the worst chart day.
Chart 1
Chart 2
Chart 3
BEAR STEARNS FALLS TO NEW 2007 LOW ... Bear Stearns, which is in the center of the growing subprime storm, was the biggest percentage loser in a weak financial group. Chart 4 shows the stock falling below its March low to end at a new 2007 low. Downside volume was huge. Today's fall was based in reports that Bear might have to bail out a second (and bigger) hedge fund. Financial selling included money center banks.
Chart 4
JP MORGAN BREAKS 200-DAY LINE ... Large banks are falling with the brokers. Citigroup is threatening its 200-day moving average (Chart 5). JP Morgan closed below that long-term support line (Chart 6). It's pretty hard for the market to ignore that kind of selling in a group that has the highest weighting.
Chart 5
Chart 6
S&P NEARS TEST OF JUNE LOW... All of the major market indexes ended in the red today. As a result, the S&P 500 closed below its 50-day average for the second consecutive day. (The NYSE Composite Index closed just below its 50-day line as well]. Keep in mind that financial stocks have the biggest weighting on the New York Stock Exchange. The key chart point to watch on the S&P in the early June intra-day low at 1487. The hourly bars in Chart 8 give a close look at the top and bottom of the trading range that's been in effect since the start of June. It also gives a closer look at a couple of potential support points at 1492 and 1487. The fact that this week marks the end of the second quarter and the first half might be enough to prompt some profit-taking by money managers who want to preserve those first half gains. As I suggested on Friday, it would take a close below the June low by the S&P 500 (and other stock indexes) to turn the short-term trend down and issue the first short-term sell signal in four months. Whether or not that happens will depend to a large extent on what happens with financial stocks.
Chart 7
Chart 8
BONDS BOUNCE ON FLIGHT TO QUALITY BUYING ... The only asset class to bounce today was bonds. That was largely due to "flight-to-quality" buying resulting from a weaker stock market. Chart 9 shows the 7-10 Year Treasury Bond ETF (IEF) jumping today as stocks fell. Bond prices are still in a downtrend. However, the rising RSI line (blue line) shows that bond prices had become deeply oversold. Bond buying also explains the bounce in utilities today. Bonds and utilities usually trend in the same direction. The day's biggest losers outside of financials were basic materials and energy. Gold shares also sold off. Utilities were the only sector to end in the black. Consumer staples and healthcare lost ground, but held up better than the rest of the market. That's normal when investors start to get nervous.
Chart 9
VIX GAINS 5%... Another thing to be concerned about over the short run is the recent upmove in the CBOE Volatility (VIX) Index. Chart 10 shows the VIX gaining 5.7% today to close just shy of a new high for the second quarter. Why that's important is because the VIX usually trends in the opposite direction of the market. In other words, a rising VIX usually means lower stock prices. A close over the early June high by the VIX at 17 would greatly increase the odds of the S&P 500 breaking its June low.
Chart 10
