MARKET HAS ANOTHER BAD DAY AS 200-DAY AVERAGES ARE BROKEN -- RETAILERS AND HOMEBUILDERS LEAD DAY'S DECLINE -- YEN RALLY THREATENS CARRY TRADE --

RETAILERS LEAD DAY'S DECLINE ... Spooked by tumbles in big retail chains like Wal Mart and Home Depot, retail stocks fell -3.5% today and led the rest of the market lower. Other big losers were homebuilders (-4%) and REITS (-3%). Heavy selling in homebuilders and retailers made Consumer Discretionary stocks the day's biggest losers (-2.2%). Basic materials (-1.9%) and transports (-3%) were also big losers. Small caps lost 2%. Although all market sectors fell, the two that held up the best were healthcare (-.47%) and energy (.47%). The only group to gain ground were biotechs (+.14%). The XAU Index lost more than 3%. That was due mainly to a 5% drop in Freeport McMoran Copper & Gold. That drop was based largely on a 3% drop in the price copper, which was the day's weakest commodity. Gold lost only $1.20. A clearer read on gold's performance might be found in the streetTracks Gold Trust (GLD). The gold ETF actually closed higher on the day and gained ground during the last hour (Chart 1). [Gold closed a couple of hours earlier]. I point this out so that you don't get the impression that the XAU drop reflects falling gold prices. Gold itself is still holding up relatively well. Treasury bonds also had another strong day. Unfortunately, so did the CBOE Volatility (VIX) Index and the Japanese yen. The yen is rallying against all currencies.

Chart 1

YEN GAINS GROUND ON EURO... Chart 2 shows the Japanese yen rising to a four-month high versus the Euro. The yen is also rallying against the U.S. Dollar, the Australian Dollar, the Canadian Dollar, and the British Pound. That's important because it threatens the "carry trade". Global traders had been borrowing (selling) yen and using that cheap money to buy other currencies and stocks around the world. The recent upturn in the yen means that traders have to cover yen shorts and sell off their other holdings. That's why a rising yen is potentially bearish for global stocks. Chart 3 shows Emerging Market iShares (red line) and the yen (orange line) trending in opposite directions over the last eighteen months. The last two times the yen rallied (spring of 2006 and early 2007), emerging markets sold off. And they're doing it again. Chart 3 also shows the yen breaking a down trendline (versus the U.S. Dollar) starting in the spring of 2006. That may be a sign that the yen rally has some staying power. That's something else for global stocks to worry about.

Chart 2

Chart 3

S&P BREAKS 200-DAY AVERAGE ... Today's -1.8% decline put the S&P 500 back below its 200-day moving average. Decliners were decidedly negative (preliminary figures were 6 to 1). And downside volume swamped upside volume. Today's selloff leaves only the Dow Industrials and the Nasdaq Composite Index still above their 200-day lines. The Nasdaq, however, closed right on its 200-day line. The 30-minute bars in Chart 5 show the S&P numbers more clearly for the month of August. Today's S&P close at 1426 puts it just shade below its August 6 low at 1427. The fact that it closed on its low greatly increases the odds for a continuation of its August decline. Two overhead resistance barriers worth keeping an eye on are 1466 and 1503. The S&P would have to exceed them to signal any kind of an upside turnaround. [Please see my message posted earlier today for a discusssion of why the collapse in Home Depot and Wal Mart is tied to weak housing and high energy prices -- and why that's bad for consumer spending. Also why it's dangerous to exclude energy from inflation].

Chart 4

Chart 5