RECORD DROP IN HOME PRICES AND PLUNGE IN CONSUMER CONFIDENCE SINK STOCKS -- HOMEBUILDERS, FINANCIALS, AND SMALL CAPS LEAD DECLINE -- BOND YIELDS FALL AS VOLATILITY AND THE YEN JUMP

FINANCIALS AND SMALL CAPS FALL THE HARDEST... Tonight's message is largely a repeat of the message I sent this morning. Except that things got even worse as the day wore on. I wrote last week that one of the ways to tell if the market rebound had any staying power was to watch financials and small caps. I pointed out that the Financials SPDR (XLF) and the Russell 2000 Small Cap Index needed to clear their August highs to lend support to the market. Failure to do so would be a negative sign. Chart 1 shows the XLF gapping down today after failing a recent test of its August high and its 50-day moving average. Although volume was light, it picked up a bit on today's price drop. Chart 2 shows the Russell 2000 iShares (IWM) also gapping down today on rising volume after failing a test of its August high and its 200-day moving average. The fact that those two groups led the market lower strongly suggests that the market rally has come to an end. News of a record second quarter drop in home prices pushed homebuilders into a 4% loss for the day. Other big losers were basic materials, transports, and cyclical stocks. The smallest losses were seen in the defensive consumer staples, healthcare, and utilities. The fact that consumer confidence fell the most in nearly two years didn't help. Nor did the fact that bond yields continued to drop, while the Japanese Yen and the VIX jumped.

Chart 1

Chart 2

BUYING BONDS, VOLATILITY, AND THE YEN ... I wrote last week that the inability of bond yields to turn up called into question the staying power of the stock market rally. After today, things look even worse. Chart 3 shows the 10-Year T-Note Yield falling to the lowest level since March. That means that investors were buying bonds in a flight to safety from stocks. [T-Bill rates also fell today for the first time in a week]. While bond prices were rising, so was volatility. Chart 4 shows the Volatility (VIX) Index bouncing sharply (+16%) off chart support around the 20 level. A rising VIX means lower stock prices. The Japanese yen also gained more than 1% today. Chart 5 shows the Japanese Yen ETF (FXY) gaining more than 1%. A rising yen puts pressure on the carry trade and is a negative factor for global stock markets.

Chart 3

Chart 4

Chart 5

NYSE COMPOSITE FALLS BELOW 200-DAY LINE ... In this morning's message, I warned that the S&P 500 and the NYSE Composite Index were in danger of falling back below their 200-day moving average. Chart 6 shows the NYSE Composite Index doing just that (as did the S&P 500). I also warned that any pick-up in volume would be an additional negative sign. Unfortunately, trading activity on the big board did pick up today (although still relatively light). Big Board decliners beat gainers by a 5 to 1 margin (3 to 1 on the Nasdaq). All things considered, I think it's safe to assume that the short-term rally attempt has run its course and that a retest of the August lows now appears more likely.

Chart 6