FINANCIALS CONTINUE TO LEAD MARKET LOWER -- FREEPORT MCMORAN COPPER & GOLD LEADS BASIC MATERIALS BELOW 200-DAY LINE -- BIG DROP IN CYCLICALS HINTS AT ECONOMIC WEAKNESS -- THAT CONTINUES TO FAVOR BONDS AND DEFENSIVE STOCKS -- NASDAQ THREATENS 200-DAY LINE

MARKET STILL ON THE DEFENSIVE ... As I review my last Market Message written on Friday November 9 (before leaving for Europe), I see nothing to change my negative view of the market. The indicators that were bearish then are still bearish (both price and breadth). The weakest groups are still consumer discretionary stocks (including retailers), financials, small caps, and transports. Defensive groups like Treasury bonds, consumer staples, healthcare, and utilities remain the safest places to be. And short funds. The last chart I showed on November 9 was the Short S&P 500 ProShares Fund (SH). Chart 1 shows that bear fund moving up toward its August high. Naturally, that's just a mirror image of the S&P 500. Chart 2 shows the SPX moving down toward its August low. Last week's failed rally attempt met resistance at the 200-day moving average. At the moment, the market is moving toward the lower end of a four-month trading range. That will be a major test for the four-year bull market. Since that earlier message, deterioration took place in former leaders that broke moving average lines. That includes basic material and energy stocks. Gold triggered some short-term profit-taking.

Chart 1

Chart 2

ENERGY BREAKS 50-DAY LINES ... That earlier message suggested taking profits in any market that broke its 50-day moving average. Charts 3 and 4 show that happening in the Energy SPDR (XLE) and Oil Service Holders (OIH). I suggested using the Parabolic SAR indicator to protect against a sudden downturn in gold. That short-term sell signal was triggered last Monday in the StreetTracks Gold Trust (Chart 5). Basic materials have been hit even harder.

Chart 3

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Chart 5

FALLING COPPER HURTS BASIC MATERIALS... Basic materials have gone from one of the market's strongest groups to one of the weakest over the last month. Today's -2.5% drop in the Materials SPDR (Chart 6) makes it second only to financials in terms of relative weakness. Chart 6 also shows the XLB trading back under its 200-day average for the first time since August. The biggest reason for today's drop is Freeport McMoran Copper & Gold (Chart 7) which has fallen 7% on the day. Most of the reason for that is a 5% drop in the price of copper. Chart 8 shows copper falling to the lowest level since March. That's where most of FCX earnings come from. The breakdown in copper carries a broader message since that key industrial commodity is viewed as a barometer of global economic strength (or, in this case, weakness). Just another sign that the global economy (led by the U.S.) is starting to show some cracks.

Chart 6

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Chart 8

FCX ALSO LEADS CYCLICALS LOWER ... The drop in stocks tied to industrial commodities has wider implications. Chart 9 shows the Morgan Stanley Cyclicals Index tumbling more than 3% today and moving dangerously close to its August low. [Today's close is the lowest since March]. That's important because the CYC is composed of stocks that are tied to the business cycle and the economy. That includes the likes of Alcoa, International Paper, US Steel, and Freeport McMoran Copper and Gold. [FCX is the most heavily weighted in the CYC at 5%]. The relative strength ratio (bottom of chart) peaked in July and has fallen to a nine-month low. That a vote of no-confidence in the economy, and explains why money is flowing into Treasury Bonds and defensive stock groups.

Chart 9

NASDAQ THREATENS 200-DAY LINE... On November 9, I removed technology from the "safe haven" list. That was largely due to the Nasdaq Composite having broken its 50-day moving average. Chart 10 shows the Nasdaq now threatening its 200-day moving average. Every other major stock index has already broken that long-term support line. That increases the odds that the Nasdaq will probably do the same. What to do. The only advice I can give is the same advice I gave back on November 9 and that I've been giving for the last month. Stay defensive.

Chart 10