FRANCE AND GERMANY ARE IN BEAR MARKETS -- COMMODITY EXPORTERS HOLD UP WHILE IMPORTERS FALL -- GOLD ACHIEVES BULLISH BREAKOUT -- FEDEX AND UPS HIT MULTI-YEAR LOWS -- LOW VIX AND CPC READINGS SUGGEST MORE SELLING TO COME

THE FALL OF EUROPE... European markets have done even worse than the U.S. Of the three biggest countries there, the weakest have been France and Germany. Chart 1 shows the CAC-40 trading 28% off last year's high. Today's drop put the French market at a new low for the year. Germany isn't doing much better. Today's drop puts the German DAX 22% below last year's high and headed for a test of its March low. Both are in official bear market territory. Britain is 18.5% off last year's high. Today's 2.6% drop puts the FTSE at the lowest level since March.

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COMMODITY EXPORTERS HOLD UP OK -- IMPORTERS DON'T ... I mentioned yesterday that the only countries that have avoided the global bear market have been commodity exporters. The next three charts show Brazil, Russia, and Canada still in uptrends. The ability of those three countries to withstand the global selloff will probably continue as long as commodities keep rising. By contrast, commodity importers like India and China have suffered more than most countries. Charts 7 and 8 shows those two emerging giants down 35% and 56% respectively. At the start of the year, we were told that both countries were immune from U.S. problems. Apparently not. Except for commodity exporters, the rest of the world appears to be in a major bear market (even if it isn't official yet). We're still being told that global economies are holding up okay. It seems unlikely that will continue if global stock markets keep dropping.

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GOLD RISES WITH THE EURO ... Expectations for a European rate hike on Thursday are hurting the dollar and boosting the Euro. Chart 9 shows the Euro on the verge of breaking through chart resistance at 158. A rising Euro boosts gold (which is priced in dollars). Chart 10 shows the streetTracks Gold ETF (GLD) breaking through initial chart resistance at 92. Gold stocks are continuing to rise as well. Here's a thought. The ECB keeps raising rates to combat rising food and energy prices. Raising European rates, however, boosts the Euro and weakens the dollar which pushes food and energy prices even higher. It seems doubtful that the ECB strategy will work until the Fed decides to join them. That seems unlikely given the recent drop in global stocks. All of that is good for gold.

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DOW TRANSPORTS BREAK 200-DAY LINE ... Tranports lost more ground today. After failing a test of the 2007 high, the Dow Transports have been falling since the start of June (Chart 11). Today's 3.5% drop pushed the TRAN back below its 200-day average for the first time since the end of March. Airlines are the hardest hit but rails are also rolling over. Two of the hardest hit stocks over the last month are FEDEX and UPS. The weekly bars in Chart 12 show FDX falling to the lowest level in four years (and on heavy volume). Chart 13 shows UPS plunging to a five-year low (also on rising volume). Those are two ugly charts.

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WHAT ABOUT THE VIX?... A lot of people are wondering what message the CBOE Volatility (VIX) Index is giving. Although the VIX bottomed in mid-May when the latest market downturn began, it's rise since then has been relatively modest. Chart 14 overlays the VIX (red line) on the S&P 500 (green line) since last summer. The two lines trend in opposite directions. Recent market bottoms (like March) have occurred with a VIX at much higher levels (over 30). In my opinion, the fact that the VIX is still relatively low suggests that the market still has more to drop. The relatively low reading in the CBOE put/call ratio (CPC) is giving the same message. Chart 15 shows that past S&P bottoms have been associated with much higher CPC readings. The S&P 500 may find some temporary support around its March low (as we near July 4). Even if it does, the major trend still favors lower stock prices.

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