MARKET PLUNGES ON FAILURE TO PASS RESCUE PLAN -- BONDS AND GOLD RISE IN FLIGHT TO SAFETY -- PLUNGE IN EUROPEAN CURRENCIES PUSHES DOLLAR HIGHER -- MOST COMMODITIES FALL SHARPLY -- VIX SPIKES TO HISTORIC HIGH

BONDS, GOLD, AND DOLLAR RISE ... Even before this afternoon's announcement that Congress rejected the massive rescue plan, stock prices were trading sharply lower. That announcement made a bad day even worse and pushed stocks into one of the biggest drops in recent memory. While all market sectors and industry groups ended in the red, the biggest losers were financials, energy, and basic materials. The only day's gainers were Treasury bonds, gold, and the U.S. Dollar. Safe haven buying pushed money into bonds and gold (see Charts 1 and 2). The U.S. Dollar also rose (Chart 3). Most of the dollar buying, however, resulted from a plunge in the Euro and British Pound on a bailout of European financial firms. [We've pointed out that dollar strength is more the result of foreign weakness than U.S. strength]. Foreign stocks fell the most in two decades.

Chart 1

Chart 2

Chart 3

COMMODITY PRICES PLUNGE ... Commodity prices took a beating today on the rising dollar and pessimism from the plunge in global stocks. The DB Commodities Tracking Index fell 6% (Chart 4) while the CRB Index lost 16 points. With the exception of gold, all other commodities fell. Oil prices plunged 10% (Chart 5). Industrial commodities (which are especially sensitive to global economic trends) hit a new yearly low (Chart 6).

Chart 4

Chart 5

Chart 6

VIX REACHES HISTORIC HIGHS ... The degree of fear in the market was highlighted by a 36% surge in the CBOE Volatility (VIX) Index to the highest level in a decade. Today's VIX high matched the levels reached during a previous financial panic (1998) and the end of a major bear market (2002). It remains to be seen if the area around the 45 level marks a bottom this time. Both of those previous bottoms took place during the month of October. There may be some hope in that.

Chart 7

FINANCIALS LEAD MARKET ROUTE ... Not surprisingly, financials were the day's weakest sector. Chart 8 shows the Financials SPDR plunging 13% on rising volume. Energy stocks saw double digit losses on plunging energy prices. Chart 9 shows the Energy SPDR falling to the lowest level in a year. Chart 10 shows the Materials SPDR also plunging to the lowest level in a year. Most of those stocks are tied to falling commodity prices.

Chart 8

Chart 9

Chart 10

S&P NEARS FOUR-YEAR LOW... Today's -8.8% loss in the S&P 500 was the biggest percentage loss in twenty years. The monthly bars in Chart 11 put that into some perspective. Today's close puts the S&P at the lowest level since the fourth quarter of 2004. The next downside target is the August 2004 low at 1060. That's roughly a 62% retracement of the 2002-2007 price advance. One piece of good news is that the monthly RSI line is in the most oversold condition since 2002. Keep in mind also that most major declines (and selling panics) end during the month of October. That's not a lot to go on, but it is something. In the meantime, let's hope that Congress can find a way out of this mess. Chart 12 shows the next potential support for the Dow in the 9700-10,000 zone.

Chart 11

Chart 12