S&P CLOSES BELOW 2002 LOW -- FINANCIALS AND DISCRETIONARY SECTORS HAVE ALREADY BROKEN THOSE LOWS -- MONTHLY CHARTS OF OTHER SECTOR AND FOREIGN ETFS IN RELATION TO 2002 BOTTOM -- NO SIGN OF A BOTTOM IN CHINA

WHERE THOSE LOWS ARE LOCATED ... The 2002 bear market lows are under attack. Charts 1 and 2 show where those lows are located for the S&P 500 and the Dow. A 6.7% plunge in the S&P 500 put it below the 2002 intra-day low at 768 for the first time since 1997. The monthly pattern in Chart 1 shows the 2007 peak failing right at the 2000 high for the S&P 500. The drop from its 2007 high has resulted in a 50% loss which matches the drop from 2000 to 2002. The current test of the last bear market low is a crucial one. If those lows are decisively broken by most of the major stock indexes (on a monthly basis), things will start to look a lot worse. So far, the S&P 500 is the only major index to crack that major support level. The Dow tumbled 444 points (-5.5%) to end at 7552. That's only 355 points (4.7%) from its 2002 intra-day low. Keep in mind, however, that valid monthly signals only become official at month's end.

Chart 1

Chart 2

FINANCIALS AND DISCRETIONARY STOCKS HAVE BROKEN 2002 LOWS ... It should come as no surprise that financials and consumer discretionary stocks (which includes autos, homebuilders, and retailers) have already broken their 2002 lows as shown in Charts 3 and 4. Their falling relative stregnth lines show both sectors leading the S&P 500 lower since the start of 2007. The good news is that no other sectors have broken their previous bear market lows.

Chart 3

Chart 4

A LOOK AT OTHER SECTORS ... The next group of charts how where the other seven market sectors are located in relation to their 2002 lows. I've tried to place them in descending order starting with those that held up the best over the last year. Those top are three are utilities, consumer staples, and healthcare. Notice that their relative strength lines have been rising. All three are defensive in nature and usually hold up a bit better in a bear market. All sectors in downtrends however. Charts 8 and 9 show energy and basic material stocks dropping as well. Their relative strength lines peaked during July when commodities started to tumble. Charts 10 and 11 show industrials and technology stocks also in downtrends. None of those seven sectors are in immediate danger of breaking their 2000 lows. But those lows are acting as magnets in the current downtrend.

Chart 5

Chart 6

Chart 7

Chart 8

Chart 9

Chart 10

Chart 11

FOREIGN STOCKS BEAR DOWN ON 2003 LOW... Foreign stocks appear headed toward their previous bear market lows as well. Chart 12 shows EAFE iShares trading at the lowest level in five years. As of today, the EFA is still 29% above its early 2003 low at 26.03. That puts it in less immediate danger of breaking those lows than the S&P 500. The downturn in its relative strength line since midyear is largely the result of falling foreign currencies and a surging dollar.

Chart 12

NO SIGN OF A BOTTOM IN CHINA ... One of our readers asked if I thought China iShares were bottoming. I don't see any sign of it. The weekly bars in Chart 13 show the China iShares still in a steep downtrend. In fact, the FXI has dropped 73% from its October 2007 high which makes it the weakest market in the world. The daily bars in Chart 14 show the short-term trend of the FXI in a downtrend as well. It's held up a bit better than the U.S. over the last month as shown by its rising RS line. But there's no chart evidence yet that the FXI has hit bottom.

Chart 13

Chart 14

BOND YIELDS TUMBLE ... Arthur Hill showed yesterday most of the yield curve in the process of testing 2002 lows, but added that long-term rates still had room to fall. And fall they did today. Chart 15 shows the 10-Year Treasury Note yield (TNX) tumbling to a new 2008 low. The monthly bars in Chart 16 show the TNX bearing down on its mid-2003 low. That earlier trough in bond yields was caused by Fed talk of possible deflation. Apparently, this week's plunge in consumer and producer price numbers has reawakened the same fears. A deflationary environment is bad for stocks and commodities. Bond prices, however, are usually the main beneficiary. Treasury bond prices hit a new 52-week high today.

Chart 15

Chart 16