STOCKS AND COMMODITIES CONTINUE TO FALL AS BONDS RALLY -- ONCE AGAIN, FOREIGN STOCKS LEAD GLOBAL DECLINE -- MORE 200-DAY AVERAGES ARE BEING BROKEN -- REVIEW OF POTENTIAL DOWNSIDE TARGETS
DOWNGRADE OF CHINA GROWTH CONTRIBUTES TO SELLING ... As has been the case since the market top in May, foreign stocks are leading the global retreat in stocks. Today's main headline was a downgrade in Chinese economic growth. That's not too much of a surprise to those of us who have been watching (and reporting on) the downturn in Chinese stocks. Arthur Hill wrote about relative weakness in the Chinese stock market just last Wednesday. The Shanghai Index fell more than 4% today to another 52-week low today. Chart 1 shows that the Chinese market has been falling since the end of 2009 and has been one of the world's weakest markets. I've written several times that Chinese stock weakness was bad for global stocks and commodities. Today's plunge in foreign stocks set a very negative tone which is pulling U.S. stocks (and commodities) sharply lower. Most foreign currencies are falling against the safe haven U.S. dollar. The Japanese yen (another safe haven) is the day's strongest currency. Treasury bonds and investment grade corporates continue to attract scared money. Riskier high-yield corporate bonds are experiencing some profit-taking.
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Chart 1
MORE 200-DAY AVERAGES ARE BROKEN... All major U.S. stock indexes started the week trading below their 200-day moving averages which is bearish sign. Up until today, several group indexes managed to stay above that long-term support line. Unfortunately, most of them are breaking that line today. The list of breakdowns include the Consumer Discretionary SPDR (Chart 2), Russell 2000 Small Cap Index (Chart 3), S&P Midcap Index (not shown), the Nasdaq 100 (Chart 4), the Semiconductor Index (Chart 5) and the Dow Transports (Chart 6). [Several sector indexes have experienced a "dead cross" when their 50-day averages fell below their 200-day lines. That list includes materials (XLB), healthcare (XLV), and energy (XLE). So far, only the New York Composite Index has experienced a dead cross owing to its heavy material weighting]. Most foreign stock indexes (including China) have already experienced the "dead cross". That's an even more bearish sign for them and increases the odds that U.S. indexes will break their February lows.
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Chart 2
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Chart 3
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Chart 4
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Chart 5
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Chart 6
DOWNSIDE TARGETS FOR S&P 500 REVISITED ... I wrote a message on May 25 entitled: "Most Foreign Stocks Have Already Broken Their February Lows -- Technical Odds Suggest the US Market Will Probably Do the Same -- Using Fibonacci Retracement Lines to Look For Possible Downside Targets If the February Low is Broken". I applied those potential support lines to a weekly S&P 500 chart which are repeated in Chart 7. The support lines were 1010 (a 38% retracement of the 2009-2010 rally), 945 (50% retracement), and 880 (62% retracement). Let's refine those targets a little more. The January/June peak has the look of a "head and shoulders" top which would be confirmed by a break of the February lows (which appears likely). There are two ways to measure a potential downside target from a H&S top. The first is to double the size of the first downleg which was 180 points (using intra-day prices). That projects a downside target to 860 (which I would round up to the 62% line at 880). A more conservative procedure subtracts the 180 points from the June peak at 1131 which measures to 950 (which corresponds closely to the 50% line). I ended the May 25 message with the opinion that: "A drop into that zone could provide a buying opportunity during the second half of the year (especially in the autumn) when the four-year presidential cycle bottom is schedule to appear". I repeated that view in a more recent message. The only problem was that I expected more of a bounce (a summer rally) before the second half downturn. Last week's market downturn, however, ruled out a summer rally having started.
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Chart 7
HOW TO SPOT THE END OF RALLY... A number of readers asked what happened to the summer rally that I wrote about recently. As you may recall, I was expecting the recent bounce to carry into July before turning back down into the autumn. That's the normal pattern. The short answer is that the rally ended quicker than I expected. But it didn't go unnoticed by either myself or Arthur Hill (please see last week's bearish messages). I expected more of a short-term rally when the S&P 500 rose above its June peak at 1105 and its 200-day average. I then expected a test of its 50-day line. The market tested that upper resistance line and retraced exactly 50% of its April/June decline. Then things turned sour. One of the big advantages of charting is that it tells us pretty quickly when something has gone wrong. That became pretty obvious when the S&P 500 closed back below its January peak and its 200-day line (which I pointed out last Tuesday). It then became clear that the June low would be retested. I suggested last Thursday that it was time to take more stock money off the table and consider bear fund protection. It's important to distinguish between "short-term" trades and a "longer-term" strategy. On June 17, I advised that "while short-term traders might want to play a short-term summer bounce, longer-term investors might be better advised to wait until the autumn". By now, short-term traders have exited the market (or gone short), while longer-term investors are still on the sidelines (or in a more defensive mode). I don't apologize for changing an opinion if the market dictates a change. The main goal is to get it right.
