STOCKS EXPERIENCE BIG SELLOFF ON FED PLAN TO SLOW BOND BUYING -- SO DO FOREIGN MARKETS -- EMERGING MARKET CURRENCIES LEAD STOCKS LOWER -- RISING RATES CAUSE GOLD TO PLUNGE -- S&P 500 BREAKS BREAKS JUNE SUPPORT AS VIX TURNS UP

GOLD PLUNGES ... Two factors are causing the price of gold to tumble today. One is a sharp jump in the U.S. Dollar. The other, and probably more important reason, is the jump in U.S. bond yields after yesterday's Fed announcement that it was ready to start cutting back on its bond purchases, and may end quantitative easing sometime next year. The negative correlation between gold and the dollar is one of the better known intermarket relationships. Gold, however, is also impacted negatively by rising interest rates. The reason is that gold is a non-yielding asset. As a result, bullion becomes more competitive when yields are falling, and especially when they're at record lows. Gold has benefited from quantitative easing because it also weakened the dollar and raised inflation expectations. Mr. Bernanke's comments yesterday made it clear that the era of quantitative easing that started in late 2008 is coming to an end. That means that bond yields will be moving higher, which will lend support to the U.S. dollar and hurt gold. Both of those factors make gold a much less attractive alternative. Chart followers shouldn't be too surprised by gold weakness. Chart 1 shows that the Gold SPDR (GLD) actually peaked two years ago. More significantly, it crashed below major chart support during April, which confirmed the end of its bull market. Back on February 28, my market message carried the headline: "The Bull Market in Gold May be Over". One of the reasons for that bearish view was that gold miners were leading bullion lower.

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Chart 1

GOLD MINERS HAVE LED BULLION LOWER... A close correlation exists between the trend of gold miners and the commodity. My February message pointed out that gold miners had already fallen to a four-year low which was a potentially bearish sign for gold itself. Chart 2 shows just how badly gold miners have done. The solid area in Chart 2 shows the Market Vectors Gold Miners ETF (GDX) peaking with gold during the summer of 2011. Since then, the GDX has fallen 60%, versus a 30% drop for bullion (putting both well below the bear market threshold of 20%). Chart 2 also shows the GDX breaking "neckline" support at the start of 2013 which completed a major "head and shoulders" topping pattern. [A H&S top is present when three prominent price peaks are visible with the middle peak (head) higher than the two surrounding peaks (shoulders). The breaking of the trendline (neckline) drawn under the two intervening troughs signals completion of that topping pattern]. The ending of the era of artificially low interest rates supports the view that the secular bull market in gold that also characterized the past decade is over.

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Chart 2

VANGUARD ALL-WORLD EX-US INDEX BREAKS SUPPORT... Last Thursday's message showed the Vanguard FTSE All-World ex-US ETF (VEU) bouncing off chart support along its 2013 lows. [The VEU includes foreign developed and emerging markets, with a 25% weighting in the latter]. I wrote last Thursday that the ability of the U.S. market to continue its uptrend depended on the ability of the VEU to stay over support along its 2013 lows. Unfortunately, that hasn't happened. Chart 3 shows the VEU tumbling nearly 4% today. It is trading at the lowest level since last December, and trading below its 200-day average (red line) for the first time since last July. Once again, emerging markets are taking the biggest hit. The red line in Chart 4 shows Emerging Market iShares (EEM) plunging 4.5% today to the lowest level in ten months. The green line shows the Wisdom Tree Emerging Currency Fund (CEW) leading the EEM lower. That's a side effect of rising U.S. rates and firmer U.S. dollar. Emerging markets remain the weakest part of the global marketplace. Unfortunately, heavy selling in foreign stocks is starting to pull U.S. stocks lower.

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Chart 3

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Chart 4

S&P 500 BREAKS CHART SUPPORT ... U.S. stocks fell heavily again today and have suffered technical damage in the process. Chart 5 shows the S&P 500 SPDRs (SPY) trading well below its 50-day moving average and its early June low. The fact that volume picked up sharply yesterday and again today is a bad sign. Rising volume and falling prices are a bad combination. Chart 6 shows the SPX breaking a rising trendline extending back to last November. That raises the likelihood of a further drop to its next potential support level at its April low. All ten market sectors fell heavily. A bouncing dollar also pushed commodity prices sharply lower, and stocks tied to them.

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Chart 5

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Chart 6

VIX IS CLIMBING... Another caution sign for U.S. stock is today's upside breakout in the CBOE Volatility (VIX) Index. Chart 7 shows the VIX jumping 22% today and trading at a new 2013 high. A rising VIX usually coincides with falling stock prices. Today's upside breakout in the VIX increases the odds for a bigger downside correction in the stock market.

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Chart 7

BOND YIELDS SURGE ... Markets never wait for actual events to take place. Markets anticipate (or discount) future events. Not surprisingly, bond investors aren't waiting for the Fed to start cutting back on its bond purchases later this year. Markets are acting in advance of that, as they usually do. Chart 8 shows the 10-Year T-Note Yield (TNX) surging today to the highest level in fifteen months. It's also very close to exceeding its March 2012 intra-day peak near 2.4%. That would put the TNX at the highest level in nearly two years. It also leaves little doubt that bond yields have bottomed, and that bond prices have peaked. [Mr. Bernanke's comment yesterday that the Fed was "puzzled" by the recent upturn in bond yields suggests that Mr. Bernanke may not fully understand how the financial markets work. Keep that in mind next time he says that the Fed can start selling off its bond assets without any serious complications]. Although the surge in bond yields is having a depressing effect on stocks, I still believe that the longer-range impact on stocks will be positive. All that money coming out of bond funds has to go somewhere. Some of it may move back into money market funds temporarily. I suspect a lot of it will eventually find its way back into U.S. stocks.

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Chart 8

CLOSING UPDATE ... Although today's message was originally posted around noon (NYT), I've adjusted all of the charts (and some commentary) to reflect today's closing prices. Needless to say, it was a bad market day all around. Bonds, stocks, and commodities tumbled. Gold lost nearly $100. The U.S. dollar, which benefits from rising rates, was the only winnner. Today's upside breakout in the VIX to a new 2013 high is a negative sign for U.S. stocks. Foreign stocks also plunged, led by emerging markets. It looks like U.S. stocks have entered the first downside correction since the start of the year. Bond yields surged to a 15-month high as bond prices tumbled. Global markets reacted badly to yesterday's Fed comments. Mr. Bernanke has gotten the Fed in a box and may not find it as easy getting out of it. I suspect he's starting to look forward to his likely departure in January.