Multiple Sector Breakdown Precedes SPX Cycle Decline

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The pre-market futures were up yesterday and forced premium openings. This took the SPX up 14.39 points to the intraday high 1488.30 on the 10 AM ET bar vs. the 1.0 Volatility Band at 1488.72. The contra move from this high declined to 1474.24 holding the previous 1473.91 close. It was a good for day traders in the SPYs/futures. The bounce of 1474.24 carried to 1484.49 and the market got soft after 1:15 PM on the news on the increasing belly up saga of American Home Mortgage Investment. The financials led the downside and the SPX tanked as it traded down to a 1454.27 intraday low, closing at 1455.22 (-1.3%). The XBD finished at -2.7% and BKX -2.0% with more to come on negative LBO and sub-prime problems. I see that the credit spreads have widened quickly and they will continue to do so. The junk bond spread vs. treasuries was quoted at +4.28% pts. above treasuries vs. the +2.4% pts. a few weeks earlier. This spread was out to +10% over treasures in 2002, so the best assumption is that current 4.28% spread will widen further. Many institutions and hedge funds are sitting with this low quality paper where the mark to the mark value is significantly above the real world value which is much lower. So there will more dislocation especially in the overleveraged hedge funds that play this game.

NYSE volume expanded to 2.3 billion shares at month end, But the volume ratio was just 28 and breadth -436. The financials led the downside as mentioned above and all sectors closed red except the TLT which was +0.7% to 87.51 and is back to the 200-day SMA of 87.50 and 200-day at 83.80. This TLT rally follows a decline to 81.88 vs. the 81.40 price objective from a head and shoulder neckline break below 86.30. The market remains obviously very short-term oversold, but there as also been significant sector damage and unlike previous corrections, many of the primary sectors are trading well below their 200-day EMAs. They are Financials (%XBD, %BKX, XLF), Retail (XRT, RTH), Drugs (PPH, XLV), Consumer Discretionary (XLY), Consumer Staples (XLP), Utilities (XLU), and course Homebuilders (XHB). In the major indexes, the IWN is also trading below the 200-day EMA while the SPX will trade below it's 1449.22 200-day EMA this morning if the -13 points pre-market SPX futures decline holds (7:50 AM ET) through the opening.

There will be a good oversold rally, but it will not take out the SPX 1555.90 cycle high. This bull cycle is already the longest time between market tops in over 50 years and is now the second longest time between 4-year cycle lows since the 8/9/1982 -10/20/87 cycle. We are also on the edge of the vulnerable September - October market period and after the oversold bounce, the highest probability is down into this period as this bear cycle unfolds.

Have a good trading day,

Kevin

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Have a good trading day,
Kevin Haggerty