Financials Confirm Downtrend in Taking Out March Lows

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In the previous commentary (7/23), the negative sequence of the declining $US
Dollar to possible new lows (1969-2007), rising oil prices and increased demand
for gold was outlined, and how it is a significant negative for the current bull
market cycle. I also mentioned that the LBO market is rolling over, with
significant increased credit risk, and that means credit spreads will widen,
which will curtail many of these over-leveraged "funny money" deals that have
become as much of a bubble as the dot-com madness in the last bull cycle. The
subprime markdown of mortgage operations will mean significant losses for many
institutions going forward. It was also mentioned how key brokerage stocks were
trading below their 200-day emas, and that the SPX reversed 6 closes to 1534.10
on Friday, so we could expect more weakness. The $US Dollar hit another new low
yesterday, at 80.02 and closed at 80.13. The TLT is back to that head and
shoulder neckline, closing at 86.14, up from the 81.88 low versus the original
81.40 price objective. Crude oil ($WTIC) was -1.8% to 73.56 and off the recent
76.39 high.

The market action yesterday was similar to the 3/13/07 decline, when the SPX
was -2.0%, NYSE volume was 1.96 billion shares, volume ratio was 5, and breadth
-2186. The $XBD that day was -4.4%, $BKX -3.3%, OIH -1.9% and XLE -1.3%.
Yesterday, the SPX was -2.0% on NYSE volume of 1.98 billion shares, volume ratio 7
and breadth -2650, with 3003 declines and just 353 advances. The OIH was -2.1%
and XLE -2.9%. The most significant factor about yesterday’s decline was the
financials, as the $BKX, MER, BSC, and LEH all took out their 3/14 lows,
confirming a primary downtrend. GS and MS are also now trading below their
200-day emas. The SPX is on life support, with the financials in a confirmed
downtrend. The reactionary earnings moves on recent "better than expected"
(sharply reduced) earnings estimates won’t overcome a continued downtrend in the
financials. SPX earnings estimates had been significantly reduced to +4.2% for
Q2, so it doesn’t take much for "better than expected" reactions. Most of the
economic numbers we are getting from the Bureau of Labor Statistics are so
bogus, that even the "spin city bulls" have trouble reconciling, as do some
former regional Fed Reserve presidents.

In the 7/23 commentary, I said that if expected weakness played out, it would
set up a month-end bounce from lower levels. The SPX hit 1508.62 yesterday
before closing at 1511.04, and month-end is Tuesday, so we are in that zone. The
internals approached the short-term oversold zone with the 4 MA of the volume
ratio 34 and breadth -918, with the 5-RSI at 29.76. I prefer to see the volume
ratio < 33 and 5-RSI <20, but it is close enough seeing that there is a
month-end bias to the upside. With the financials where they are, the SPX will
not be taken to new highs in the next 5 days, and the odds of a significant
month-end bounce are no better than 50-50. "They" are trying to get it going,
with the SPX futures +6.5 points in Globex at 8:30 AM as I complete this

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Kevin Haggerty