Thursday’s Sell-Off Could
Trigger a “Crash-Like Scenario”
By Dennis Slothower
Editor, Stealth Stocks
Stocks sank on Thursday; Treasury 10-year yields slid to a record and the Dollar Index rose to a seven- month high amid concern central banks are running out of tools to prevent a recession. Commodities were crushed.
The commodity markets were absolutely clubbed after the Fed took away the inflation punch bowl.
Crude oil fell $5.41 a barrel to $80.51. (The economy desperately needs this relief.)
Gold fell $66.3 to $1,739. Silver (SLV) plummeted $38.83 to $34.92, a 10.3% correction closing below its 200-day moving average. (Watch out below)
Given that the S&P 500 index is correlated 80% to the direction in crude oil prices these days, the stock market didn’t take well to this news either.
One of the points the Fed made on Wednesday is their $400 billion intervention is not going into POMO’s as it did with QE2, which caused inflation to soar.
This new “twist” intervention is targeted to drive down long-term interest rates. Ten-year Treasury yields fell as low as 1.6961 percent, the lowest in Federal Reserve figures starting in 1953. The Fed is determined to reward investors with nothing if you invest in Treasuries and for much of the world that’s better than losing their shirts.
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Meanwhile, the Dollar Index rose 1.3 percent. (US Dollar is now at the monthly middle Bollinger Band line—key resistance—a push above 78.77 pushes the dollar into bull market territory. Amazing given how popular the dollar was just a couple of months ago! I told you to watch for this, didn’t I?
The Fed said on Wednesday that it saw “significant downside risks” in the economy.
What happened to the slow growth, soft landing spin the Fed was promoting just a couple of months ago, or the temporary weakness talk due to the Japanese earthquakes?
Unable to explain away the truth we get the truth! I told you not to buy their spin. This is a classic oil shock recession developing, not a soft patch and now the Fed is acknowledging “significant” risks.
As investors we have to think very clearly, focusing on the steps we take in this mine field within a fog bank.
Notice, the Fed said their focus on the long-bond will last until June of 2012! This implies the Fed will not take any further action until after this time. No massive POMO’s support and that means we need to prepare for bear market conditions to persist, perhaps at least until this time period.
Then it will probably be time to bring out the POMO’s again to support the markets going into the elections.
The Stock Market is Breaking Down
Since making an intermediate-term bottom on August 8th, the stock market has seen a series of bungee cord swings, gaps and reversals and here we are now the S&P 500 within just a few points of retesting its August 8th lows.
On two different occasions the S&P 500 has tested its 50-day EMA downside resistance level, missing its 200-day moving average by a mile.
As I said before this is classic bear market behavior but we have also seen 4 separate whipsaws of dramatic fashion designed to snake you.
The strongest of the indexes is the Nasdaq 100, due to Apple, Amazon and Google, which has been bid up ahead of quarterly earnings due out next month.
While at the same time we see the financials getting killed as we saw going into the 2008 recession. The surge in the US dollar is damaging the steel stocks and now with commodities getting killed, the emerging market indexes are completely falling apart, with the last two days breaking down through the wedge formation.
Near term, the S&P 500 is now approaching its August lows at 1,100. Most stocks are very washed out at the moment, so we can’t rule out another snap back rally again to retest the 50-day EMA, or attempt to do so but I can’t see anything really that is going to support this market for long.
If we breach 1,100 we could sell off to the lows of 2010 at 1,000, which is where the bottom of the monthly middle Bollinger Band line rests.
If we take out the lows of August we could be looking at this scenario.
Remember we are coming up on the end of the month and quarter, next week. The Fed has just said it’s not looking so hot, so we could be setting up for a crash like scenario if we can’t hold support at 1,100.
Beware.