The Next Big Move Will Be Down – Wait For SPY 126 To Fall!

Friday's market decline set the table for a tough week. Monday and Tuesday, prices continued to slip as financial concerns resurfaced. Many analysts are talking about the next major bank failure and I have heard staggering projections that many more could fail before this is over. Fannie Mae and Freddie Mac are struggling to secure capital and a government bailout is likely. That will hurt shareholders, but at least bondholders (many of which are foreign) will be kept whole. The Fed has been able to keep its focus on the economy and the financial crisis due to falling commodity prices. However, this week's 1.2% spike in the PPI included a "hot" core number. That means that inflation has spread beyond food and energy. This morning, oil has spiked five dollars higher even after oil inventories showed a 9 million barrel build. Russia is to blame. It looks as if we have entered a new "Cold War" era. The US is supplying Poland with defense missiles and Russia has expressed concern. Meanwhile, Russian troops maintain their presence in Georgia much to our dislike. The Russians control much of the gas that goes to Europe and they can cause an energy disruption. This morning, initial jobless claims dropped by 13,000 to 432,000. Continuing claims are still relatively high and they are at 3.36 million. These are not encouraging numbers, but at least they are not on the rise. Next week's economic releases include consumer confidence, new home sales, the FOMC minutes, durable goods, GDP, initial jobless claims, personal income, Chicago PMI and consumer sentiment. The market is looking for direction and it will trade off of these numbers. However, the major economic release will come in two weeks when the unemployment report is released. Earnings and interest rates drive the market. We have just concluded earnings season and year-over-year; profits were down 20% for the S&P 500 this quarter. Interest rates are likely to stay at this level for at least two months. The financial crisis is teetering on disaster and the Fed would not dare to raise rates. Technically, the market was not able to hold a nice trend line that formed from the July lows. It tried to rally above minor resistance at SPY 130 and it was not able to hold that level. This recent breach is very bearish. Even with falling commodity prices, the market could not stage a decent short covering rally from an oversold condition. This wimpy little bounce tells me that trouble lies ahead. The double bottom at SPY 126 was breached in July and I believe we will break below it soon. The long-term chart (5-year) is also very bearish and it shows that the neckline of a head and shoulders formation has been breached. The 5-year uptrend line is also been violated and the market is below its 200 day moving average. Finally, the next few months are seasonally bearish. All of these events point lower. The dark cloud that hangs over this market continues to grow and even though I see some great values, no one wants to step up and buy stocks in this environment. If the SPY breaks below 126, short consumer stocks (retail, airlines, hotels, restaurants). I do like commodity stocks here and they could move contrary to the market.

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