The five-session rally came to a screeching halt Monday as economic reports from the financial centers of Europe and Asia confirmed that a global recession was underway. Along with that, the November Institute for Supply Management (ISM) Index showed that the manufacturing sector of the U.S. economy fell at the fastest rate in 27 years.
Financial stocks were the hardest hit — sliding almost 17% followed by energy, off 13%, and materials, down 10%.
Fed Chairman Ben Bernanke, while acknowledging that the Fed has lowered interest rates to its maximum, said that the Fed still has other available firepower that it could deploy to restore the financial markets to normal. He went on to say that the Fed could buy U.S. government bonds of various types in a bid to drive yields still further.
Bernanke also said that the economy is under “considerable stress” and that it “downshifted further” after the financial crisis in September. His speech coincided with an announcement from the National Bureau of Economic Affairs that the economy entered a recession nearly a year ago.
A report from the Semiconductor Industry Association showed a big slump in October sales; JPMorgan (JPM) analysts said that a shortfall of unit sales was to blame. Semiconductor sales are often used as an indicator of economic activity.
After the Bernanke speech, bond yields headed south, with both the 10-year note and the 30-year bond dropping to record lows. The 10-year is yielding only 2.75% and the 30-year is at 3.25%.
The Dow Jones Industrial Average (DJI) suffered its fourth-worst point loss ever, falling 680 points to 8,149. The S&P 500 (SPX) fell 80 points to 816 and the Nasdaq (NASD) lost 138 points, closing at 1,398.
Volume increased slightly, with 1.6 billion shares trading on the NYSE and 834 million on the Nasdaq. Decliners exceeded advancers on both exchanges by about 9-to-1.
Crude oil for January delivery fell $3.15 to $51.34 a barrel after OPEC decided to keep output unchanged at its meeting this weekend. The Amex Energy SPDR (XLE) fell $5.35 to $44.93.
The February gold contract tumbled $42.50 to $776.80 per troy ounce, and the PHLX Gold/Silver Index (XAU) lost $12.63, closing at $88.96. Support for the XAU is at its last reversal at $73.71.
What the Markets Are Saying
No sooner had the proverbial ink dried on my comments Monday about the lack of solid technical evidence of a bottom than we saw the fourth-biggest point decline in history hit the Dow (DJI).
Yesterday’s dramatic sell-off from Friday’s high of Dow 8,840 has the ring of a true test of the recent closing low at 7,552 made on Nov. 20. On the surface it appears to be much like the small corrections from the two prior declines from the peaks of Oct. 14 at 9,924 and Nov. 4 at 9,651.
But there is a difference — the prior tops started from points much farther from the major support line at Dow 8,000 and, therefore, took days to reach it. Instead, yesterday’s one-day plunge fell to within 150 points of the line that has dominated the charts since early in October.
Yesterday’s sell-off also resulted in an alarming jump in the sentiment indicators — the CBOE Volatility Index (VIX) and the CBOE Nasdaq Volatility Index (VXN) — and drove the stochastic very close to new sell signals on each of the major indices.
And while the Dow is holding just above its support line at 8,000, the S&P 500 (SPX) is now under its support at 840 and the Nasdaq (NASD) has turned away from a significant resistance line represented by its 20-day moving average.
Despite the pressure from last week’s rally, we’ve had the discipline to hold our Ultra-Short Exchange-Traded Funds (ETFs) and hope that you have, too. The evidence of a plunge to new lows is growing.
If you haven’t yet made the decision to protect your portfolio with a hedge by holding one or more of these special funds that increase in value when the markets fall, you may want to move quickly and establish a position on any rally. The test has begun.
Today’s Trading Landscape
Earnings to be reported include: America’s Car-Mart (CRMT), Bank of Nova Scotia (BNX), Beacon Roofing Supply (BECN), Beazer Homes USA (BZH), Gladstone Capital Corp (GLAD), Isle of Capri Casinos (ISLE), Landauer (LDR), Omnivision Technologies (OVTI), Sears Holdings Corp (SHLD), Sigma Designs (SIGM), Solarfun Power Holdings Co Ltd (SOLF), Sonic Foundry (SOFO) and Staples (SPLS).
The following economic reports are due today: International Council of Shopping Centers (ICSC) Chain Store Sales Index for Nov. 29, Redbook Retail Sales Index for Nov. 29 and ABC/Washington Post Consumer Confidence for Nov. 29.
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Sam Collins is a registered, fee-based portfolio manager who may be contacted at samailc@cox.net. You can also check out an archive of some of his most recent market outlooks by clicking here.
