Both international and domestic stocks were hit hard yesterday following a downgrade of foreign countries by bond-rating agencies. Greece was cut to BBB-plus from a A-minus by Fitch, and scores of Dubai-government-controlled companies were downgraded by Moody’s. 

Even the United States and Britain were under the microscope as Moody’s commented that both countries must do something about their public debt or risk losing their AAA rating.

The U.S. dollar index was up 0.6% yesterday, mostly due to gaining on the euro, which traded at $1.4704, down from $1.4813 on Monday. And, as usual, when the dollar rallies, futures fall, so a decline in the Reuters/Jefferies CRB Index of 0.8% was expected.

The exception to the broad decline in futures was natural gas, which gained 14.3 cents to $5.114 per million British thermal units (btu).

Dow member 3M (MMM) said it expects adjusted earnings for fiscal 2009 to be below the prior forecast of $4.57, and more in the order of $4.50 a share. The company said it expects to earn between $4.86 and $5 next year. MMM fell 80 cents to $77.11. 

At the close, the Dow Jones Industrial Average (DJI) fell 104 points to $10,285, the S&P 500 (SPX) lost 11 points to 1,092, and the Nasdaq (NASD) was down 17 points to 2,173.

The NYSE traded 1.2 billion shares with decliners ahead by more than 2-to-1. On the Nasdaq, 611 million shares changed hands with decliners ahead by 9-to-4.

Crude oil for January delivery was lower by $1.31, closing at $72.62 a barrel. The Energy Select Sector SPDR (XLE) fell 95 cents to $54.82, conclusively breaking its 50-day moving average and likely heading to the next support at around $52. 

Gold also fell as a reaction to the dollar rally. The February contract fell $20.60 to $1,143.40 an ounce. The PHLX Gold/Silver Sector Index (XAU) fell $6.86 to $172.11. Its next support is the intermediate trendline at $160.

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What the Markets Are Saying

Three major indices, the Dow, S&P 500 and the New York Composite Index all closed under their 20-day moving averages yesterday. This is generally considered by traders to be a short-term sell signal, but it could turn out to be more than that. 

The NYSE Composite is a broad-based index of every stock on the Big Board, so is a good measure of what is going on in the markets. It almost closed at its low of the day, which also happened to be the 50-day moving average, and it received a sell signal from its Moving Average Convergence/Divergence (MACD) indicator. 

If it was to close under the 50-day, I would expect the S&P and Dow to pull back, as well.

The next support level for the Dow is the zone from 9,380 to 9,900, with its 50-day moving average at 10,064 and rising about 10 points a day.

And even the small- and mid-caps indexes, the S&P 600 SmallCap Index (SML) and Russell 2000 (RUT), fell to the conjunction of their 20- and 50-day moving averages, but are still on buy signals from their respective internal indicators. These indices are more volatile than their big cousins, and a break below the support of two intersecting moving averages could be a serious blow to investors planning for a January Effect.

As the year draws to a close, the markets are mired in conundrums. And the latest, threats to the ratings of major international debt, could have an impact on the world’s market stability. Last night Japan cut its Q3 growth more than expected — another sign of international uncertainty.

Stand aside until the direction of the broad market indices is made more clear.

Today’s Trading Landscape

Earnings to be reported before the opening include: Hi-Tech Pharmacal, Jackson Hewitt, Movado Group and Powell Industries.

Earnings to be reported after the close: Analogic, BWAY Holding, FuelCell Energy, Greif Brothers, Lululemon Athletica, Orleans Homebuilders, Oxford Industries and Pall Corp.

Economic reports due: MBA purchase applications, wholesale trade and EIA Petroleum Status Report.  

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