U.S. stock markets sold off sharply yesterday, following the plunge of European and Asian markets. The chief concerns of investors focused on a report that China had its leading economic indicators for April slashed and that the European Central Bank (ECB) is caught in a serious liquidity squeeze. The S&P 500 fell to its lowest level since November with 499 of its 500 stocks showing a loss before a late rally closed the index slightly above its May 26 low.

As for China, its leading economic indicators for April were cut to 0.3% from a previously reported 1.7%. Since China has been considered the engine of the world’s economies, stock markets around the world sold off on the news.

And the Europeans could now be in an even worse condition with the ECB unable to loan to its member banks. Meanwhile European governments are attempting to raise taxes while cutting expenditures which is considered a recipe for disaster by most economists — as one maven put it, “Hasn’t anyone heard of the 30’s when such a policy lead to a depression?”

In addition to the global worries, a fall in U.S. consumer confidence brought more sellers into the market. The Consumer Confidence Index for June came in at 52.9 versus an estimate of 62, which was well under the 62.7 reported in May. And the long-awaited financial reform bill is reportedly mired down following the death of Senator Robert E. Byrd.

Under such conditions investors flocked to the safety of U.S. Treasury bonds, investment grade corporate and municipal bonds, and gold. The yield on the 10-year Note broke under 3% for the first time in over a year. And the euro plunged to $1.2206. Gold had a modest rise.

At the close, the Dow Jones Industrial Average was down 268 points to 9,870, the S&P 500 lost 33 points to 1,041, and the Nasdaq fell 85 to 2,135.

The NYSE traded 1.6 billion shares with decliners ahead of advancers by more than 7-to-1. On Nasdaq decliners were ahead by over 8-to-1 with volume of 868 million shares.

What the Markets Are Saying

There is no doubt that there were reasons aplenty for yesterday’s dramatic sell-off. But there are also reasons to question the permanency of the selling. The Fed’s monetary and fiscal policy has failed to put the economy in fast forward, but it is in forward, China’s policies and even their reporting are always questionable, the European situation is not new but a rerun of the same failed policies, and consumer confidence is almost always down in the hot summer months.

The question is, did the market’s breakdown tell us that a new bear market has begun?

From a technical viewpoint it would have been better to see either a new low on the close or to have enough buying at yesterday’s close to reverse prices up. Instead we got late buying that brought the close of each of the major indices above the point of a defined breakdown but not nearly enough to reverse the near-term downtrend.

My guess is that today, the last day of the quarter, will likely turn out to end with a rebound following a weak opening that will flush out the stragglers of the herd of tenacious bulls. A rebound could result from either the Chinese disowning the report of slowing indicators, the ECB saying that they are willing to lend enough to keep their economies afloat, the Senate getting its act together on the finance reform bill, or any combination of the above — or even something new and positive. But the effect will be the same — a rally following yesterday’s sell-off.

Perhaps 43 years in examining stock patterns has made me reluctant to join a pack, which is running in either direction. But yesterday, with the public scared out of their wits, just before the close institutional buyers arrived and bought a lot of stock. This is the fourth time this year that the major indices have held at the S& P 500’s 1,040 level and my guess is that it will hold again — at least temporarily and rally just enough to pummel the shorts who arrived late at the party.

The overall pattern is weak, but the final act of this drama is yet to be played, and my guess is that before the bulls are slaughtered there will be one more round of bear hunting.

Today’s Trading Landscape

Earnings to be reported before the opening include: Acuity Brands, American Greetings, Canadian Solar, Lindsay Corp, Monsanto and UniFirst.

Earnings to be reported after the close include: Apollo Group, Christopher & Banks, Schnitzer Steel, Smith & Wesson and Xyratex.

Economic reports due: bank reserve settlement, MBA purchase applications, ADP employment report, Chicago PMI (the consensus expects 59.7), and EIA petroleum status report.

If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.