A broad sell-off hit the world markets yesterday, leaving investors wondering about the viability of a financial recovery. From Washington, D.C., to London and Beijing, banking officials warned of the frailty of the recovery while suspicions are growing that the Federal Reserve has used up most of its ability to respond to further economic problems.

Selling was widespread with 499 of the S&P’s 500 stocks ending lower. Macy’s, Inc. (NYSE: M) was the only one to show a gain following a better-than-expected quarterly earnings report and an optimistic forecast for the year.

Blue chips suffered their worst day of the year with all 30 of the Dow Industrials at a loss. Alcoa Inc. (NYSE: AA), The Boeing Company (NYSE: BA) and Caterpillar Inc. (NYSE: CAT) fell 6.1%, 4.4% and 3.8%, respectively. Cisco Systems, Inc. (NASDAQ: CSCO) fell more than 8% in after-hours trading after reporting disappointing earnings.

Even the Transportation Index fell 4.27%, exceeding the percentage drop in the Industrial Average by over 2%.

The euro dropped 2.3% versus the greenback. And the 10-year Treasury notes were in demand dropping the yield to a four-month low of 2.69%.

At the close, the Dow Jones Industrial Average had fallen 265 points to 10,379, the S&P 500 fell 32 points to 1,089, and the Nasdaq plunged 69 points to 22,209. 

The NYSE traded 1.2 billion shares with decliners over advancers by more than 5-to-1. The Nasdaq traded 676 million shares and decliners were ahead by over 8-to-1.

Crude oil for September delivery fell $2.23 to $78.02, and the Energy Select Sector SPDR (NYSE: XLE) lost $1.65, closing at $53.76. 

December gold rose $1.20 to $1,199.20 an ounce. The PHLX Gold/Silver Sector Index (NASDAQ: XAU) fell 4.55 points to 170.72.

What the Markets Are Saying

Yesterday every index suffered the same defeat as confidence in the Fed and foreign banks waned and stockholders headed for the exits. So in just one day a trap was sprung, and in it investors found a very tired bull bellowing in frustration. 

The Dow Industrials fell sharply closing below both the 20- and 200-day moving averages, and the S&P 500 crushed its 200-day moving average landing just 2 points above its 50-day moving average, now at 1,087. But the Nasdaq’s demise was the worst of all as it gapped through both its 200-day and 50-day moving averages, closing at close to its low of the day and down over 3%.

The real surprise was the weakness of the Transportation Index, which fell over 4%. The transports are considered a leading indicator because the companies in the index generally pick up business before a recovery. A crushing day like yesterday will be a shock to many analysts who concluded in July that the transports were telling us that the recession was over.

As for the broad-based S&P 500, the index closed just above its initial support at 1,085 to 1,087. Its next support is at the July 20 low of 1,057. 

The worst technical problem for the bulls following yesterday’s rout is that the overall chart pattern has taken on the image of a huge developing head-and-shoulders formation with the recent high of the S&P 500 at 1,130 as the right shoulder. I personally doubt that this ominous pattern will develop, but many will no doubt be talking about it for days — and that alone could put more selling pressure on the market.

At the very least, this week’s action confirms that the S&P 500’s tops at 1,131 and 1,130 are now confirmed as a double-top. That means that the next firm area of support is at the triple low of 1,060. And that translates into around 9,800 for the Dow — 580 points or more below yesterday’s close. 

We have listened and Mr. Market has made it clear that new highs will not be made soon — the current path of least resistance is down.

I’ll forego the current discussion of the Dow Theory since today’s analysis was of more immediate interest, and I’ll take up the very appropriate subject of a bear market’s characteristics on Friday.

Today’s Trading Landscape

Earnings to be reported before the opening include: Accretive Health, Briggs & Stratton, Brinker, Broadridge Financial, Cache, China Agritech, Elizabeth Arden, Estee Lauder, Gildan Activewear, Kohl’s, O’Charley’s, Perrigo, Royal Gold, Sara Lee, Simcere Pharmaceutical Group, SmartHeat, Textainer Group, Tim Hortons and Wendy’s.

Earnings to be reported during trading hours include: BOFI Holding.

Earnings to be reported after the close include: Alimera Sciences, American Dairy, Autodesk, Bally Technologies, Bottomline Technologies, DeVry, Dionex, Flotek Industries, Geo Group, Medidata Solutions, Nordstrom, Nvidia, Red Robin Gourmet, ShoreTel, and Spreadtrum Communications.

Economic reports due: jobless claims (the consensus expects 460,000), import and export prices, EIA natural gas report, Fed balance sheet and money supply.

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

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