The stock market had a significantly difficult day on Friday. Options expiration probably exacerbated the problem but the damage was done none the less. This break seems important due to the picture it makes with the previous charts.
As you look at the major indexes over the past ten days or so, the theme is not being able to generate much on the upside. The market has stocks down quite a bit over the past week alone. The global markets are all struggling together. As we write this, Asia is down about the same 2.5% that we were down on Friday. Plus, the futures trading over night are down almost a percent and, even though we know that is based on thin trading and Asian markets, Mondays are typically Up days.
We think the market will write its own story but we think that the credit markets are somewhat in control at the moment. Last week's big "bailout" SIV is on death watch and probably will never see the light of day. The comments from Warren Buffet were that the banks can shuffle the paper around all they want to but what is important is that the underlying risk has Not changed. Those comments were probably enough to kill the deal in its tracks.
This evening we see the market being in some trouble. The movement of one day does not dissuade bulls from their particular positions but they will soon change their minds as the prices of stocks start dropping regularly. The bulls are thinking that any dip is only going to be temporary because they have seen it before. The problem is that the stock market has a job to do and that is to confuse the majority of the players.
Bull markets are just grand because they don't force people to think about what to buy. This latest several years has come down to what the world is calling the Four Horsemen, hardly an endorsement for a broad rally. Just the opposite is true.
As we look out over the landscape, there is a Fed meeting next week over Halloween and we think the Fed will almost have to consider another cut. As we have said many times, the Fed Follows the market and right now it is behind and needs to catch up by lowering rates. While most think that lower rates should be bullish, the reason for rates going down is recession on the horizon which is Not bullish for stocks.
Let's see what Monday brings and whether the current futures' weakness holds into the trading day and then whether the bulls can buy that dip. There will be bounces in this decline but we think they will be labored and not lasting. Back here tomorrow.