China: Back in a Bear Market

FN: Chinese stock hit that magical 20% peak to trough decline and are now in a "Bear Market"... again. Like I said yesterday: Parabolic Moves Always End in Tears.

Stocks Fall as China Slumps; Commodities Drop, Yen, Bonds Rise: "China’s stocks dropped, briefly dragging the benchmark index into a so-called bear market and triggering declines in equities and commodities worldwide. The yen and Treasuries rose as investors sought less risky assets.

The MSCI World Index of 23 developed nations sank 0.4 percent at 8:54 a.m. in New York and futures on the Standard & Poor’s 500 Index slid 1.1 percent. China’s Shanghai Composite Index slumped as much as 5.1 percent, extending its drop from a 2009 high to more than 20 percent, the common definition of a bear market. Copper fell 3.3 percent. The yen strengthened against all 16 of the most-traded currencies tracked by Bloomberg and the pound weakened. The 10-year Treasury yield dropped to its lowest level since July 14.

The U.S. and Chinese governments pledged more than $13 trillion to combat the worst financial crisis since the Great Depression, helping to fuel a nine-month rally in the Shanghai Composite that pushed the index’s price-to-earnings ratio to almost double the valuations for the S&P 500, according to data compiled by Bloomberg. Earnings for Chinese companies that reported since July 8 have trailed analysts’ estimates by 12 percent on average, Bloomberg data show."

Shanghai: Parabolic Moves Always End in Tears

FN: Parabolic moves always end in tears. Always. BTW, thats where the Chinese stimulus money went. From the central banks it went into the corporations and retail investors... and from there straight into the equity markets.

S&P 500 Percent of Stocks Above 200 Day Moving Average

FN: The percent of stocks above their 200 day moving averages peaked at 91.6% on Thursday last week. The last reading over 90% was in March 2007, just before the market corrected.

First Major Distribution Day Since July

FN: Yesterday was the first Major Distribution day since the first week of July. Since they tend to come in clusters, expect more over the next weeks accompanied by price weakness.

Semiconductors and Energy: Major Divergence from Rest of Market

FN: Notice how this important technology index started diverging from the broader market indices? Even as the S&P 500 (SPX) attempted to make higher highs, the Semiconductor Index (SOX) simply rolled over. The bounce lasted two days and failed. This morning the SOX is gapping way below 290.

Energy (XLE) has diverged worse still. The highs reached in June around 57.70 when the SPX was at 950 were not reached again, even as the SPX powered thru to 1018. XLE is gapping below 50 this morning.

Both SOX and XLE are important leading indicators of a true economic recovery... and they are currently signaling weakness.

Reality Slowly Catching Up to the Market

FN: Markets are set to gap down pretty hard this morning. This would chunk the S&P 500 (SPX) below the rising 20 day EMA (blue line) at 985 in one move. It looks like the high of 1018 will stand for some time and a drop to the 950 area is the likely first stop.

Notice the data coming out of China is starting to look shaky...

Stocks Slide on Economy Concern; Yen, Dollar, Treasuries Gain: "Stocks fell around the world, led by China, while the yen and the dollar advanced and Treasuries rose as investors speculated that a rally in riskier assets has outpaced the prospects for economic growth.

The MSCI World Index of 23 developed nations sank 1.7 percent at 12:55 p.m. in London, the biggest retreat in a month. Futures on the Standard & Poor’s 500 Index slid 2.3 percent, while China’s Shanghai Composite Index slumped the most since November. The yen strengthened against all 16 of the most-traded currencies tracked by Bloomberg, while the dollar advanced against every one except the yen. The yield on the benchmark 10- year Treasury note dropped to its lowest level this month. Copper and oil declined for a second day.

Equities tumbled after foreign direct investment in China fell, Yunnan Copper Industry Co. said there were “no clear signs” of a recovery and Japan’s economy grew less than economists estimated, reigniting concern that a five-month, 52 percent rally in the MSCI World was overdone. The tally of failed U.S. banks this year climbed to 77 last week, while the Reuters/University of Michigan index of consumer sentiment in America showed an unexpected decrease.

“The rally in risk assets has become overextended as it has run ahead of the improvement in fundamentals,” Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, wrote in an e-mailed report. “The dollar and yen have been boosted by a pickup in safe-haven demand.”

The Dow Jones Stoxx 600 Index of European shares retreated 2.4 percent, the biggest drop in a month. A 41 percent rebound since March 9 has left the regional measure valued at 40.2 times the profits of its companies, near the most expensive since 2003, data compiled by Bloomberg show."