The Market Has Almost Wiped Out the Gains From Monday's Historic Rally(Update 2)

U.S. stocks headed sharply lower Wednesday after a round of data showed more weakness in the U.S. economy and surprising resilience in inflation.

Chart Courtesy of Naked Capitalism

Table Courtesy of Businessweek

Retail sales dropped by the most since August 2005 as consumers cut spending on cars, furniture, electronics, clothing and sporting goods. Americans are even eating out less and only spending on the necessities - health care and gas.

Core producer prices increased but headline prices declined. Headline numbers have become just as important as the core numbers, which means that the data today gives the Federal Reserve an excuse to continue cutting interest rates.

Interest rates at 1 percent before the end of the year is a very real possibility. Given the way the futures markets are trading, there is a decent chance that we will see the Dow test 9000 today. This will weigh on USD/JPY and other carry trades. Over the past few weeks, the equity market has been sell-off positive for the dollar but negative for the Japanese Yen.


The gloom was pervasive Wednesday. In a speech, Federal Reserve Chairman Ben Bernanke said credit markets will take time to unfreeze and called for action on the "too-big-to-fail" problem involving U.S. financial institutions. The Fed's Beige Book survey of economic conditions suggests a difficult path for the rest of the year. Earlier, San Francisco Fed President Yellen said the U.S. economy is in a recession.

From Bloomberg: S&P Reviews $280.1 Billion of Alt-A Mortgage Debt

Standard & Poor's said it may downgrade $280.1 billion of Alt-A mortgage securities, the most that the ratings company has identified in a single announcement for bonds backed by the loans.

The debt may be cut in part because S&P has boosted estimates for losses on each foreclosure on Alt-A loans with at least five years of fixed rates to 40 percent, from 35 percent.

"There has been a persistent rise in the level of delinquencies among the Alt-A mortgage loans supporting these transactions," S&P analysts Scott Davey and Ernestine Warner said in the statement.

As inflationary as government efforts are, further writedowns and more financial bankruptcies might be coming.

2008 10 04 Hypo Real fights for life after rescue collapses
2008 10 05 The Citi Restraining Order and Supporting Motion
2008 10 05 BNP Paribas to Purchase Fortis's Units in Belgium, Luxembourg
2008 10 05 Hypo Real Gets EU50 Billion Government-Led Bailout
2008 10 05 Germany Guarantees Private Deposits in Bid to Calm Bank `Panic'
2008 10 05 Denmark Guarantees Deposits in $6.4 Billion Pact
2008 10 06 BofA earnings tumble, cuts dividend
2008 10 06 Countrywide to Set Aside $8.4 Billion in Loan Aid
2008 10 07 Iceland gets $7.6b Russian loan to halt meltdown
2008 10 07 Spain announces emergency fund
2008 10 07 UK makes massive rescue plan for banks
2008 10 07 Zurich Write-Downs Total $615 Million
2008 10 08 Federal Reserve, ECB and Bank of England make emergency interest rate cuts
2008 10 08 Fed Will Lend Directly to Corporations
2008 10 08 Austria Guarantees All Deposits, Stops Short Selling
2008 10 12 Australia to guarantee bank deposits for three years: PM
2008 10 13 Manulife Discloses C$250 Million of Credit Losses
2008 10 13 Spain’s Santander Buys Sovereign for $1.9 Billion
2008 10 13 Fed Says ECB, Others to Offer Unlimited Dollar Funds
2008 10 13 Germany Pledges EU500 Billion in Bank Rescue Plan
2008 10 13 EU Nations Commit 1.3 Trillion Euros to Bank Bailouts
2008 10 15 Iceland Cuts Key Interest Rate to 12% From 15.5%

Tomorrow is very critical because the market may test the last Friday low. Whether the mid-term bullish trend will be killed, in some extent, depends on whether the Friday low still holds tomorrow. For people who are desperate to cut losses, you may want to wait to know if that low is broken.

Chart Courtesy of Cobra's Market View
The level that the market will test tomorrow is a consolidation region on last Friday, which has a strength and could hold. Additionally RSI at the top of the chart has oversold, if the market gaps down at open it will be deeply oversold. On the chart, the oversold of RSI on the 15-min chart, specially if RSI forms a double bottom, is quite accurate. Today RSI has formed a double bottom, therefore the market might hold there. Good luck, bulls!


Sources:

1. EconompicData: Retail Stores Slump (September), October 15, 2008 06:01 am
2. EconompicData: PPI: Year over Year Inflation; Month over Month Deflation, October 15, 2008 05:44 am
3. Credit Writedowns: Writedown news: 15 Oct 2008
4. Calculated Risk: S&P may downgrade $280 billion of Alt-A, October 15, 2008 05:26 pm
5. Kathy Lien: Weak Consumer Spending = Negative GDP, October 15 2008
6. Naked Capitalism: Dow Falls 730 on Deteriorating Fundamentals, Evidence Rescue Efforts Not Taking Hold (Updated), October 15, 2008 05:04 pm
7. Cobra's Market View: 10/15/2008 Market Recap: Testing Low

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