Financial Markets Are Looking Worse

Wow -- what a weekend.  I am in the Chicago airport waiting for my flight back to Houston.  The convention was great.  My panel on the middle class went very well.  On top of that, I found out I was accepted to an LLM program in taxation on Thursday, so Bonddad and Bonddad's girlfriend (by far my better half) celebrated over the weekend, along with Bonddad's dad.  All in all, a great time was had by all.  I met some great people as well.

However, let's get down to brass tax because we're entering a difficult period in the markets.  

First, I use the S&P 500 tracking ETF to track the market.  The S&P 500 is the broadest measure of the market around.  The daily chart is looking terrible.  First, notice the daily numbers closed below the 200 day SMA on Friday.  Also of importance is the fact that the market dropped in the last half hour, indicating no one wanted to keep positions over the weekend.  The 20 and 50 day SMAs are all heading lower, indicating further downward moves are likely.  Finally, notice we've seen some pretty heavy volume indicating people are dumping shares right now.  All in all, this is not a happy market.

Here's the weekly chart of the SPY which goes back a few years.  Notice that  the SPYs were in an uptrend channel for a few years and then broke through the upper level of resistance in the last quarter of last year.  The SPYs have been bouncing off this level of support for almost a year.  Now it looks as though the average is going to move back to its upward trend area.

There are two other problem areas in the market.  The first is the transport average.  Dow theory -- which has been around for about 100 years -- says the SPY and the transports have to confirm each other.  The underlying logic is simple.  When the economy is expanding, businesses will have to increase the amount of transportation services they use.  The  converse of this theory is also quite intuitive.  When the economy is slowing, transportation demand decreases.  

Here is a chart of the IYTs, which represent the transportation sector.  Notice this average moved through the 200 day SMA on heavy volume on Friday.  This indicates the markets may be looking for an economic slowdown in the coming months.

Finally there are the financials which are in near free fall right now.  Traders are deeply concerned about the ramifications from the subprime market's problems and how those problems will filter into the financial sector as a whole.  Last Friday, Wells Fargo announced they were increasing the interest rate on home mortgage loans from 6 7/8 to 8%.  That's a really big increase.  In addition, there has been a ton of bad news about various financial institution's exposure to risky loans and fund blow-ups on three continents.  In short, there is plenty of reason to sell this area of the market.  Finally, financials make-up 20% of the S&P 500 and are by far the largest sector of the average.  When this area of the market is doing poorly the chances of a recovery in the broader average is pretty slim.

In short, the technicals of the market look like, well, crap right now.  Expect next week to be pretty crazy.