Do Markets See Economic Slowdown and Contagion?

As I stated yesterday, Tuesday's down market qualified for a 90% Down Volume day. Statistically, a 90% Down day is usually followed by a 2 to 7 day rally. This is usually due to bargain hunters entering the market, technical traders looking at oversold indicators, and short covering, However, yesterday, Wednesday, was essentially flat and Tuesday's selling wasn't enough to entice people pick up their buying.

Today, the Dow was down 145 points to 10,152, breaking through the important support level of 10,186. The S&P was down 18 points to 1073 also breaking through support of 1089. Additionally, the NASDAQ was down 36 to 2217 staying below its 200 day moving average.

The European markets were down significantly with Spain down over 3% and Italy & France down over 2%. The Asian markets were mixed, either marginally up or down. Shanghai was the worst down almost 1%.

The Fundamentals of our economy and the world economy is slowing. Therefore, the bailouts, excuse me, the stimulus didn't work and create a sustained growth economy. People are worried about economic contagion from Europe and China is having troubles of her own.

Tomorrow, I will be watching very diligently to see if selling accelerates and buying dries up, or we get a bounce. The fundamental shift I have been speaking and writing about may come sooner than we think.

I have attached a graph of the Baltic Dry Index, which is a very good indicator of global economic activity and a good indication of growth expectations going forward. I have attached a long term chart and a short term chart so you can overlay and compare to the indices. Notice the near vertical decline over the past month.

Again, the next few days will give us a very good indication of the trend to come. Until we get some better clarification, I will continue to hold a lot of bonds, cash, and some stocks. Incidentally, I am short European stocks.

Keep studying,
Dan Stewart CFA®