Market Summary

It would be inappropriate to brag about our market signal going to exit last Friday just before the biggest weekly fall in the S&P 500 since September 2002 as it lost 4.9%. As we pointed out last week, the signal has been erratic this year, to say the least, but this time it may finally have got it right. Other indexes did not fall as sharply but the carnage was still pretty bad as the DJI lost 4.23% and the NASDAQ Composite dropped 4.66%. Volumes increased sharply adding strength to the sell-off. Volumes were 70% above average and Thursday and 40% above average on Friday. All three indexes are below their 50 day moving average and the S&P 500 looks as though it will test support at its 200 day moving average in the near future as it is only 10.8 points (0.7%) above that level now.

Each day we publish a snapshot of the market condition in the form of an equivolume chart. The equivolume chart is a succinct summary of price, volume, accumulation day, distribution day action and the relationship to short, medium and longer term moving averages. The equivolume chart of the SPX index as of Friday provides a clear picture of the amount of distribution that has taken place in the last six sessions and how close it is to the 200 dma support line.

If it fails to find support early next week, then we could see the S&P 500 fall to the level it reached following the China market crash in February, which would be a further 6% below the current level.

While February's correction was in reaction to an intervention by the Chinese government in their local market and was quickly erased, the causes of the current correction are much more systemic and likely to have a longer term influence on markets in the US. Credit is tightening and the cheap and easy money that has fueled the expansion so far is drying up. We can expect the "plunge protection team" to step in and halt the slide, although when remains in question. Inflation is coming under control, as Friday's core CPI number fell to 1.4% in the second quarter so the Fed may feel there is room to expend the money supply further thereby adding more liquidity, and easier credit, to the market.

While the economy exceeded expectations in the second quarter, the credit squeeze will make business investment more expensive and may prolong the housing recession. Prospects for economic growth in the second half of the year are falling and there is now a real possibility that the Fed will cut interest rates later this year.

In the meantime, I recommend being in cash.

Gold members were given access to our T/A charts.

Go to Cash

If you did not heed the advice of our market signal last week, then go to cash now. This may be a correction or it may be the begining of the long anticipated bear market. It is too soon to know but unless you are very risk tolerant, this is the time to be on sidelines.

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