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Italy Likely Default Kills Stock Market...

Stock-Markets / Stock Markets 2011 Nov 10, 2011 - 05:25 AM GMT

By: Jack_Steiman


We all went to bed last night with the futures fairly flat, but when we woke up this morning, the futures were totally annihilated with the European markets crashing. Italy down over 7% as they saw their 2-year yield rise over the magic 7% mark, up .669 overnight. Once over 75, they believe that they can no longer pay their bills, folks.

Default is the word of the day. Our futures went from flat to -290 on the Dow. While it improved slightly from time to time, we still gapped down over 200 points at the open. Lots of back and forth as the day wore on, but in the end, a very nasty day for all of the major indexes. The market can handle an amazing amount of bad news day after day, but the one thing it can't handle is a default. It's just too devastating to the entire global financial system. Everyone is holding paper from these defaulting, or likely to default, countries. This will bring devastation to the world if they all do actually follow-through with default. Our country will go into recession. The world will likely go into recession. This would kill the stock markets around the world. Depression is possible in Europe. It gets uglier and uglier. So, today was a day to remember, possibly, if Italy does indeed default out. It's the beginning of the end of our stock market, not to mention the same to be true globally. We still haven't lost key support. I will talk about that later in this report.

We look around the market place today, and we see that no one was immune from the selling that took place. 400 points worth of selling. Every sector took it on the chin, but the leader in the carnage was just where you'd expect it to be. The financials nosedived. Stocks, such as The Goldman Sachs Group, Inc. (GS) and Citigroup (C), were hit more than 8%. Uglier than ugly. A massive nosedive at the open. A huge gap down that never recovered. The usual intraday bounce, of course, but in the end, these stocks led down, and rightfully so, as a default overseas will bring these companies to their knees.

Bad will get far worse, so naturally, these stocks were the absolute most vulnerable for today, and will be in the future if this potential crisis becomes a reality. Beyond the financials, we saw problems arise in a big way in the commodity world. Of course, that makes perfect sense as the need, and use, for them will decline rapidly as things deflate out across the world. Demand will literally disappear, so these stocks are extremely vulnerable at this time. There's nowhere to run, or hide, in a market such as this. Bottom line is when the market gets news such as this, everything gets hit. It's a dart board worth of losses. No matter where the dart lands, red numbers are to follow.

Sentiment issues still abound, but far from their worst readings. We had five weeks straight of numbers inverted, and two weeks inverted double digits. The sentiment trade was on in a big way. We are now at +9.5%, and, although that's still a good number, it won't help one bit with the news that's hitting our markets now. No amount of pessimism can help when the very worst of news hits the stock market. When the news is dire, such as it is now, the bull-bear spread could be 30% inverted, and we'd still head lower. Markets such as these cause long squeezes, and thus, the shorts, who pile in, feel no need to cover up their positions. That's totally understandable. At this point in time it would be safe to say, based on the prevailing news out there, the sentiment trade is now behind us. Not good news for the bulls, but again, it wouldn't matter with this type of news anyway.

So, we're on the precipice of losing key, critical support at the 50-day exponential moving average currently at S&P 500 1219. If we lose 1219 we're in trouble. There is a line of horizontal support at a recent tailed high at 1195, but then it drops to the 1150 area before we find any significant support. Below that it gets ugly rapidly. We're getting close to oversold on the short-term charts, but not there yet. Any bounce has to be watched closely. If its weak, and without the oscillators showing strong movement upward, the rally will fail in a hurry, and then support will go away for quite some time. The gap down today is huge, and may not get filled for a lot longer than we'd like to think. Volume was higher today, and the advance-decline line was horrific at best. The real deal with many leaders getting slaughtered. We watch 1219 closely.



Jack Steiman is author of ( ). Former columnist for, Jack is renowned for calling major shifts in the market, including the market bottom in mid-2002 and the market top in October 2007.

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© 2011

Mr. Steiman's commentaries and index analysis represent his own opinions and should not be relied upon for purposes of effecting securities transactions or other investing strategies, nor should they be construed as an offer or solicitation of an offer to sell or buy any security. You should not interpret Mr. Steiman's opinions as constituting investment advice. Trades mentioned on the site are hypothetical, not actual, positions.

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