Reality about a slowing economy not only hit Wall Street yesterday but also dragged global markets down as no region proved to be a safe haven from the selloff. Bonds were the beneficiary again as interest rates headed lower.
I was not about to wait around to see if that debacle would turn into a 500 point down day, so I sold some of our recently acquired country ETFs. Our international fund, which initially raced higher after we purchased it, headed sharply lower and actually dropped below its own respective long-term trend line. Barring a sharp reversal today, this fund will be sold as well.
While all global markets were affected, the damage was far greater internationally than domestically. This was reflected in the sharp drop of our international Trend Tracking Index (TTI), which moved to within +0.09% of generating a sell signal. Its domestic cousin is still hovering above its own trend line by +2.89%.
Contributing to the market’s sudden demise were continued worries that the global economy will be heading in the wrong direction. Not helping matters was a 19% increase in the June U.S. trade deficit, which will result in a downward revision of the second quarter economic growth figures.
Additionally, after a night of thinking about Tuesday’s Fed move, it became clear that, while they are concerned about a slowdown, their intentions might be too little to right the sinking ship.
It seems like the markets have been moving in a vacuum for most of this year with no sustainable long-term trend in place; either up or down. The result has been whipsaw sideways action where neither the long nor the short side has produced any meaningful results.
Yesterday’s pullback violated some important technical levels. First, the S&P; 500 plunged below its all important 200-day moving average (1,115). Second, it has also moved to within shouting distance of breaking its 50-day moving average (1,081) which, if broken, could invite some serious selling.
The bottom-line is that we’re back to a level within the range where anything is possible. You could see another sharp move up, but given the economic backdrop, it’s questionable whether there will be any staying power.
The reality of globally slowing economies finally seems to have made its way to the stock exchanges of the world. Short of any incredibly good news to the contrary, it’s my opinion that over the next few months the path of least resistance will be to the downside.