There was something akin to a reality check for investors yesterday. Stocks tumbled on depressing economic news and that glimmer of hope that emerged over the past week began to fade. While it feels like the financials have just given that so-called “kitchen sink” quarter longed for by the Street, bad news in economic releases yesterday only gave investors a “sinking” feeling. I will say, however, I don’t think investors are so silly as to think the economy turned on a dime.

Most understand even in a best-case scenario the market will hit its share of air pockets and have close calls with disaster. I think (some) investors are looking just a little further out, beyond the six months range equities can usually forecast, and assuming things will get better. (Before you think it, I know how the word “assume” can be broken down.)

Nonetheless, investors will eventually guess right. In the meantime, there's a fundamental argument that the market is oversold and that position has nothing to do with the bigger question of when we will see a sustained turn.

The thing about the market is it goes down a lot faster than it goes up. Even over the past week great up days were mostly hard fought. Yesterday the market opened under pressure and folded like a house of cards. I didn’t sense fear. I did get a feeling investors just were sure and selling begets selling. Once those stop losses were triggered it became a domino affect. We know things are bad, but that part is easy to deal with. The greater angst comes from the sense that things could get worse. Obviously, we have to keep an eye on the financials today.

Technical View

The Financial Select Spider ETF (XLF) closed at the low of the session and under its 50-day moving average. From here the key support point looks like 20 which would mean a move below the 20-day moving average. Such a move could result in the formation of a double bottom as financials would re-test the recent lows.


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Much has been made of the correction in oil but the move in natural gas is something to behold. The August contract is off 31% in two weeks…ouch! I think it’s oversold but I must admit this is a tough commodity to call. I think it’s better to trade crude because it’s easier to anticipate speculators and the emotional aspects that trigger parabolic moves and swift sell offs.

That being said I wasn’t thrilled with the way crude traded yesterday, it should have been much higher considering its status as the only thing that was working in the session. At some point natural gas becomes a buy but I'm content to watch for the time being. Technically, I’d like to see a close above $10.50 or watch it slide even more, perhaps down to under $8.


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In addition to the financials there were other hot pockets of carnage.
 

• Defense contractors were hit hard on greater than average volume even after Goodrich (GDP) posted a strong earnings report and rallied on a million more shares that normal changing hands. Boeing (BA) was the big loser but General Dynamics (GD) also took a hit on higher volume.
  
  
• Agricultural stocks were walloped even after fantastic earnings results from Potash (POT) and Bunge (BG). Potash came out the gate with some vigor but finished the session off 3.3% on 25.6 million shares traded. The stock normally trades 9.85 million shares per session.
  
  
• Airlines have been trading in tandem with financials so when the latter got smacked around it stood to reason the former would too. Northwest (NWA) was down 21% on its average daily volume.

And then there are Freddie (FRE) and Fannie (FNM)…

Moody’s commented yesterday on a topic many have thought about but few have dared to utter publicly. Is the United States government at risk of going belly up backing these government sponsored enterprises and offering a string of bailouts? Apparently both Freddy and Fannie have $800 billion each on their balance sheets and together have combined guaranteed portfolios of $3.9 trillion. The combined risk is only $5.5 trillion -- I feel better already. Moody’s does seem more concerned with the housing market and the status of the FDIC. Stay tuned.

Speaking of bracing for the worst, today’s consumer sentiment data could take us through a time machine to results that will match multi-decade lows. Wall Street may have gotten excited for a moment but Main Street is afraid and will be for a very long time.