In US markets, more credit concerns and falling existing home sales started equities moving south by the end of Monday, counterbalancing the recent good econ news related to (i) US manufacturing activity, (ii) a liquidity injection by the Fed, and (iii) several international mergers and acquisitions deals.

With the final hour sell-off to start the week, the talk was that ubiquitous credit difficulties have poisoned economic fundamentals. So traders were nervous and volatility shot up. Then yesterday, the shoe dropped that the Conference Board Consumer Confidence Index (105) for August fell to its lowest level since last August. That disappointment, followed by Wall Street’s interpretation of the FOMC minutes, where investors were hoping for hints at rate cut, that the Fed would let the economy and the credit market crisis work out on its own, led to even more volatility in the equity market.

The DJIA (-280 -2.10 pct to 13042) and the Nasdaq Composite (-60.6 -2.37 pct to 2500.6) is the result of traders fearing, without additional help from the Fed, the equity market has started down a slippery slope. The word now is that if the stock market is going to fall, and the economy slow, that recession is on the way.

I don’t see the present situation as being so dire. However, I do believe that if the Fed did drop rates and equity prices continued to fall, recession would surely be around the corner.

Moreover, with lower rates, inflation would likely pick up, creating a stagflation condition like the early 1970’s that sent stock prices on a long and difficult slide (the 1973-74 Bear).

There is no shortage of negative news this week, including ratings downgrades for HB&B.

Financials (XLF 33.12 -3.0 pct) dropped after Merrill Lynch downgraded Citigroup (C 46.14 -3.5 pct), Lehman Brothers (LEH 54.28 -6.0 pct) and Bear Stearns (BSC 108.42 -3.8 pct) from buy to neutral, citing their over-dependence on debt markets.

Auto manufacturer July production dropped as sales disappeared. Toyota Motor Corp cut production in Japan -8.4 pct, which was the first cut in 3 months. Nissan Motor production in Japan for the year dropped -20.9 pct to 85,976 vehicles. As the Carry Trade was winding up, the Yen:USD lifted, which really hurt sales of these exporter companies.

Do you recall me referring to gold as being the Lexus Hedge? The USD would fall, and gold would rise, but with the higher Yen, the Toyota shares would fall. So, I would ask if today was a Lexus day or a gold day.

In addition, real estate continues to slide. Yesterday, the Standard & Poor's S&P/Case-Shiller Home Price Index fell -3.2 pct. According to Robert Shiller, chief economist at MacroMarkets LLC, the housing market retreat "shows no signs of slowing down". There could be two or more years of difficulty for the industry and for house-builder stocks.

The housing cycle is already a couple years old. The last down cycle for housing took four years or more to reach a bottom. I believe the same thing will happen here.

The International Council of Shopping Centers-UBS Retail Chain Store Sales Index increased by +0.3 pct, a relatively flat, but not disappointing figure.

US chain store sales fell -0.7 pct in the first three weeks of August, a modest decline when coupled with the seasonally adjusted sales for the period that rose +2.3 pct compared to last year. But, as I pointed out several weeks ago, the share prices of US retailers hit the wall in July, which was a signal that consumers were waving a black flag on spending.

Just as, last year, we started watching the housing industry foreclosures and average time to sell data, traders now have to watch inventories for the retailers to see if that becomes a problem. If both areas (housing and retailers) turn down at the same time, and the capital spending cycle doesn’t rise here, then there will almost certainly be a recession in the US.

However, I am not so sure that will happen.

The Richmond Fed Manufacturing Index rose to 7 for July compared to 4 from June as economic activity expanded in that district. If manufacturing were to pick up in other districts, and if the retailers could stay healthy, then the economy could suffer through another couple years housing and mortgage-related issues without going into recession.

So, we already know what we need to know about the housing/mortgage crisis, and ought to dismiss it from our top-of-mind thinking. The rest of the year will be a time to focus on business inventory and capital spending issues.

Yesterday, medium term US Treasury Notes lifted in price (yields fell) as traders moved towards safe-haven securities while equities stumbled. Oil slipped below $72/bbl ahead of today’s crude, gasoline, and distillates inventory report.

European equities also ended a 7-day upswing as share prices traded lower across the board; Germany's DAX dropped -0.74 pct.

Today, as I started by saying, will be one for hope. There will be discussion that the Fed will come to the rescue once again. Stock prices are likely to rally again.

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International Economics Review

US Economic Calendar

Another excellent Economic Calendar is provided by BMONesbittBurns.

Econoday Weekly International Report

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The Cara Global 100 Stockwatch

Here are the Tuesday session Cara 100 gainers.

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Here are Cara 100 losers from Tuesday.

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There were no Cara 100 stocks that hit 52-week intra-day highs or lows in the Tuesday session.

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Here are the Cara 100 stocks that had extreme volume changes.

It pays to watch the price and volume extremes, ie, Money Flow, especially when markets start trending.

What the market gives you quickly, it often takes away just as quickly.

Yesterday, I presented four China stocks that were bursting out. I wrote, “If you noticed, it’s only the China stocks that ballooned the volume yesterday, and they also led the Cara Global 100 gainers.

The trick to trading here is to tighten stops after stocks like this have had a run to where the RSI-7 on the Daily price data has moved up over the 70 line. You don’t want to sell until the RSI-7 falls back below 70 because as the charts show, these stocks have really had a ride in the past few days and selling too early may hurt your portfolio performance.

Pro traders will have international accounts where they can track the stocks in the offshore markets, eg, Hong Kong, where they would sell on a pull-back. Another Tactic is to use put and call options to control the downside risk, but also stick with the “glorious China” opportunity of the present rally.”

CHL gained +4.87 pct on Monday and lost -7.19 pct on Tuesday.
CHA gained +4.72 pct on Monday and lost -8.26 pct on Tuesday.
CEO gained +5.57 pct on Monday and lost -8.36 pct on Tuesday.
PTR gained +3.55 pct on Monday and lost -6.91 pct on Tuesday.

Capital markets fail to operate as an effective pricing mechanism when the largest cap companies (oil and telecom) in one of the world’s largest economies (China) can gain an average of +4.68 pct on Monday and then lose an average of -7.68 pct on Tuesday. Traders might just as well be playing a casino slot machine.

Today, these prices are likely to be much higher once again. Red 11, Black 4, Red 33... (LOL)

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Key Stocks plus Cara 100 In Focus

I am appreciative to the folks at KNOBIAS, Inc for providing the Cara 100 summaries.

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Relative Strength Index (RSI) analysis of the Cara 100 company stocks .

RSI > 70 (0)

RSI < 12 (12 of 13)

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Here are the Cara 100 stocks trading with the highest and lowest RSI-7, sorted by (i) daily and (ii) monthly values, for Tuesday:

“Chris,” used BillCara2.com data that is unsmoothed, unlike the data from Worden used by “David”.

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US Equity Markets Review

DJIA (interactive) chart

After dropping -57 points in the final hour on Monday, the DJIA plunged –280 points (-2.10 pct) on Tuesday to close at 13042. That’s -337 points in just a little more than a single day.

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NASDAQ Composite (interactive) chart

The Nasdaq Composite was off -15 points on Monday, mostly in the final hour, and -60.6 points (-2.37 pct) yesterday to close at 2500.6.

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International Equity Markets Review

Asia-Pacific

The indexes across Asia-Pacific equity markets were all down sharply, except for India. The losses, however, were not as bad as in the US.

Here is the latest session data for the Asia-Pacific stock exchanges.

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Here is the latest chart for the Japanese Nikkei 225 index.

The Nikkei Dow was down -1.69 pct at 16013.

Yen strength hurts Japanese exporters, including the auto manufacturers. As I wrote a week ago, I would be bottom-fishing the top quality auto makers, but only if, as, and when the Yen weakens, which it seems to be doing with the Bank Of Japan liquidity injections, and a return (for now at least) of the Carry Trade.

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Here is the latest chart for the Singapore index .

Today, the Singapore STI was down just -0.25 pct at 3335, which has now consolidated recent volatility. This index looks ready to move higher.

Indonesia dropped -1.14 pct to 2135.

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Here is the latest chart for the Shanghai Composite index .

The Shanghai Composite dropped -1.64 pct to 5109.

After a series of fresh all-time closing record highs, it was a day to hold back.

Since I came to Bahamas just weeks ago, the Shanghai Composite index moved from 3781 to 5194 yesterday, which is a humungous gain of +37.4 pct. I have never seen an index move like that so quickly on the upside. October 1987 was that magnitude on the downside.

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Here is the latest chart for the Hong Kong Heng Seng index .

The Hong Kong market dropped -1.47 pct to close at 23020. The intra-day record was set in the morning session yesterday. So, today was a time to consolidate gains.

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Here is the latest chart for the India BSE 30 index .

A week ago, I said, don’t lose faith in the Indian equity market. Traders there were very confident.

Today, the Bombay Stock Exchange BSE 30 Sensex index gained +0.50 pct to 14993.

A few weeks back, at much lower prices, I wrote, “I believe the recovery from the sharp pull-back this summer is going to proceed to new high levels for the index.” The BSE 30 Sensex index is still headed in the right direction. Today the Sensex was the only Asia-Pacific index that held up.

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Here is the latest chart for the Australian All Ordinaries index .

The All Ordinaries index of Australia dropped -1.23 pct today to close at 6101.

“I continue to believe that a new rally will take the Aussie bourse to a return to July highs. For that to happen, however, the Basic Materials sector will have to take the lead.”

I continue to believe it will.

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Europe>

Here is the latest session data for the bourses of Europe.

There are mixed prices today (8:30am ET) across Europe.

Here is the latest chart for the UK FTSE 100 index.

The FTSE is up +0.35 pct at 6124 today in mid session (1:32pm local time). I do not think that the FTSE will return quite to the former high of 6754 before the start of the next downwave in global equity markets. But I do see a rally in the next several weeks.

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US Dollar Review

Here is the chart of the recent trading.

The trade-weighted USD is up a bit early this morning at 80.779. Its stronger against the Yen (good) and weaker against the Euro (good). Good in the short-term for gold/broad US equity prices on the upside.

“A USD in the 70’s is an almost certainty based on Bank Of Japan plans to raise rates in this or the next quarter.”

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Oil Review

Interactive Chart of Weekly Crude Oil:

Here is the e-miNY Oct-07 Crude Oil chart.

It is presently (about 8:20am) at 72.10.

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Gold & Precious Metals Review

Here is the Recent Spot Gold chart.

Spot gold is presently (about 8:36am) at 664.83, down from 667.6 at this time yesterday, and looking like it needs to find a bottom before rallying.

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Here is the Recent Spot Silver chart.

Spot silver is stronger today (8:40am ET), presently at 11.80.

There had been a false break-out to the upside on Friday, but the silver Bulls have the story right. I think silver will trade above 12 in the near future, then 13… 14.

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Wrap-up

Yesterday was a tough and confusing one for traders unless you happen to be “Ken”. Ken has life all figured out. Every week he sends me a humorous presentation of a slice of life. This one is called the “Nursing Home Plan”. Check it out. It’s good for a laugh. But, you should turn your speakers on.

Since I’m only a few hundred yards from the cruise ship docks here in Nassau, I think I’ll mosey down to check out possibilities. Ken just might be onto something here.

Have a good one.

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