Concerns over the fiscal woes of certain European nations continued to weigh on the markets yesterday; as the major indices suffered steep losses. The correction is in full swing and the bears, after being in hibernation for more than ten months, are firmly in control. The S&P 500 (1063.11) has convincingly broken below the three month trading range and the 20 week average. Rallies must still be sold, and the likelihood calls for more selling and lower prices down to the 200 day averages over the next few weeks. The jobs report is out and it shows a loss of 20,000, and a large downtick in the official unemployment rate to 9.7%. The futures are rallying on the news, but we would agree with the skeptics on this one; just because more people are falling out of the workforce does not mean the rate of unemployment is falling. Of course it’s a heck of a lot better than when we were losing 700,000 a month and facing the greatest economic calamity in eighty years, but then that is increasingly becoming yesterday’s news. Adding to the woes in Europe this morning is news that industrial production fell an unexpected 2.6% in Germany in December. The problems in Greece and Spain were the result of at first facilitating credit and then abruptly removing the punch bowl. We have long been critics of Trichet as hopelessly behind the curve, utterly incapable of discriminating between cost push and cost pull inflation, and quite frankly this recent example of ineptitude hardly surprises us. That said, it is important to appreciate that the economy of Greece is still far smaller than that of California, and the talk of “contagion” is ridiculously over played in a world still reeling from the Lehman fall out. That said, we feel it still has a few more rounds to play out, and stock prices will head even lower. What has been more disappointing to us is the increase in the predicted budget deficit from $1.4 trillion to $1.6 trillion this year. While we have to shake our heads when a Maria Bartiromo says that she is not being political but quite adamantly the deficits are now far greater under Obama than when Dubya left office; we have to recognize that the perception of spiraling out of control deficits must be contained before any p/e multiple expansion can occur. For the record the inherited deficit from Bush was $1.2 Trillion (he overspent by a total of $5 trillion in his eight years) and grew to $1.4 trillion last year. With the economy improving and with it receipts, we would have thought a drop of a couple hundred of billion or so would be in order. The system is stabilized, and while we are a long way from the 125% record federal debt as a percentage of GDP recorded after the Second World War, the direction has to move lower to cement the perception that something is being done about our fiscal disorder. Anyway, for now our focus is on the 200 day averages and we suspect we will see more selling in the near term.

S&P 500 (1063.11) plenty of overhead resistance. Rallies, especially back towards the down sloping 10 day average need to be sold, currently at 1088. Also the critical break down levels at 1083 and 1071. The 200 day is at 1019 as is the 360 Gann degree move from our closing high. The 50 week will be at 986 next week. The 986/1019 area is the pivotal bull market support area and we will buy aggressively at that juncture, but not before.

Nasdaq (2125.43) Nov 27th low at 2114 is next brief support, but ultimately the 200 day average (currently at 2020) is calling. Rallies must be sold, especially back towards the 10 day average at 2181. We are trying to increase short exposure where applicable, and we suspect any early strength today will fail and would give us a better opportunity to add defense.