We Haven't Seen the Lows

06/30/2010 2:08 pm EST

Focus: STOCKS

Mark Leibovit

Chief Market Strategist, VRTrader.com

Mark Leibovit, chief market strategist for VRTrader.com, warns that the S&P 500 could soon lose a digit.

New correction lows were posted yesterday in the Nasdaq Composite, the S&P 500, and the Total Stock Market Index. Other indexes are in the process of retesting May/June lows after a downward revision of an economic indicator for China, weak economic data from Japan, concerns over European banks, and a sharp decline in the US consumer confidence index. Additionally, recent earnings reports have been disappointing.

I warned on Monday that, despite the market closing nearly unchanged, market internals were giving us some very bearish signals. Though I am bearish, I was surprised to see such dramatic weakness during end of the month and end of the quarter 'window dressing.' Greater weakness lies ahead as the Dow Industrials and S&P fulfill previous downside targets with the potential that even lower targets could be generated. The S&P should easily trade under 1000 ahead. And, what can we expect during the fall when markets tend to exhibit further weakness.

Will we get a rally? Yes, but I think it will come from lower levels, potentially from the 900s in the S&P 500. If we don't see those levels now, we will very likely see them later in the year.

In the last hour of trading yesterday, the S&P 500 broke support from the May/June lows, but managed to recover back above them. No other broad index has broken through support, yet.

Over in Asia on Tuesday, Shanghai stocks retreated sharply to close at a 14-month low on concerns that China's economy could slow down in coming months. China's Shanghai Composite erased early gains to tumble 4.3% for its worst percentage fall in more than a month, ending at 2,427.05, its weakest finish since April 2009. Why do so many still mistakenly look to China to be a growth leader? Their benchmark index (the Shanghai Composite) topped in August 2009 and has been moving lower ever since. Hardly the type of action one would expect from a global economic leader.

What happened to the economic recovery the media and Washington were telling us about? The S&P 500 has tumbled 14% from this year's high on April 23 on concern a sovereign-debt crisis in Europe and China's moves to slow the world's largest emerging economy will dent global growth.

In a world of uncertainty, traders rush to the safety of Treasuries and gold. However, a rising dollar in such uncertain times will push more of that money into Treasuries. That played out perfectly yesterday with the dollar rising and Treasuries doing much better than gold. However, I continue to believe in gold as a long-term hold.

World-wide inflation OR deflation will cause gold to rise. In deflation, currencies will likely collapse, driving investors into gold, and I'm pretty sure we're in a deflationary environment. If I am wrong, that's OK, because gold will also do well.

We're in a 20-year up cycle in gold and, yes, we're going to get our shakeouts, but I'm not recommending selling your hoard of gold under any circumstances. Remember, if it falls on your foot and hurts, it's probably a good investment—referring to gold and other metals—[in contrast to] paper investments.

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