Bear Tracks

• The S&P 500 was the last market to crack. The unraveling of the global market recovery actually began with the Shanghai's breaking down through its 200-day moving average. While the Shanghai composite peaked way back in September, it didn't completely break down until April-- then came the Euro, Euro stocks, emerging markets, copper/commodities, the US financials and then the S&P 500?all like a house of cards.
• The prognosis is bearish. At the low last Friday, the S&P 500 took out its "flash crash" low of 1,065.79 and is just barely above the 1,044.50 February low. Beyond that, its back to 900. As it stands now, the index has followed virtually all other risk trades in breaking down below medium-term support, which indicates we are now in the so-called interim correction we were talking about way back in February. Listening to the chatter in the blogs and among the talking heads on TV who have been talking to their hedgie and big institutional contacts, investors are spooked and could stampede at any time, if they have not already begun to do so.
  
• The economic news in Japan over the past few weeks is actually quite positive, not that anyone cares. Foreign investors remain the primary driver of Japanese stock prices, and they have been net sellers of Japanese equities for the past three consecutive weeks. Working against Japanese equity sentiment is the sharp uptick in the JPY index, both against EUR and USD, as yen carry trade sees an unruly reversal. This only adds to concerns that slowing Euro and China economies will put a crimp in Japan's now-buoyant exports.
  
• That said, Japanese equities probably have less potential downside than other developed as well as emerging markets, simply because Tokyo stock prices haven't gone up as much, and the long-term prognosis (i.e., debt and even more debt) was already pretty glum. Since domestic investors are not piling into higher yielding overseas currencies or stock markets anymore, JGB yields have quickly lost about 10bps as cash-rich domestic investors park their excess cash in JGBs for the time being. As a result, JGBs have also become somewhat of a safe haven, if only for domestic investors.

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