Stock Averages Continue to Break Down

• Last week, the S&P 500 made an attempt to break up through its 200-day moving average but it failed. The next move is to re-confirm downside resistance, the first stop being the 1,000 level. The failure to hold the 200-day MA is telling us that the US equity (and global equity markets) has yet to fully discount the shifting of gears from an excess-liquidity driven market to a fundamentals-driven market, and that economic growth going forward is likely to be slower than recently seen and already discounted in stock prices.
• While a move by China to adopt a more flexible exchange rate regime is generally a positive for the Shanghai index as it would stave off a brewing trade war with the US and help to keep domestic inflation under control by lowering import prices, the announcement only elicited a short-term bounce in the Shanghai composite, which is looking for support at the 2,500 level.
• As a bellwether, the selloff in China is a weight on emerging market stock prices. While US mutual fund flows show that investors piled back into emerging markets, the iShares MSCI EEM  ETF has not only failed to hold its 200-day moving average, but has also seen a dead cross between its 50-day and 200-day moving averages. On the other hand, the bull market in emerging market sovereigns continues.
• There is similar bearishness in the Nikkei 225, which has struggled unsuccessfully to hold 10,000 and last week saw a dead cross between its 50-day and 200-day MAs, opening the door for a selloff to the 9,000 level. The weakness in Japanese stock prices has been led by the mining, insurance, broker/dealer and real estate sectors, and while the leading and coincidental economic indicators continue to show recovery and the BOJ language is more upbeat, stock prices are telling a different story. In other words, investors are beginning to discount a slowdown in Japan's economic recovery as well. Stock prices rallied ahead of the July 11 upper house elections, but stock prices usually rally ahead of Japanese elections, while the new-found popularity of the DPJ and the Naoto Kan administration may be as fleeting as his predecessor's.
  

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