Bad News Deluge

Investors who have been waiting for the "other shoe" to drop may feel like a giant centipede is bearing down on them. A deluge of bearish news hit the stock market Friday and today. Subprime mortgage losses are still hitting Wall Street, with Merrill Lynch (MER) and Citigroup (C) both reporting larger-than-expected writedowns - and both CEOs leaving as a result. Investors clearly do not think this will solve the problem as both stocks continued to drop, taking financial services sector funds down with them. The analyst who first reported the possibility of greater losses at Citigroup reportedly received death threats. Homebuilders, materials, energy, and luxury retailers fell today. The only sector able to show significant strength was utilities.

Concurrent with all this, the previously impregnable Chinese stock market gave up the last month's gain as Premier Wen Jiabao said his government may delay a plan to allow mainland investors to buy stocks listed in Hong Kong. It remains to be seen whether this will be a quick correction or an end to the China boom. A violent government crackdown on civil unrest in Pakistan created more geopolitical concerns about the Middle East, combined with hopeful signs in the Turkey-Kurdistan disagreement to drive oil prices up and down in rapid succession.

Amidst all this it is actually quite impressive that some sectors are still in solid uptrends when examined on a long-term or intermediate-term basis. Technology in particular has substantial upward momentum. Energy and materials have weakened somewhat, though a rally in gold may help turn around the natural resource stocks. Major support levels on the index benchmarks are holding so far. The weakness of the last few days has brought the market back to the bottom of its trading range. That makes this week a critical test; stocks need to move back up quickly or there could be a lot more downside coming.