The bears notched another solid victory on Tuesday as global chaos in the financial and commodity sector continued to weigh on the market. The pounding the bulls took came on renewed fears of a potential rate hike from China and the potential bailout of Ireland – similar to the one given to Greece, which is still blowing up.
A quarter-point rate increase from the Bank of Korea also reminded Wall Street the threat of a currency war is still a real possibility and didn’t help matters. The raising of rates around the world can have a ripple effect of slowing down demand for basic materials and then growth which would not be good for the market.
Ireland’s Prime Minister has said the country has enough cash on hand to meet its funding needs through mid-2011, but there are reports the country is holding negotiations to receive a bailout. We expect European Union officials to push through some kind of rescue package but they better get ready for Portugal and Spain who will be next in line.
Against this backdrop, we knew going into the open yesterday that major support levels would be tested and they were.
The Dow got hammered for nearly 180 points, or 1.6%, and finished at 11,023. The index traded to a low of 10,978 and fell below 11,000 for the first time in nearly a month. We are still bullish but a break below 10,800 will hurt the case. The Dow is still trading above its 50-day moving average, which is a good sign, but not by much.
The S&P 500 fell 20 points, or 1.6%, to close at 1,178. The index traded to a low of 1,173 which was right in the middle of our 1,170-1,175 zone we said to watch for yesterday. There could be a test down to 1,150 for the S&P, and if so, it will be make-or-break time for the bulls.
The Nasdaq also fell below our first support target of 2,500 by dropping 44 points, or 1.8%, to settle at 2,469. We were looking for the index to hold 2,475, and there is additional support at 2,450, but a break below 2,400 would not be good.
As far as specific news this morning, demand for General Motors (GM) stock has been so strong that the company will expand its initial public offering (IPO) by 113 million shares, or 31%, to 478 million common shares. The move, coupled with the sale of GM preferred shares, could bring the total value of the deal to $22.5 billion.
We mentioned yesterday that Visa (V, $74.99, down $1.37) has been the largest IPO in U.S. history to date, but GM’s offering could top Agricultural Bank of China’s $22.1 billion score in July to become the globe’s largest IPO ever.
The indexes finished off their lows yesterday, barely, which leads us to believe we could test the second waves of support we have outlined. However, futures are pointing towards a slightly higher open so we shall see.
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