I think the main reason for today’s sell off is yesterdays fed conference. As I explained in the post from last night, Bernanke clearly laid out yesterday that in the near term the market should forget about any extra stimulus from the fed. This was bullish for the dollar and reduces expectations for inflation. To me this had clear short term bearish implications for gold, and gold is actually down around $30 from yesterday. So as expected you are seeing a huge rally in the dollar and we still have that inverse correlation between the dollar and the stock market intact, so the stock market is getting hit pretty hard also. I wasn’t that sure about stock market weakness because the stock market is a little bit oversold and valuations are starting to become attractive for long term investors.
The unemployment claims data came in weak also so that added to the damage. On the positive side new home sales were slightly better than expected. I think new home sales data is not that important at this time, as you really need to see existing home sales pick up to clear the inventory of homes.
We are at an interesting juncture in the stock market. We have fundamental catalysts for a large move down but If the market is able to hold above 1260 in the S&P 500 for the next 2-3 days then I think that would be a good signal for underlying support and in my opinion a good signal for a short term bottom.