... The S&P 500 Index closed at 1,458.95 23.71 (1.6% ) plunged 5% for last week, 6.5% decline from the record highs set in mid-July.The S&P 500 fell within two points of near term technical support, creating a major test of the 200-day moving average at 1450. As stated on Friday morning, use 1456.38 as an important level, which the index must not violate. If on the other hand, the 200-day is compromised by more than 2%, 1374.12 (last achieved March 5, 2007) would be the next down leg. ... A key indicator to measure investor fear closed at its highest level in more than four years.The Chicago Board Options Exchange's volatility index, VIX jumped 16.54 percent to 24.17, surpassing its June 2006 closing high of 23.81, and finishing the week at its highest level since April 2003. Indeed,. the strong rise in the index suggests that investors are willing to pay higher premiums for options on the Standard & Poor's 500 index. ... On the brighter side, U.S. equities appear defensive, backed by our conclusion in October '06 that the Fed will not raise rates. Considering a busy week for earnings, including 99 reports from S&P 500 companies, the S&P 500. the stock market may have an excuse to advance. Be as it may, stay focused on 1450 for the S&P 500 index. ... Earnings and economic data this week will be telling on market direction. On Tuesday, Chicago purchasing manager's index -- a precursor to the Institute for Supply Management's national manufacturing index -- is expected to indicate slightly weaker growth in July than in June. Along with indicators of personal income and spending, the Commerce Department will release data on construction spending, and the Conference Board will report on consumer confidence. Dartline predicts that construction spending will be flat in June compared with May, and that consumer confidence rose in July compared with June. Also on Tuesday, look for the government's reading on core personal consumption expenditures, one of the Federal Reserve's preferred gauges of inflation. June's core PCE is projected to show a 2.0 percent year-over-year rise -- up from 1.9 percent a month earlier, and at the very top of the Fed's comfort zone of 1 percent to 2 percent. Wall Street's inflation worries have taken a back seat to concerns about credit but could re-emerge if the PCE figure is higher than expected. ... On Wednesday, the ISM releases its manufacturing index, which is anticipated to show that growth in July was marginally weaker than in June; the National Association of Realtors reports on June pending sales of existing homes -- which have fallen for three straight months -- while the nation's big automakers release their July sales figures. ...Thursday will bring the Commerce Department's June factory orders report, and on Friday the ISM releases its service sector index, which is expected to show slightly slower expansion in July than in June. ... Hedge-fund problems will remain in the spotlight as the subprime-mortgage financial sector continues to implode. The latest bout of jitters came last Thursday with news that a second Australian hedge fund, partly owned by Dutch financial-services giant ABN Amro ran into trouble because of its exposure to U.S. subprime mortgages. Un- confirmed rumors about German and Japanese funds may collapses from bad U.S. home loans will add more pressure to the financial sector. Such problems are creating a major credit contraction as investors refuse to provide Wall Street firms with cheap money to finance leveraged buyouts, a key source of support for the stock market over the past few years. Furthermore, tight credit conditions, weakness in the housing sector heightened by the subprime-mortgage crisis will spread into a contagion that might materially slow the broader economy. Add the loss of jobs, wages and equity price, while energy price continue to accelerate, would place new pressure on consumer spending. ... Commodities traders are confused with the recent run up energy prices. Crude futures climbed, with September crude closing at $77.02 a barrel, its highest level since mid-August of last year. The contract was up 2.8% for the session and 1.6% for the week as supply and demand concerns returned. Funds and speculators continue to buy crude into the rally, yet if perception begins to take hold that macroeconomic conditions rest on a shaky foundation, it will certainly impact energy demand expectations and effect oil prices to the downside.

... July 27, 2007, 7:30am ... The S&P 500 Index closed at 1,482.66 35.43 (2.33%) after sliding to a low of 1,465 earlier on. The next flag on the downside leg is 1456.38, a level reached on February 22, 2007. Within 1456 to 1520 should be the new channel as the general market backs and fills, attempting to regain its footing. However, a disturbing pattern has developed since February when consistently increasing volume is created by sellers who are managing distribution into buyers. ... With worries about credit quality and availability mounting, the federal funds futures market at the Chicago Board of Trade are be priced as if a rate cut is probable. Don't embrace the noise or believe a mere cut in the prime rate would cause stocks to rise. At the root of collapsing stock values are credit market worries, high energy prices and the housing sector as the easy money days are quickly evaporating. The put-call ratio — the volume of bearish put options vs. the volume of bullish calls — swelled to 1.32, the highest levels of the year. The Chicago Board Options Exchange's volatility index surged 21 percent to 21.95, its highest since June 13, 2006, as global equity markets are not attracting buyers at current prices. ... Clues to the nervousness can be traced to the U.S. dollar, which dropped against the yen as investors looked elsewhere to park their surplus paper. As the U.S. equity markets declined, investors jumped into Japanese currency, unwinding the so-called yen carry trade.The carry trade refers to investors borrowing currencies at cheap interest rates in one place, in this case in Japan, to invest in higher-yielding currencies -- ie., where interest rates are higher -- in this case the U.S. dollar. Indeed, unwinding of carry trades has hit the markets rather than then broad dollar selling as the yen became the paper of choice. ... But don't blame the dollar for all the market's problems. A sharp reduction in global risk appetite was documented by huge hedge fund losses. Reduced international liquidity and the unwillingness to hold long term fixed yield instruments can be the wedge to drive all values lower, including equities, real estate and commodities.

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