The NDX is challenging the upper band of its one month-long consolidation - 1875 is the level to watch. A breakout would set up a likely target of filling the large "gap" between 1900-1930.

Gold still under pressure - currently testing round number support at $900. 200 ma (at $888) is much more significant though. If gold breaks its 200 day, we would assume that a correction of some magnitude has commenced.

Just a reminder of how range-bound the NDX has been since the start of July - if a break above the 1875 level (blue line) were to occur, this would therefore be very significant. Index is currently 1852.98, just over 1% below the breakout level.

After peaking at 893.85 on July 3rd, the S&P GSCI index has suffered a deep reversal in recent weeks. Trading this morning took the index down to 744 (as crude oil tested the key $120 level) and it is currently just above the 750 level (short-term support). Below 750 there does not appear to be any obvious resting place above the 200 day moving average at 689, some 200 points (or 22%) below its recent all time high.

The question therefore arises as to whether this is simply another bull market correction that will be followed by a rapid recovery or something more meaningful. The lower chart, which shows a 21 day Percentage Rate of Change (ROC), may be helpful on this regard. Note that the current decline is more severe than any experienced since March 2003 (the start of the Iraq war which saw the crude oil price briefly collapse). Should support at $120 for crude and 750 for the S&P GSCI Index fail to hold, the ROC would probably end up challenging its 2003 level, which would be a reasonable indication that the current sell-off is the start of a more protracted move lower for the commodity complex. Obviously the investment money at stake in 2008 is many many multiples of that which was at stake 5 years ago - not only was the index a quarter of the price in 2003 but also there was very little financial money directly exposed to the commodity complex back at that time.

Heebner's CGM Focus May Be Shifting Gears: Chart of the Day, Bloomberg.com, July 25, 2008

Heebner is a very well-respected fund manager whose moves tend to be copied by a wide institutional following. If he is indeed dumping his commodity/materials positions (and it certainly looks like he is), we would expect many others to follow suit.

Goldman has been particularly aggressive in their crude oil call in recent weeks. Will be interesting to see how much of an effect their latest call will have. Maybe their commodity crew should sit down with Abby Joseph and get some tips about how long a great reputation lasts in a bear market.

Mechel Falls as Putin Calls for Probe, End of Duties, Bloomberg.com, July 24, 2008

We have been arguing for several weeks that Russia is vulnerable to correction. With materials prices already under pressure. the last thing the Russian market needs is the "paw of the bear" exerting control.

Natural Gas has now given up the entire 2Q gains in just over 3 weeks of the 3rd quarter. Another reminder that markets that go up too fast come down even quicker.

The turnaround in BKX large cap bank index continues. We had two potential targets for a recovery rally - the 50 day moving average @ 67 which we blew through yesterday and the 75 "breakdown point" (red line). While these were meant to be medium-term targets (note that 75 is 60% above the July 15th low of 46.52), the speed of the move is less important than the distance traveled. We would look for this move to run into serious resistance at around 75 and then attempt to establish support somewhere along its recent recovery path.

Huge oil trading loss sinks energy trader SemGroup, globeinvestor.com, July 22, 2008

This is always what makes a real top.

China Tightens Scrutiny of Foreign Direct Investment, Bloomberg.com, July 18, 2008

China is starting to use multiple measures to tighten liquidity. With a very weak equity market, decelerating economy and strengthening currency, this is a very powerful negative combination - and one that threatens to turn sentiment decisively negative not only on China but also the general EM/commodity trade.

IndyMac Failure May Prompt Rush to Pull Bank Deposit, Bloomberg.com, July 17, 2008

A story that should have run several days ago - but it is still correct in its assumptions.

As we continue to track 5 year swaps and agency spreads we are starting to see an interesting divergence between these 2 measures. Swaps have moderated in the days following IMB's demise suggesting that the forced unwind of hedged positions has indeed lessened following this event (note that swaps are still extremely elevated on a historical basis). Agency spreads (bottom chart) on the other hand have continued to widen with 5 year spreads reaching almost 108 bp this morning. It would appear that this has developed into a straightforward wish to divest or outright short agency paper given the well-publicized problems at the GSEs. While spreads may well end up exceeding the levels reached at the height of the BSC crisis before this is over, we have a hard time believing in a worst case scenario that the FRB/Treasury/Congress will not in the end stand behind the implicit guarantee of GSE paper - which in the end would see spreads collapse much in the way that CDS in BSC and CFC did in the aftermath of the bailout-mergers with JPM and BAC respectively.

As of the end of last week, the CS HY Index had risen to 10.64%, just below the level that it peaked in March with much of the recent weakness being attributed to the automakers. It looks likely that nominal yields will break out to a new 5 year high in the coming days with the next obvious resting point being 11.5%. Interestingly, the spread to 5 year T-note (5 years being the approximate average duration of the HY index) is still over 100 bp, below its March peak (see red line on lower panel). The failure of spreads to blow out demonstrates that there has been far less of a flight to safety into the US Treasury market during the current sell-off than was the case in March. As with other measures of distress (notably the VXO Index in equity markets), we are not currently faced with the possible collapse of the US financial system - rather the fear of collapsing corporate profits and the wish of participants to cut back on a host of equity and bond exposure. With so many players choosing to exit before the news is out, the quality of earnings set to be announced in the next 30 days have rarely been so important to the immediate direction of debt and equity markets.

It is the start of the all-important 2nd week of the quarter. Our basic assumption is that the vast majority of new "index money" has been deployed by now and the true underlying strength or weakness of the commodity complex should start to become apparent. One of the most intriguing charts is that of gold - which briefly broke out through important resistance and challenged the key $950 level last week only to fall back. In early trading Monday, gold is down over $11 to $921.56 and it will be interesting to see how much of the end of quarter gains will be held on to. In this regard, Gold remains strong above $900 and would need to fall below its 200 day moving average ($872) in order to signal a new downtrend was underway.

Freddie Mac, Fannie Mae Plunge on Capital Concerns, Bloomberg.com, July 7, 2008

Now you know why watching the agency spreads on Thursday meant something...

We are finally seeing some evidence of a flight to safety in the Treasury market. Given that this is happening against a backdrop of widening swap and agency spreads, it may well be that a sizable book is in the process of being unwound. We would look for 2 year yields to test support at 2.20%.

Note that virtually all the prior assumptions of FRB hawkishness has been wrung out of the market over the last two weeks.

We have been tracking a steady widening of five year swaps and agency spreads in recent days. Both of these key measures have now reached levels that typically indicate significant stress in the financial system. Whether this is being caused by a single large institution (as with BSC in March) or a general wish to cut back on leverage across the board leading to adverse pricing is not yet clear - but we would be concerned if five year swaps (top chart below) were to break through the key 100 level and FNMA spreads stayed over 90. Clearly today's light volumes and truncated session will partially negate the importance of any move - we would wait until Monday for a confirmation that any breakout is valid.

One of the giveaways is the number of new funds and indexes launched to capture this "opportunity". Only up 500% since 2003 - let's see if it's still above 50 at Christmas.

June ISM data came in at 50.2 vs. a survey of 48.5 and May's reading of 49.6. This month's reading is just over the 50 level - meaning that it suggests a tiny improvement in manufacturing activity over the last month. While we would not make too much of a reading 0.2 above neutral, this is clearly a far more robust performance from the manufacturing sector than most observers expected earlier this year. Thus far this remains very much a Real Estate/Financial Sector melt-down without significant collateral damage in the industrial economy. It remains more likely to spread geographically (i.e. to other countries RE and Financial sectors) than across industries in the US economy. The Prices Paid Index, on the other hand, continues to be problematic. This reflects very strong commodity related inputs and this index is now registering a reading not seen since the mid 1970's. Despite this pressure we continue to believe that the FRB will not embark on a significant tightening program for the remainder of this year.