Huge Down Day...so...What's Next?

Stocks opened lower and immediately headed south from the opening minutes. All of the major averages hit their lows of the day during the second hour of trade and from there the market was locked in a narrow sideways range, We finally closed a little bit off the lows but still markedly lower from Friday.

The Dow closed -187 points (-2.69 %) and the S&P was down 22.49 points or -2.38 %.

The interesting fact about today's decline is hat there was really no major economic report or policy announcement which soured the mood. The almost complete absence of fundamental news left the market to itself and had traders focused on the only piece of financial data which until recently would hardly ever found itself prominently featured in the financial news.

It was a report that foreign buyers of US debt (Treasuries) reduced their net purchase position for the month of April to a meager 11.2 Billion US $ versus a March number of 55.4 Billion.

Now...the fear of course is that the May number is even lower than the April number turned out to be.

I have been talking about it a at various points points during the past couple of weeks...the FED and the Treasury might have a major problem developing under their feet.

Record issuance of debt needed to fund the greatest Federal deficit this country has ever seen combined with the FED buying US debt for the first time ever in an effort to stabilize the credit markets are not the type of cocktail one wants to drink as a foreigner.

The Fed's inability to control the rise in long term rates despite an all out effort to do so simply does not bode well for longer term interest rates. It still is to early to tell but the fall in foreign purchases of US Treasuries is potentially a sign that foreign buyers, who traditionally were more than happy to fund the US government debt, might for the first time in decades truly try to diversify to some degree out of the dollar.

If this were to happen we would be looking at major shift in longer term interest rates with all of its cosequences. (higher interest rates = lower home prices, less available credit to US consumersn and businesses)

Today's market action was not good. There was almost no attempt to rally the market and the late day recovery amounted to a bit of short covering but not more.

If the market continues its decline tomorrow the 14 week old rally might be in trouble but up until then I still remain positive stocks and would expect higher prices.

Until Tomorrow,

Steve Benger