Dow Closes Below 10,000 as Worries Mount

I guess it's time to throw away the Dow party hats! Hmmm...Now when do you think we will be rolling out the Dow 10,000 3.0 versions?

Will it be a day from now or will it be another decade before they make another appearance? That's the question every investor is asking themselves right now.

The market has clearly lost confidence as fears on several fronts continue to worry investors. Stocks pulled back sharply at the close as the Dow closed below 10,000 for the first time since early February.

The trigger yesterday was a drop in the Euro late in the day as rumors started to float around the trading floors that China might be backing away from European debt. A strong correlation right now is a weak Euro means weakness in stocks. As soon as the Euro started moving, stocks started to roll over.

180 Degree Turn from 2009

I find it fascinating to see how psychological the market is. Last year the market rose no matter how bearish the news was. The bulls got their mojo back and the momo traders/speculators sent the Dow soaring 70% higher from the lows.

Currently, the exact opposite is true. Good news is now ignored as fear has crept back into the market. This was seen yesterday. The durable goods and housing numbers both came in way above expectations yet stocks still sold off on the news.

I think what's going on right now is the market is looking 6 months ahead like it always does and it doesn't like what it sees.

Any smart economist knows that we have pulled a lot of our GDP growth forward in the forms of various stimulus. Cash for clunkers or home buyer tax credits were excellent examples of this.

It definitely worked as we saw strong GDP growth over the past several quarters. The problem we have looking forward into the second half of the year is these programs are all now gone. So the question now becomes where is the growth going to come from in the second half of 2010?

Uhhhh...Good question!

Adding to concerns around future growth are the announcements over the last couple of days around severe austerity measures in Western Europe. Italy, England, Portugal, and Spain all came out with austerity programs that will slash jobs and cut spending.

This is a huge concern since about 30% of our multinational corporate earnings come from the major economies in Europe. Spending is going to come to a halt in these countries as they start paying off their enormous debt loads. This combined with a strong dollar is going to slam exports and thus badly hurt corporate earnings.

As if these worries aren't bad enough we also have oil spewing into the gulf, serious military tensions in the Koreas, and continued concerns around potential failed bond auctions in Europe.

Other than that, everything is great! In fact....Why aren't stocks going up?(sarcasm off)

The Bottom Line

Technically the market acted terribly today. Usually you see strong follow through the day after you see stocks rebound from a 250 point loss to close near even.

The fact that we saw no follow through yesterday was not a good sign for the bulls. I actually grabbed some SDS on the bounce and held it into the close.

From a macro perspective, I was expecting one more thrust higher before stocks rolled over. However, I am starting to wonder if that's ever going to materialize which is why I grabbed a position. BTW, the ES has now turned red (-1.75).

If the bulls can't organize a move higher here over the next few days I think the market is in deep deep trouble.

I wouldn't be surprised to see the market dump on Friday. I expect that we are about to revisit the price action that we saw back in 2008 where no one wanted to hold stocks over a long weekend when there were so many potential triggers for a huge sell off.

Stay nimble out there folks. Like 2008, there are several holes in the dam that threaten to bring down the whole financial house of cards, and we are rapidly running out of fingers.

Disclosure: Bought ETF SDS on today's early bounce.