WARNING : U.S. stocks could nosedive at any time

Wall Street Indexes steepened their losses in the final hours of trading

So much happened in the markets the past week that it was easy to miss.

 The Dow Jones Industrial Average (DJIA – 12,548.37) ended a wishy-washy session with a loss of 47.4 points, or 0.4%, capping off its second straight finish beneath its 20-day moving average. Only nine of the Dow's 30 components emerged unscathed, with American Express (AXP) pacing the advancers with a gain of nearly 1.2%. On the flip side, tech titans Microsoft (MSFT) and Cisco Systems (CSCO) led the laggards with losses of 1.8% and 1.5%, respectively.

The S&P 500 Index (SPX – 1,329.47) also gave back its mid-session gains, ending 8.3 points, or 0.6%, below breakeven. What's more, the broad-market barometer settled south of the psychologically significant 1,333 level -- which marks double its March 2009 low -- for the first time since April 20. Finally, the Nasdaq Composite (COMP – 2,782.31) fared the worst of its peers, swallowing a loss of 46.2 points, or 1.6%, to end beneath the round-number 2,800 level for the first time since April 19.

But – lost amidst the huge sell-off in commodities and the 115-point drop in the Dow last Wednesday – were a couple of very clear warning signs that the U.S. is fast approaching a rotational downside season.

The U.S. now inching ever closer to the possibility of a "double-dip" recession.
You just about have to be prepared for anything in the month of May and that certainly proved true on Wednesday following a halt in the CME in the energy futures contracts for 5 minutes that sent commodity traders heading for the hills for fear of being locked into trades in fast market conditions.
One of the unknowns is the action of the CME and the sudden risk of being forced out of positions on margin - especially when the market is halted!

Stocks were hammered last Wednesday and commodity stocks were largely crushed. Crude oil prices fell $5.67 a barrel to close at $98.21; with the US dollar up sharply again as intermediate-term cycles emerge higher.
I don't know what sparked the energy futures selling for sure, but I can say that most of the big oil speculators are none other than JP Morgan and Goldman Sachs - both clearly into selling mode today right on the heels of trying to suck people into the market these last few days. Did anyone care to notice the volatility that ended on Friday. Pheeewwww!

In any case, it is rare to see a halt in oil trading as we saw Wednesday. The last halt in oil trading occurred in September 2008.

CME also doubled the daily limits in its energy futures, which means more downside risk for oil speculators. Fast market conditions – coupled with the CME halting the market – create a sense of panic among speculators who already have to cope with the uncertainty that margin requirements could be jacked up at any time on them and another possible halt, locking them out of the market.
As you can imagine commodity stocks were hit Gold closed down $15.50 an ounce to $1,501 (still above its 50-day moving average) while SLV lost all of its 3 day gains, now probing its bottom again at 34.39. As I said, the primary dealers will be looking now to sell into any rallies. And given the recent overhang of the CME it could be a rough go this second quarter for commodities in general.

Sorry if I am so cynical but isn't it a bit late now that the economy is going into oil shock and gasoline prices are back to the highs of 2008? And we see Senators are just now going after commodity speculators?

This suggests the primary dealers are ready for the slide and are shorting the commodity market ahead of the next recession. To me, this is a huge tell, folks!

Is the US Close To A Double Dip?
In other news, the Fed announced its new POMO schedule for the month of June ($93 billion). This is the lowest of all the QE2 months. The challenge now for investors will be the volatility as we head towards the end of June.

Also, it was reported on Wednesday that The U.S. trade deficit widened from $45.4 bln in February to $48.2 billion in March. This is the widest the trade deficit has been since June 2010.

Not only was the increase in the trade deficit in March greater than the consensus forecast, it was also significantly higher than what the BEA assumed in the first quarter GDP report. There should be significant negative revisions to Q1 GDP as a result of the new data.

This puts the US very close to striking distance for double dipping in this economy and this data is really before we get the Japanese earthquake eff

Early Stages of a Correction

From a purely trend following perspective, the stock indexes are trending above their 50-day moving averages, are trending above their 200-day moving averages and the long-term primary trend remain in bullish territory.

However, we also know that this bull market since March of 2009 is not based on free market action discounted to the true economy but based on liquidity injections of QE1 and QE2 going directly to the primary dealers who in turn have leveraged this money into the capital and commodity markets to re-inflate their sunken balance sheets.

When QE1 ended at the end of April of 2010, a flash crash followed and stocks fell back into a bear market until the Fed started up its POMO activities again in August of 2010 and a new bull market began as a result of QE2. That ends in June.

For the last few months market breadth has been contracting. Technically, this is a clear warning signal as we saw in late 2007 that investors were getting ready for recessionary times and we are seeing a similar pattern now. Bear market begins when liquidity dries up for the primary dealers and the economy begins to contract, so as investors we have to prepare for a very limited life span for the remainder of this bull market.

The first place where prices will start to break down is at the 50-day moving averages. It will become harder for the indexes to hold above them. The major indexes should then oscillate above and below the 50MA for a while - and then prices will start to fail the 50MAs - and when that happens, the 50-day MA will start to descend downward towards an upward sloping 200-day moving average.

Investors have to decide how willing they are to gamble with the Fed before QE2 ends or gamble that something new will be revealed before the end of June that will support the bull market, independent of deteriorating fundamentals.
As per said, we are entering into the early stages of a contraction and just about anything can happen now.

HAPPY TRADING