U.S. Stock Market: Russell 2000 Down 4% Last Week

The Russell 2000 Index (of small-cap stocks) was down 4.0% last week, but the S&P 500 Index (of large-cap stocks) was down just 0.9%. So nothing to worry about, right?

In my view, last week was nothing short of amazing, especially on Thursday and Friday!

Portugal's largest bank, Espirito Santo International SA, missed a bond payment as reported very early Thursday morning. Maybe this is a small thing to some, but for these bondholders the loss in principal was about 20% overnight. There appears to be some "irregularities in its accounts" and maybe even some "ponzi-like" maneuvers within this Bank, according to a report by Bloomberg.

I was making the long drive to work on Thursday morning at the height of this debacle. Stock index futures here in the U.S. were down about 19 points (about 1% pre-opening) at 8:00 AM ET, but this turned out to be about as low as they fell all day. I was listening to Bloomberg radio at that time when well-respected Wall Street veteran Barry Ritholtz co-hosted a segment. With the world "collapsing all around us" in terms of sharply lower stock futures prices, Mr. Ritholtz asked an outside guest a direct question, "why should a problem at a bank in Portugal impact U.S. stock prices?" I think Barry Rithholtz is one of the wisest and most level-headed advisers on the Street, but I was completely taken aback by this question. Of course, I was then (and still am now) short the U.S. stock market with my largest possible exposure, and I was feeling pretty good about my position at the time. To me it was obvious! Problems at Portugal's largest bank are just the tip of the iceberg in terms of potential bank failures all across Europe. The next global financial "contagion" was clearly beginning in earnest and this contagion would spread like wildfire, and no amount of central bank action could stop it. Alright, maybe this view was a little outside reality at the time, but I remember thinking this scenario exactly. In fact, in my head, I was already thinking that a "mini-Lehman" crisis was just getting started and that I was perfectly positioned.

While I couldn't read Mr. Rithholtz's mind, of course, but when he asked this question to a guest on Bloomberg radio that Thursday morning, my read of the inflection in Mr. Ritholtz' voice at that time was that he thought the overnight collapse in S&P 500 Index futures was way "OVER-THE-TOP" and completely unjustified. I even sensed from Mr. Rithholtz that (if he wasn't already long the limit, which I think he may be) Thursday's gap-down opening would be the greatest buying opportunity ever! As it turned out, while Thursday's gap-down opening wasn't the greatest buying opportunity ever, it was a pretty good trade for the bulls, just as Mr. Rithholtz's tone suggested. Bad for me, of course, and worse the next day when U.S. stocks again absorbed several selling sprees, only to finish higher on the day.

So where does that leave us now!

Despite Thursday's miraculous resilience in U.S. stocks last week in the face of ominous news about Portugal's largest bank, I remain convinced that U.S. stocks are poised on the precipice of a major decline. In the interest of full disclosure, I still remain significantly short (and unhedged) the S&P 500 Index. And I have even sold ALL my gold/silver mining shares in my managed accounts (with nice profits).

Before I talk about the Russell 2000 Index monthly chart below, I just want to relay a fascinating story I read about this morning on Yahoo Finance (www.finance.yahoo.com). The stock of Cynk Technologies was halted Friday by the Securities and Exchange Commission. Apparently, the SEC is "shocked" that there is "gambling going on" in the market for penny stocks. According to a direct statement released by the SEC, there are "potentially manipulative transactions" in the trading of CYNK's stock. Of all the places where there are "potentially manipulative transactions", why would the SEC get involved in CYNK's stock. Here's why: CYNK's stock price recently went from $0.06/share to more than $20/share. At $20/share, this "penny" stock had a valuation of more than $6 billion. The next FaceBook maybe? No, well how about Twitter then? No, not quite. According to the Yahoo Finance story, CYNK is a "social network" company with no revenues, no products, and only one employee. At the time of the halt on Friday, CYNK's stock was $13.90/share. The SEC has imposed a halt in trading until at least July 24th. Any guesses where it will open at that time? I'll bite; how about under a $1.00/share? For those who believe that U.S. stocks are still attractive at current valuations, you may wish to open your eyes to the speculative excesses that seem to be everywhere right now. And if your mantra is "don't fight the Fed", then maybe it's time for you to read the transcripts of recent speeches by St. Louis Fed President Bullard and Philadelphia Fed President Plosser. Both are now saying that the Fed is very close to achieving its objectives and that increases in short-term interest rates will come sooner than most investors now seem to expect.

And how about the stock price of Lumber Liquidators (LL) last week? Ouch!! For anyone thinking that the collapse of Q-1 GDP was just weather-related, you may want to read the latest Q-2 earnings report and follow-up management forecasts from this company. This "growth" stock is now down 54% from its all-time high of $119.98 set last November! As recently as this past Wednesday, July 9th, LL's stock was trading at $77.27/share. It now $54.86, down 29% in just two trading days!

Lumber Liquidators (LL) Daily Chart with 250-day Moving Average Line

And now to the Russell 2000 Index Monthly Chart below. Of all my charts, this is my favorite. It's my favorite because my computer trading system has been PERFECT in ALL its calls for at least the last 16 years. Six perfect calls in a row! And with last week's 4% decline in this key stock market barometer, I now strongly believe that a monthly chart sell signal will be triggered in the Russell 2000 Index here in July. And given my computer trading system's perfect track record of forecasts in the Russell 2000, the bearish case for the overall stock market is that much more compelling to me. We're not there yet, but a 7th perfect call in a row is about to be triggered in the Russell 2000 Index on the very near-term horizon!

Russell 2000 Index Monthly Chart with Computer-generated Buy & Sell Signals