We keep repeating the mantra that “Something Has Changed.” Exactly what has changed, from a technical standpoint, is discussed below, as well as some reasons why we are quite certain now that the Fed will loosen, and soon. (Sayonara, US$!) Meanwhile, talk about ugly!  Bearish as we were at the opening yesterday, the ferocity of the stock market’s decline took us somewhat by surprise. We were looking for a minimum 13-point decline in the S&P futures and said so in a trading recommendation sent out the night before:  “On a weak close, the futures looked poised for a minimum 13-point fall to 1534.00, although further slippage to another Hidden Pivot support at 1531.75 would be implied if the higher number were to be breached by more than a couple of ticks.”  Our intention was to bottom-fish at the lower target, but even after adjusting it downward to 1528.50 intraday, we still got socked for a small ($38) loss on a forced exit.

(Click on chart to enlarge)

We had warned of possible trouble in the shares of Apple as well, even though our longer-term outlook was bullish. Here’s the actual Rick’s Picks Tout that was sent out Monday night with the stock trading 143.70, just $1.50 below its recent all-time high: “Word that iPhone is vulnerable to hackers seems not to have much slowed the pace of AAPL's ascent. For the record, our current minimum upside projection is to 153.41, a Hidden Pivot that comes from the monthly chart.  However, the midpoint support associated with the target is down at 134.40 and, as always, a pullback to that number could occur at any time.” As indeed it did -- with a vengeance.  Apple recorded a low of 134.15 on Tuesday, leaving us a tad less eager to buy aggressively at these levels, as we’d said we would.

We also bailed out of some October 50 Wachovia calls for a very small (i.e., $15 per contract) loss after it, too, exceeded what had looked to be an exceptionally promising Hidden Pivot support.  Not everything we looked at in Tuesday’s edition went down, however. Newmont recorded a small gain and still looks likely to achieve a Hidden Pivot rally target provided to subscribers in yesterday’s Touts. And September Wheat spiked to a high that fell just two points shy of the 650^2 target we’d proffered, receding thereafter like the tide at Fundy’s.

Fed Will Ease, But…

What does it all mean?  For one, that the days of complacency on Wall Street are over. To warn that that day had arrived, we used the headline “Something Has Changed” atop two essays that appeared here in the last six weeks  With yesterday’s routing of the bulls, evidence grows even stronger that the market is in the process of making – or perhaps already has made – a very important top.  We note that, from a Hidden Pivot perspective, it has been years since we’ve seen pullbacks in the broad indexes correct all the way to their ‘D’ targets, much less exceed them as occurred yesterday. Typically, bull markets produce rallies that reach their minor- and major-cycle targets, while corrections make it only halfway to theirs. This dynamic now appears to have reversed; for, not only have the S&Ps over-corrected this time, they did so after having failed recently by four points to reach a 1569.25 rally target that had looked to us as certain as the daily setting of the sun.

Now, any bullish bets we make will be tied to extremely tight stop-losses, much as they were yesterday (and have been, as a rule).  For it seems, finally, to be dawning on investors that the mortgage-securities debacle could threaten more than a mere handful of profligate lenders;  moreover, that before it has run its course, things are likely to get worse – perhaps much worse – before they get better.

Countrywide Delinquencies

News yesterday that 24% of Countrywide’s subprime loans are delinquent and that, even worse, payments on 4.6 % of their prime loans are late, clearly shocked Wall Street, but it should not have shocked anyone who has been following this newsletter regularly. Nor will we be the least bit surprised when the Fed starts to ease again -- and soon, as it absolutely must. This will provide a boost to stocks when it happens, but don’t expect the bounce to go very far.  We have grave doubts that in an economy already hyper-saturated with debt, any attempted stimulus can succeed at turning back the deflationary juggernaut that has begun to bear down on debtors with irresistible force.