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[Tor]

BEGINNING THE GREAT UNWIND? Last Monday we noted: Since there are no breadth divergences in place to warn of a serious sell-off, we believe that, barring a so-called “exogenous event,” any short-term pullback here would represent yet another buying opportunity. The exogenous event arrived from China on Tuesday morning. But the event is not the China sell-off per se. Rather, it’s the linkages among global financial markets and asset classes that Shenzen/Shanghai sell-off revealed, and the unwinding of leverage that it triggered. We believe that last week’s spike in volatility is not a one-day wonder, and conclude that it would be imprudent here to “buy the dip.” The charts on page 2 show how the price and momentum setup for the major indices is remarkably similar to last May. The question now is whether a 6 to 8 week sell-off like last summer’s would clear the air and set the stage for a new intermediate advance. In 2007: The Year In Prospect we outlined the case for a V-shaped correction of greater than ten percent starting close to mid-year. We believe that, given the price pattern setups of the major indices, it is highly possible that such a correction is getting underway sooner than originally anticipated. The near-term course of the Yen will likely give us the best signals regarding what comes next: if the Yen (85.82) stalls right here just under its 200-day average at 86.00, then markets may well return to “normal.” If the Yen breaks above 86.00 (basis March futures) and holds above that level, then a new and more serious round of liquidation across asset classes seems likely. Gold’s collapse late last week even in the face of a weaker U.S. Dollar re-enforces our concern that liquidity flows may be shifting into reverse.