The cascading torrent of bad news for stock market bulls continued today with little sign of a merciful end coming anytime soon.

On the home front, Wal Mart lowered guidence going forward, building permits dropped a stunning -11%, the New York Empire Manufacturing Index  declined sharply and deflation reared its ugly head with the April Producer Price Index dropping -.1%.

The Shanghai Composite is in bear market territory while at home the S&P 500 is closing in on its 200 Day Moving Average, widely considered the demarcation line between bull and bear markets.  The 200 Day Moving Average will offer significant support but a sustained move below this average would most likely generate even more selling ahead.

But the bombshell du jour was the news coming out of Germany that Germany’s financial regulator Bafin banned short selling of euro-zone government debt along with short selling of the country’s most important financial stocks.

In response, the Euro immediately plunged to a four year low and a global selloff in equities ensued as the German move was widely seen as injecting more uncertainty into alreay uncertain markets. 

With the announcement coming just a few hours before the new policy’s implementation at midnight Frankfurt time, it looked like a panic reaction to the recent pummeling of the Euro and ever growing volatility in global markets.  The price of credit default swaps instantly soared and so it becomes more expensive to insure government debt while LIBOR, the London Interbank Offered rate, rose to its highest level since last August with banks growing increasingly reluctant to lend in these uncertain conditions.

Overall we see fear rippling around the world as the European leaders struggle to get out in front of this mushrooming crisis, so far without much success.  As we all know, markets hate uncertainty and it’s hard to remember when there was more uncertainty afoot.  Short term we can expect extreme volatililty and more downward pressure on the Euro and “risk assets” in general unless the central bankers of the world can get control of the fear factor.

Earlier this month, Chancellor Merkel of Germany called this “a battle of the politicians against the markets“ and said that “the speculators are our adversaries,” while others referred to the speculators  as a “wolf pack.”

Tonight Germany went to war and so far the markets and the wolves are winning.

At Wall Street Sector Selector, we remain in the “Red Flag Flying” mode, as we have been for sometime, expecting lower prices ahead.  We’ve been enjoying the ride and the fact that our strategies allow us to seek opportunities in both up and down markets.

 Written By John Nyaradi From Wall Street Sector Selector 

Disclosure: (SLV), (EFZ), (VXX), (EEV), (AGQ), (S&P 500 put option)

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