The Russell 2000 joined all of the other major market measures in the red, year to date, and the Fed-led January bounce seems like a long-ago memory. Both the Nasdaq 100 and S&P 500 hit new 52-week lows, with all of the major market measures ending the bifurcated session at their worst levels. The new-lows list was peppered with erstwhile highfliers and must-owns, such as Broadcom (BRCM:Nasdaq - news - boards), Cisco (CSCO:Nasdaq - news - boards), EMC (EMC:NYSE - news - boards), Corning (GLW:NYSE - news - boards), JDS Uniphase (JDSU:Nasdaq - news - boards), Nokia (NOK:NYSE ADR - news - boards), Network Appliance (NTAP:Nasdaq - news - boards) and Sun (SUNW:Nasdaq - news - boards), just to name some of the tech stocks that were discarded like a pail of ashes.

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Market internals deteriorated throughout Wednesday afternoon after a very choppy morning, which was dominated by the CPI report. Downside volume topped upside volume by about 3 to 1 on both the Nasdaq Composite Index and the New York Stock Exchange, with breadth negative by more than 2 to 1 on the former and just short of 2 to 1 on the latter. Murphy's Law continues to rule, as bad economic news, massive technical breakdowns, lower guidance and unpleasant rumors combined for a truly dismal environment. Unfortunately, it didn't get any better after the close. Brocade (BRCD:Nasdaq - news - boards) was hit for almost 20% on lower guidance. What a surprise!

The Core of the CPI Report

Although the CPI headline number of 0.6% led to a sharp downturn in early trading, which also hit the bonds, the 0.3% increase in the so-called core rate wasn't much higher than expected. Higher energy prices accounted for much of the advance, and the Fed is on record as viewing higher energy prices as more of an economic drag than an indication of mounting inflationary pressures. Of course, inflation has been on the rise for more than a year, but the Fed has bigger fish to fry right now. Nonetheless, concerns about stagflation made the rounds on the Street of Dreams, as did worries about Turkey, which contributed to the afternoon reversal.

It's consumer confidence that's got the Fed's attention right now, and it seems to me that the only hope of stemming the plunge in confidence is for Alan Greenspan to unleash a rate cut very soon. The futures recovered some overnight, but if the market can't hold near current levels, we could see rates lowered before the Conference Board reports February consumer confidence Tuesday. It's expected to show a continued decline, as the more timely University of Michigan data have already been released. Is the Fed targeting the stock market now? Almost certainly.

The last thing that already nervous consumers need to hear and read on the nightly news and in the daily rags is a plethora of economists and assorted gurus talking about the market breaking to multiyear lows. What else would a crisis-management-oriented Fed target? I'm already reminded of the Joads this morning, having stumbled upon a headline that read, "Farmers Use Crops to Heat Homes." Perhaps middle-class urban dwellers can burn plastic to heat theirs. Bankruptcy will unfortunately be the only recourse for many lower-income families.

I thought that the initial selling on Wednesday morning's Globex session was quite an overreaction. It's virtually unimaginable that a 0.3% increase in the core rate will influence the Fed's thinking or course of action. (Though San Francisco Fed President Robert Parry stated, "I'm not pleased with those numbers we saw for January.") Short-covering appeared to account for much of the morning's rebound, and buyers were clearly scarce once the rally attempt failed just after noon. It was a blow to the bullish case to see the weakness spread throughout the broad market, leaving few places to hide. Even utility stocks gave back their gains, and the S&P Value Index fell 1.8%, which was only a tick better than the Growth Index's 1.9% decline.

Bad News for the Bulls

Still, the most discouraging action for the bulls was found in the financial sector, which was even weaker than tech stocks in general. The Philadelphia Stock Exchange/KBW Bank Index and S&P Insurance Index both fell 3.2%, and the American Stock Exchange Broker/Dealer Index lost 2.8%. All three have now violated their 40-week simple moving averages and appear to offer further opportunities on the short side. Retailers gave back Tuesday's gains and more, as the S&P Retail Index was on sale to the tune of 5.3%. If you're of the same mind as I am, that a near-term recession is in progress or unavoidable, many of the retailers also look ripe for further downside. Drug and defense stocks were the only major groups to show any significant strength, as most of the others have broken down.

The bulls must have also been discouraged by this week's Investors Intelligence report. Bullish sentiment increased to 61.2%, the highest it's been since January 1987, and bearish sentiment slipped to a three-month low of only 28.6%, according to CNBC's Bob Pisani. These are readings generally found at tops and, to the best of my knowledge, have never been seen at or near a significant market bottom. And Ameritrade's capricious clients continued to catch falling daggers, as they kept buying large-cap tech, although not quite as aggressively. The Ameritrade Index dipped from Tuesday's 82.9% to 73.8% Wednesday, showing no sign that individual investors have capitulated. On the other hand, institutions still appear to be hedging and/or playing the short side, as the SPX put/call ratio was 1.78. The overall Chicago Board Options Exchange reading came in at 0.72, virtually unchanged from Tuesday.

It looks like the SPX has risk down to the 985 area, which is also a virtual total retracement of its move from October 1998 to March 2000.