In a break with tradition, we didn't get any big M&A news this morning. Is this the liquidity pool drying up, risk coming back to the market, or a blip? We'll find out in the future, but it certainly is a sea change - this marks two weeks running.

On the open bonds rallied and the market rolled over. Flight to quality? Maybe. More probably an attempt to reposition ahead of more fun in the CDO market. While I've no proof of that, its where my bet would be placed, and if that thesis proves out this is very bad for equities on balance, as it is a further assault on the equity pool. The size of the drain appears to keep enlarging and I'm starting to see a nice swirl develop in the center!

The Nasdaq led the declines. If this pattern holds, with the 'Daq being weaker than the broader averages, it will underscore one of my prime thesis points - that the 'Daq has a habit of leading market turns, and so if you want to play "the fade", this is where you want to concentrate your bets.

There will be a mighty defense of the 1490 level in the S&P. An early assault drove the S&P well under the 50 on the day; it served as resistance this morning and blocked the "at open" advance quite solidly, with the index bouncing convincingly off it to the downside.

Existing home sales for May came in flat, falling 0.3% to 5.99m units, 10.3% below May of 2006. Inventories up 5% to 4.43 million units, 8.9 months supply. Awful!

Median price is down 2.1% from 2006.

Single family homes down, condo sales up.

Initial household formation, however, is down 70% from last year! This was a big surprise - and not of the good kind. You generally don't see that in a "strong economy." So is the economy really strong or is this an anomaly? Hmmmm.... and by the way, household formation collapsing makes getting rid of the inventory overhang much harder! Why do I think the truth is that the economics aren't as strong as we've been led to believe, and the Household Formation number is the more accurate indication? Oh, by the way, that's a leading indicator, unlike so many of the lagging ones that Bulls like to cite.

So what does the negative "household formation" number mean? Simple - this is 20-somethings and 30-somethings moving back in with Mom and Dad and/or taking roommates. Why? Do you really need someone to explain this one to you? Its called hitting the economic wall - that is, going broke.

Gas prices. Food prices. Housing is unaffordable. Unemployment is masked by all the illegal immigrants in the homebuilding industry and others working under the table. Consumer revolving credit decreased last month as people hit the wall - and went "splat".

It all makes sense, yet those who are willfully blind simply will not see. Not because they can't - but because until they're hit over the head with a 2x4 they won't pay attention to the facts.

The markets initial reaction to what was clearly awful news was positive. The home builders rolled over. At least some people are acting logically.

But the broader markets - complete with the absolute nonsense "news reporting" that there was "relief" from the housing numbers - decided to take off. The S&P moved smartly above the 50, with the Dow tacking on 100 and the Nasdaq popping up about 14.

Of course the credit markets think the situation continues to suck. The ABX continued its slide and so did the CMBX.

By the way, to those of you who think that "A" rated credit is ok - the market says otherwise. Only AA and AAA rated credit has escaped - so far - now the ABX has its deterioration all the way into the A rated tranches, with them now trading under 90! The BBBs are trading, in some cases, close to 55 cents on the dollar!

The CMBS is not doing any better; the BB rated tranche lose even more ground, while the BBBs are now worse than they have ever been historically. This not over.

You have to be out of your mind to trade this to the long side, other than as a daytrade on momentum.

Why?

Let's step back for just a moment on this and consider just what a month-over-month "slight decline" means here, along with the credit issue.

May and June are typically the strongest selling months in the year for homes. Consider that May's number for existing home sales was awful, with new home sales being supported only by huge price declines. Now consider that this down month report also came with price declines - not huge, but 2% is quite a bit on a monthly basis - that'd be 24% annually, if it was to be annualized!

Twenty four percent?! You better hope that doesn't annualize if you're a bull on equities, because if it does, the economy - and equity markets - are going to be crushed.

So what, exactly, is there to like in this report? You have one of the two strongest months of the year for home sales, yet they sucked by any measure you care to use. This is somewhat like retailers saying "Oh Christmas was kinda bad, but in general the retail market is pretty decent."

Give me a break. If Christmas is bad, the entire year is bad! What we have here so far is a total and complete bust in the spring selling season for real estate. Earlier in the spring this was blamed on "bad weather." That, of course, is now off the table - its summer. Nice try.

There is no indication that the bottom is in with regards to housing, or even being approached. Inventories continue to build and household formations are down strongly, meaning that this overheated inventory will take even longer to work through than originally forecast.

And - to work through inventory you first have to see the trend on building inventories reverse! So long as inventories keep going up there is nothing to work through, as the build hasn't stopped yet!

"The impact of housing is abating on the economy", or so many in the media claim?

I don't think so. In fact, the evidence is for exactly the opposite - the drag on the economy continues to worsen and in fact is now leading people to move back in with Mom and Dad or take on roommates, which is further depressing the housing market! Can you say "spiral downward"?

Certainly, in the home-building stocks people seem to be figuring it out. Hovnovian is in the ditch, pushing at the lows of the day. Toll Brothers is pinging to the downside, and so is Lennar, which is due to report what are expected to be dismal earnings tomorrow. And the XHB, the composite ETF for home builders, is headed for the ditch as well.

So how come the major indices responded with an uptick? There certainly isn't a good reason for it that I can find.

Yes, oil is down today and so are yields, but aren't, in the end, equity prices really all about the economy, of which 70% is consumer spending? How do you discount the household-formation and home inventory numbers?

How does Chuckie continue to spend when he can't afford his house, and is forced to move back in with Mom and Dad?

I don't believe you can make this thesis stick.

The numbers this morning foretell severe economic distress on the road ahead - perhaps very shortly ahead - and they are correlated with the other data we have received recently pointing in the same direction.

In other words, this is probably not an abberation in the data. It is, in fact, likely to be a trend. A very bad trend.

In even more ominous news, a Businessweek article suggested that people are now preferring to pay credit cards over mortgages. This is something that the Realty industry has said would "never happen" - in other words, that people would "guard their house" no matter what. Uh, no. See, people are a bit smarter - and more rational - than Realtors!

"The significance? One explanation could be that many recent subprime homebuyers simply aren't that worried about losing their homes because they don't have much to lose. Most put down small or zero down payments. If prices have fallen since they bought, they may actually owe more than the house is worth, making it an easy choice to walk away.

At the same time, keeping access to their credit cards has become more important than ever, says Stan Oliai, vice-president of decision sciences for Experian Decision Analytics. "People are using credit cards for everyday items like gasoline and groceries, and to tide themselves over from paycheck to paycheck," says Oliai."

Yet more confirmation of the thesis - and the decline in revolving credit outstanding last month.

We had an interesting event here recently in Florida. In Destin there was an actual prayer service for "better Real Estate market conditions."

May I somewhat impolitely suggest that asking God for help to rescue your sorry ass when you have created a bubble from avarice and outright fraud, gleaning huge personal profits from the people who you sucked in, possibly destroying their financial future in the process, is more than a bit imprudent?

After all, my admittedly-imperfect study of the Bible suggests that God tends to frown on taking advantage of your fellow man for your personal profit - something that has been the hallmark of the so-called "boom years" in Florida Real Estate.

Indeed, it would seem to me that the wise man would stay well clear of such "prayer services", lest the Almighty become more than a bit peeved and decide that His form of relief could come via a few "bolts from the blue". Think of it as "God's Raspberries."

Perhaps its a good thing for those Realtors that God has tended to not meddle in the minor events of mankind over the last couple of thousand years.

This morning Oil was down sharply on the settlement of the Nigerian strike, only to bounce hard on news that Venezuela was basically kicking US oil companies out. Now to be fair, Chavez isn't exactly doing that, but he apparently has shoved "new deal terms" under their noses and insisted that they sign or leave. Apparently, those terms are only good for Chavez (big surprise, right?) Reports are that at least one of the big US oils said "nuts" and another is close to doing so. Here comes that 7-handle on oil! It seems that as fast as we can put one problem to bed another pops up. While my oil play is basically flat since I took it I still believe we're looking at the mid 70s - at which point I'll consider exiting and taking the profits.

In a big change, CNBS is now starting to talk about major bond defaults and credit market deterioration. While they're playing both sides (as is fine; you need a bull and bear perspective) the tone has definitely shifted. A few weeks ago there was zero attention being paid to this in the mainstream media. But now we've got the media recognizing the systemic risk - and what can happen as the liquidity pool starts to get impacted. And Steve Liesman, who has for months been pretty sanguine about this, is starting to sound a lot like me - that the deals in the pipe may be at risk as risk gets priced back into the market and cheap money disappears. This puts the LBO market at risk, and if you've got deals in the pipe, widening spreads threaten that.

The 2:00 hour came and with it a big selloff. The Nasdaq gave back all its gains, with the DOW giving back most. Ditto on the SPX. Was the market listening to CNBS? Or did people finally wake up and read beyond the headlines? Not sure - but I really liked the big green move on my portfolio right at the 2:00 hour......

And lookie what just hit the wires!

"Bear Stearns Cos. may have to salvage the second of its two teetering hedge funds after offering $3.2 billion last week to bail out the first one, Merrill Lynch & Co. analyst Guy Moszkowski said.

Investors ``can't rule out'' the chance that Bear Stearns will ``stump up even more for a similar, more-leveraged, fund,'' Moszkowski, who rates the firm a ``buy,'' wrote in a note to clients today. He estimated that the second fund, the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund, owes about $7 billion to its financiers. "

Seven billion?! Oh my GOD!

That would be $10 billion in total, or roughly half of the firm's market capitalization!

Folks, if that happens, its a catastrophe and will totally blow Bear out of the water. That would be the mother and father of all short plays, assuming you've got the stomach for the risk.

But it will also, with near certainty, kick the market over the edge in terms of technical support levels, leading off a wave of selling that WILL NOT be contained to Bear Stearns and pals!

The market smelled it and headed south as soon as this hit the wire and got under trader's skins. It did not take long, and the reaction was violent and immediate to the downside.

Nor does it stop there. We also have Goldman now potentially exposed to a similar degree:

"Goldman Sachs Group Inc. subprime mortgage bonds issued last year are being downgraded by rating companies at the fastest rate of any issuer, according to Citigroup Inc. research dated June 22."

And if that's not enough, the SEC is now interested (its about damn time!)

"Bear Stearns (BSC) may have a lot of explaining to do about a big restatement of losses at one of its troubled hedge funds—and not just to its investors. BusinessWeek has learned that the Securities & Exchange Commission recently opened a preliminary inquiry into the near-collapse of Bear Stearns' High-Grade Structured Credit Strategies Enhanced Leveraged Fund. People familiar with the inquiry say regulators are interested in learning how the Wall Street investment firm came to dramatically restate the April losses for the 10-month-old fund, which invested heavily in securities backed by subprime mortgages, or home loans to consumers with shaky credit histories. "

And if you go beyond the sugar-coated media here in the US, you find this from the UK:

"The United States faces a severe credit crunch as mounting losses on risky forms of debt catch up with the banks and force them to curb lending and call in existing loans, according to a report by Lombard Street Research.

The group said the fast-moving crisis at two Bear Stearns hedge funds had exposed the underlying rot in the US sub-prime mortgage market, and the vast nexus of collateralised debt obligations known as CDOs."Excess liquidity in the global system will be slashed," it said. "Banks' capital is about to be decimated, which will require calling in a swathe of loans. This is going to aggravate the US hard landing."

Guess what? Goldilocks really did get mauled and what was left apparently got eaten on top of it! This is no longer a "specific stock" story - it has now spread to the entire primary dealer/broker sector. This is what happens when you get greedy, and these guys ALL defined that word during the Housing Boom, paying absolutely no attention to risk!

While you might hear the Talking Heads saying that "this will be contained" don't you believe it. This is getting far more serious now because as bond downgrades spread we are going to see trouble show up as forced selling by pension funds and other firms that cannot hold bonds rated below a certain grade. As those levels fall there will be more forced selling, which is going to put a real crimp in the credit markets.

There is never only one cockroach! You know it, I know it, we all know it, right?

Keep that in mind and guide yourself accordingly in the markets.

Oh, and don't believe for a minute that "all is ok" in the Dow. The entirety of the DOW's disparity today was due to the upgrade of GM - which held a nearly 2% gain despite the rest of the market going to crap around it. When you only have 30 stocks, one makes a big difference; take that out and suddenly the DJI looks pretty ugly.

Let's go through the "Five Indicators" list again:

• The S&P closes under the 1490 level. That's second-level support, and has been approached several times recently - but it has held. NOT YET. The 50, however, HAS FALLEN.
• China blows up (stocks). If their parabolic ascent is to be believed, this may occur within the next week or so. MAYBE - it closed under the 50 last night. Give it another day or two; if they keep dropping like a stone......
• Goldman, Merrill, and Bear Stearns all close under their 50s. Both Merrill and Bear have. Goldman is all that's left. BIG CHECK TODAY (New Signal)
• HGX has broken trendline support. On technicals, it appears this may continue downward. CHECK.
• The Nasdaq Composite breaks the 50. This occurs at roughly 2563. The Nasdaq usually breaks down first. NOT YET.

So we've got two in the bag, one maybe, and the other two one nice down day away.

No Omen today, although we took a valient stab at it - New Highs didn't quite get there. Unless, of course, you count the Nasdaq, where if we were to use that index we sure did.

Here's today's SPX - what a wild ride eh?

Tomorrow could be "the day" to break technical levels. I thought we had a decent shot at it today, and the market attempted a strong reversal instead in both directions - but failed to hold - twice!

In the morning we get Chain Store Sales at 7:45 and Redbook at 8:55 - both important. At 10:00 AM we get Richmond Manufacturing and New Home Sales, along with Consumer Confidence.

Of these, same store sales and consumer confidence are probably the bigger potential issues. A bad confidence number, especially if it comes with soft same-store sales, would presage a consumer slowdown - exactly what this market cannot tolerate right now. People have pretty much come to expect crap home sales numbers - the leg on the stool holding it all up is Consumer spending.

Threaten that, we have a 200+ point down day and my remaining technical indicators go "poof".

See 'ya tomorrow for The Great Roller Coaster Re-Ride - Part Deux!