Monday, October 3, 2011


It's only fitting that one of the worst quarters in some time ended with the well-respected Economic Cycle Research Institute (ECRI) saying that the U.S. economy is "tipping into a new recession." Many market players have been fighting the idea of a double-dip recession, but ECRI is the tipping point and we are now more fully pricing it in.

The market has been struggling since breaking down in early August, and the action this week raised fears that another down leg is coming. The bull's argument has been that we aren't going to have a double-dip recession and even if the economy is poor, it's already priced in.

But this week's action called that conclusion into question.

Technically, the S&P 500 is holding above key support at 1120 to 1125, but the more often we beat on those levels, the more likely they will fail. And it sure looks like another test is coming. The technicians may be correct in believing it would be healthy for the market longer-term to breach that support and have a washout that triggers the stops that are set there. The market would be healthier if you got rid of the bulls clinging to the hope that support will hold. Once they give up, we will be in better position to heal. Or so they say.

On the positive side, this breakdown is a good set up for a recovery as third-quarter earnings hit and positive end-of-the-year seasonality kicks in.

The mood is downright negative. The contrarian bulls are hopeful that it is so negative that we run out of sellers, but one of the lessons of this market has been that trends have a tendency to last longer than most people think is reasonable.