Liklihood of a bear market

Since the high in the S&P 500 Index (The "Index") of 1553 mentioned in a previous posting, the Index reached a slightly higher high of roughly 1562 recently. However, the new high was unconvincing because it occurred with unimpressive breadth and volume. The recent weakness from that high can be attributable to the confluence of a number of possible causes:

1. The problems in the financial system resulting from the mortgage mess. The ensuing writeoffs by major financial institutions may not be complete.

2. The weakening dollar, while a spur to export growth, is beginning to accelerate on the downside; and global holders of dollar assets are getting nervous. Since the Federal Reserve is worried about recession, it stands ready to continue its easing to avoid one, which would exacerbate dollar weakness. The Fed's best tactic to buoy the dollar would be to RAISE interest rates, hardly likely at this juncture. In short, the Fed is in a bind.

3. While careers have ended on Wall Street in the past due to predictions of the consumers' folding, which rarely happens, one can make a case for recession. Oil prices at close to $100 a barrel, home prices on the decline which restricts borrowing against home values to bolster consumption, and the rapid drop in financial equities could reduce consumer confidence so much that the Christmas season is a bust. That would set off a vicious cycle of lower employment, still lower consumer confidence, leading to lower employment, etc.

4. During this economic up cycle, profit margins have reached 13%, versus a historic norm of 8%. There is plenty of room for Index earnings to decline in the event of a recession.

5. If the leading contender for the Democratic Party's nominee for the Presidency, Hillary Clinton, beats the drum for protectionism loudly; and the financial markets sense that she means it rather than just trying to generate votes, the stock market could take a serious hit.

It is always difficult to identify a bear market in its early stage. After all, the stock market goes up more than 80% of the time. Bull markets die hard! However, for the above reasons, there is more than a de minimus probablity that a bear has already started.

If the recent Index high of 1562 is not exceeded before a bear market occurs, then possible Fibonacci buy points in the Index would be 1261, 1168, 1076. Tune in!