My New Market Thesis

So -- where are we with Mr. Market? I have a theory which I will outline. Basically, we are already in the middle of a correction.

First, consider the following:

Merrill, itself one of Wall Street's biggest casualties of the sub-prime crisis, is the first major bank to declare that a recession in the world's biggest economy is now underway.

David Rosenberg, the bank's chief North American economist, argues that a weakening employment picture and declining retail sales signal the economy has tipped into its first month of recession.

Mr Rosenberg, who is well-respected on Wall Street, argues: "According to our analysis, this [recession] isn't even a forecast any more but is a present day reality."

And this

Goldman Sachs yesterday joined a growing chorus of top Wall Street investment banks that are now forecasting the US downturn will turn into a recession.

Morgan Stanley was the first top investment house to forecast a recession, while long-time bears Merrill Lynch said following the latest jobs report that "recession is no longer a forecast but a present-day reality."

In a note to clients, Goldman said: "We expect economic activity to contract modestly through late 2008, followed by a gradual recovery in the course of 2009."

Bill Poole, president of the St Louis Federal Reserve, acknowledged the risk of recession but said it was still "too early to tell" whether the housing-related problems would push the US into one.

And from today's WSJ:

Economists surveyed by The Wall Street Journal see increasing odds of a recession this year along with mounting inflationary pressures, an uncomfortable mix that could play a role in shaping the 2008 presidential campaign and complicate life for the Federal Reserve.

In the latest monthly survey, economists put the chance of recession at 42%, up from 38% in December and 23% just six months ago. On average, the 54 forecasters who participated see the economy expanding at less than a 2% annual rate in the first and second quarters. Last month's survey estimated 2007 growth at 2.5%.

Short version: There is an awful lot of recession talk in the market.

Now -- let's look at the charts for the SPYs, QQQQs and IWMs (click on an image for a large picture).







Notice we have the same down, up down pattern. Also note the pattern is clearly lower lows and lower highs. In other words, there is a pretty firm trend of a market pullback in play right now.

And this is also true of several important market sectors



The financial sector is in a bear market already.



The consumer discretionary sector is also in a bear market.



The industrial sector is clearly in a lower low, lower high pattern



Technology -- which was going to save us from the housing mess -- as also in a correction.

Bull market news, or News That Will Alter the Market's Downward Trajectory

1.) The clearest and strongest bull market stimulus right now is Fed action or the possibility of Fed action. The markets all jumped yesterday when Bernanke made his comments about aggressive Fed action.

2.) Anything that helps the financial sector. For example, yesterday's news the Bank of America was in negotiations to buy Countrywide was an obvious boost. Any news along those lines will help.

3.) Positive employment news. Last Friday's employment report really knocked the bills down hard because the employment situation was a primary reason the bulls were still in business. So, anything that reignites that thesis will help to move the market higher.

4.) Fourth quarter earnings news. If the fourth quarter turns out to be a good quarter the bears may rethink their analysis.