You can expect to see a down start tomorrow (2/9). I will be out of the office all day but will be monitoring the market during the day. Today the market did just what I told you yesterday it would do, it spent most of the day testing the 1070 level on the S&P500. I would rather be putting charts on this site that we can act on but there isn’t much we can do with all this volatility. The next level down is 1020 (see chart). Will it make it there? Most likely. The upper resistance is still at 1070. The VIX keeps getting higher showing that there is fear in this market and the fear is growing.

The “Average Joe” can’t take another big down. How the “average Joe” is going to react to the new move down might be a surprise because he might pull out sooner and not let his money run like he did in 2001 and 2008. The brokerage houses fear this and are telling him that the market has gone up 50% since the bottom and has only dropped 8% over the past few weeks. So, he should hang in there because this is the 10% correction which everyone has been expecting and the market will be going up again soon.

Every good trader I know or have been reading are saying stay out of this market unless you REALLY know what you are doing. You have your warning so it is time to start trading.

Here is a number telling you how far this market might go down.

Rosenberg: This Is A Real Correction, S&P Headed To 912
by Joe Weisenthal — businessinsider.com

David Rosenber tends to be pretty bearish in his tone, though it’s been awhile since we’ve seen him offer a real, numerical forecast.

That changed today:

This is a stock market that is as overpriced as it was heading into the October 1987 crash and as the case back then, it wasn’t about the fundamentals but about policy discord between the U.S., Japan and Germany. A market priced for perfection requires perfection on all fronts.

The comments on Fast Money were that the fundamentals hadn’t changed this selloff is pure emotion. Really? We had a 70% rally from the March low in advance of any serious turn in the economic data this was purely a bear market rally that was rooted in the technicals (and short coverings). How do we know? Because at the January 19 high in the S&P 500 of 1150 it had completed a 50% retracement off the slide from the October 2007 highs to the March 2009 trough.

Now, since this is a technically-driven market, we are bound to get a 50% reversal of the bear market rally, which would take us to 912 on the S&P 500 so keep your seatbelts on. We had been warning for a while that too much complacency had set in, and what happens when the market shoots up 70% without taking any serious break along the way? Investors tend to believe that we are into some sustainable new parabolic bull run.

Meanwhile, its seems that Mr. Market had already started to top out back in mid-September, yet so many pundits still believed we were still in the throes of a bull phase market even though a vivid topping formation was becoming increasingly evident. How about that slide in bond yields yesterday? In the realm of technical analysis, a break towards 3.2% on the U.S. 10-year Treasury note yield cannot be ruled out over the near-term.

Below is an article I found on the current and future state of the economy. The article is truthful but at the same time depressing. As a trader we need to know the current economic conditions and this article does a good job of summing things up.

20 Reasons Why The U.S. Economy Is Dying And Is Simply Not Going To Recover
Michael The Patriot Blogger

Even though the U.S. financial system nearly experienced a total meltdown in late 2008, the truth is that most Americans simply have no idea what is happening to the U.S. economy. Most people seem to think that the nasty little recession that we have just been through is almost over and that we will be experiencing another time of economic growth and prosperity very shortly.

But this time around that is not the case. The reality is that we are being sucked into an economic black hole from which the U.S. economy will never fully recover.

The problem is debt. Collectively, the U.S. government, the state governments, corporate America and American consumers have accumulated the biggest mountain of debt in the history of the world. Our massive debt binge has financed our tremendous growth and prosperity over the last couple of decades, but now the day of reckoning is here.

And it is going to be painful.

The second wave of foreclosures

Do you remember that massive wave of subprime mortgages that defaulted in 2007 and 2008 and caused the biggest financial crisis since the Great Depression? Well, the “second wave” of mortgage defaults in on the way and there is simply no way that we are going to be able to avoid it. A huge mountain of mortgages is going to reset starting in 2010, and once those mortgage payments go up there are once again going to be millions of people who simply cannot pay their mortgages. This chart reveals just how bad the second wave of adjustable rate mortgages is likely to be over the next several years.

Tighter lending standards

The Federal Housing Administration has announced plans to increase the amount of up-front cash paid by new borrowers and to require higher down payments from those with the poorest credit. The Federal Housing Administration currently backs about 30 percent of all new home loans and about 20 percent of all new home refinancing loans. Tighter standards are going to mean that less people will qualify for loans. Less qualifiers means that there will be less buyers for homes. Less buyers means that home prices are going to drop even more.

Hard to find jobs

It is getting really hard to find a job in the United States. A total of 6,130,000 U.S. workers had been unemployed for 27 weeks or more in December 2009. That was the most ever since the U.S. government started keeping track of this statistic in 1948. In fact, it is more than double the 2,612,000 U.S. workers who were unemployed for a similar length of time in December 2008. The reality is that once Americans lose their jobs they are increasingly finding it difficult to find new ones.

1 million discouraged workers

In December, there were also 929,000 “discouraged” workers who are not counted as part of the labor force because they have “given up” looking for work. That is the most since the U.S. government first started keeping track of discouraged workers in 1949. Many Americans have simply given up and are now chronically unemployed.

Depression in some cities

Some areas of the U.S. are already virtually in a state of depression. The mayor of Detroit estimates that the real unemployment rate in his city is now somewhere around 50 percent.

More jobs going overseas

For decades, our leaders in Washington pushed us towards “a global economy” and told us it would be so good for us. But there is a flip side. Now workers in the U.S. must compete with workers all over the world, and our greedy corporations are free to pursue the cheapest labor available anywhere on the globe. Millions of jobs have already been shipped out of the United States, and Princeton University economist Alan S. Blinder estimates that 22% to 29% of all current U.S. jobs will be offshorable within two decades. The days when blue collar workers could live the American Dream are gone and they are not going to come back.

Much worse job loss than 2001

During the 2001 recession, the U.S. economy lost 2% of its jobs and it took four years to get them back. This time around the U.S. economy has lost more than 5% of its jobs and there is no sign that the bleeding of jobs is going to stop any time soon.

Unemployment funds are running dry

All of this unemployment is putting severe stress on state unemployment funds. At this point, 25 state unemployment insurance funds have gone broke and the Department of Labor estimates that 15 more state unemployment funds will likely go broke within two years and will need massive loans from the federal government just to keep going.

More food stamp recipients every day

37 million Americans now receive food stamps, and the program is expanding at a pace of about 20,000 people a day. The United States of America is very quickly becoming a socialist welfare state

Bankruptcies skyrocketing

The number of Americans who are going broke is staggering. 1.41 million Americans filed for personal bankruptcy in 2009 – a 32 percent increase over 2008.

The decline of the dollar as global reserve currency

For decades, the fact that the U.S. dollar was the reserve currency of the world gave the U.S. financial system an unusual degree of stability. But all of that is changing. Foreign countries are increasingly turning away from the dollar to other currencies. For example, Russia’s central bank announced on Wednesday that it had started buying Canadian dollars in a bid to diversify its foreign exchange reserves.

State and local governments are dead bankrupt

The recent economic downturn has left some localities totally bankrupt. For instance, Jefferson County, Alabama is on the brink of what would be the largest government bankruptcy in the history of the United States – surpassing the 1994 filing by Southern California’s Orange County.

No money for pensions

The U.S. is facing a pension crisis of unprecedented magnitude. Virtually all pension funds in the United States, both private and public, are massively underfunded. With millions of Baby Boomers getting ready to retire, there is simply no way on earth that all of these obligations can be met. Robert Novy-Marx of the University of Chicago and Joshua D. Rauh of Northwestern’s Kellogg School of Management recently calculated the collective unfunded pension liability for all 50 U.S. states for Forbes magazine. So what was the total? 3.2 trillion dollars.

The Social Security & Medicare Crisis

Social Security and Medicare expenses are wildly out of control. Once again, with millions of Baby Boomers now at retirement age there is simply going to be no way to pay all of these retirees what they are owed

Federal debt was already out of control

So will the U.S. government come to the rescue? The U.S. has allowed the total federal debt to balloon by 50% since 2006 to $12.3 trillion……To get an idea of where we are now, just add at least 3 trillion dollars.

Now the debt is a nightmare

So has the U.S. government learned anything from these mistakes? No. In fact, Senate Democrats last week proposed allowing the federal government to borrow an additional $2 trillion to pay its bills, a record increase that would allow the U.S. national debt to reach approximately $14.3 trillion.

Corporate tax revenue is way down

It is going to become even harder for the U.S. government to pay the bills now that tax receipts are falling through the floor. U.S. corporate income tax receipts were down 55% in the year that ended on September 30th, 2009

So where do we get the money?

So where will the U.S. government get the money? From the Federal Reserve of course. The Federal Reserve bought approximately 80 percent of all U.S. Treasury securities issued in 2009. In other words, the U.S. government is now being financed by a massive Ponzi scheme.

Reckless inflation

The reckless expansion of the money supply by the U.S. government and the Federal Reserve is going to end up destroying the U.S. dollar and the value of the remaining collective net worth of all Americans. The more dollars there are, the less each individual dollar is worth. In essence, inflation is like a hidden tax on each dollar that you own. When they flood the economy with money, the value of the money you have in your bank accounts goes down…… What do you think this is going to do to the value of the U.S. dollar?

The day of reckoning is here

When a nation practices evil, there is no way that it is going to be blessed in the long run. The truth is that we have become a nation that is dripping with corruption and wickedness from the top to the bottom. Unless this fundamentally changes, not even the most perfect economic policies in the world are going to do us any good. In the end, you always reap what you sow. The day of reckoning for the U.S. economy is here and it is not going to be pleasant.

Article here with charts:

Is the market on it’s way up? Well, at least for awhile. Here is one of the similar comments I have been hearing lately.

…..stocks were due for a bounce given oversold conditions pointed-out here last week. The sectors most oversold, materials and commodities, rallied most. Monday was a classic short-squeeze under those conditions……The news sparking this reversal was primarily manufacturing data which was better than expected……Monday was the kind of bounce a number of indicators have been promising, especially the NYMO. Now the severe nature of that condition is relieved and we’ll see if bulls can add to it throughout the week. There’s a lot not to like now as the Fed is running out of bullets on its balance sheet. The deficit is staggering in its size…….The government is there are lots more economic data on the way with most beginning on Wednesday and ending with the employment report on Friday. big and it seems reducing it is impossible from a political view. But it must be done. Until then, traders will trade because they must…. by Dave Fry

I have been busy with business all this week so I don’t have much to say. Here is an interesting newsletter from famed Jeremy Grantham who does have something to say.

Jeremy Grantham’s latest quarterly newsletter. Grantham is one of our most respected professional investment managers, with over $100 billion in client assets. Here are excerpts from his latest quarterly letter.

I just returned from a long vacation in Patagonia. I took long hikes that gave me lots of time to think about life and death and Bernanke. It was an ideal time to have an inspiration, and I had one. This is it: sometimes, whatever the situation and however hard you try, you will not have an inspiration! This is not to say that insights are not available, just that someone else is having them. There is always a great temptation to convince yourself that you have an insight, and then to push it. It can be very, very expensive.

It is easy today to be confused, for this is a remarkably complex time. I argued two years ago that we were all part of an elaborate experiment, the inputs to which were completely new. We had an unprecedentedly low risk premium on every asset class and a stew of new and badly understood financial instruments. That was bad enough, but isn’t the picture even more complicated and without precedent now? We have never in our lifetime seen a fi nancial and economic bust such as the one we just had. We have never had two great asset bubbles break in the same decade. We have never wiped out so much wealth in all asset classes as we have this time: $20 trillion at its worst point, on our reckoning. We have never experienced such rapid deterioration in the government’s budget and in the balance sheet of the Fed, nor witnessed such moral hazard, with bailouts flying around like this. What hope do we really have in making accurate predictions of how the world will recover from all of this, and in what ways it will be changed? Very little.

My view of the economy’s future is boringly unchanged: “Seven Lean Years.” I still believe that after the initial kick of the stimulus, we will move into a multi-year headwind as we sort out our extreme imbalances. This is likely to give us below-average GDP growth over seven years and more than our share of below-average profi t margins and P/E ratios, so that it would feel more like the bumpy (bumpy, but not so disastrous) 1970s than the economically lucky 1990s and early 2000s.

But the bigger danger is that once again the Fed is playing with fire!

Whenever the Fed attempts to stimulate the economy by facilitating low rates and rapid money growth, the economy responds. But it does so reluctantly, whereas asset prices respond with enthusiasm. In our studies of the Presidential Cycle we have shown that, historically, where modest Fed stimulus and some moral hazard hardly move the dial on the economy in the third year of the cycle, they push stocks up almost 15% a year above normal and risky stocks even more.

I thought in return for the pain we had all learned some lessons. I was naïve. Congress will probably stay in the pocket of the financial world, and few useful changes will be made. Investors, traditionally reluctant to burn their fi ngers badly twice in a generation, line up to buy risk and bid down spreads as if eager to suffer for a third time in a decade.

Scientists believe that some wild animals that are threatened constantly by predators quickly forget the worst episodes lest they become so completely traumatized that they dare not return to nibbling grass. Normally, investors appear to have longer memories than rabbits, but not this time! And the Fed, having learned nothing, still worships at the Greenspan altar.

So all investors should brace for the chance that speculation will continue for longer than would have seemed remotely possible six months ago. I thought last April that the market (S&P 500) would scoot up to 1000 to 1100 on a typical relief rally. Now it seems likely to go through 1200 and possibly higher. The market, however, is worth only 850 or so; thus, any advance from here will make it once again seriously overpriced, although the high quality component is still relatively cheap. EAFE equities seem a little overpriced, emerging markets more so, and fi xed income seems badly overpriced, especially cash, which is awful.

The real trap here, and a very old one at that, is to be seduced into buying equities because cash is so painful. Equity markets almost always peak when rates are low, so moving in desperation away from low rates into substantially overpriced equities always ends badly. So this is a dilemma. In 2010, value purists will have to struggle increasingly with the Fed’s continued juicing of the markets. In order to control real risk the risk of losing money they will be forced to take the increasing career and business risk of lagging a rising market.

Our choice by no means a “solution” is to only very slightly underweight global equities on the grounds that, when tilted to quality, they are still adequate in terms of return potential. We also have to swallow our distaste for parking the rest in unattractive fi xed income. And if the equity markets are indeed driven higher in the next six months, which, unlike my view of last summer, now looks to be at least 50/50, we will very slowly withdraw equities: eight times bitten, once shy, so to speak, for in these situations we typically beat a much too rapid and enthusiastic retreat. If we do see a substantially higher market in the next few months, we will probably underperform, but likely not by much.

For the longer term, the outperformance of high quality U.S. blue chips compared with the rest of U.S. stocks is, in my opinion, “nearly certain” (which phrase we at GMO traditionally defi ne as more than a 90% probability).

These few paragraphs make a good point. You need to understand what is happening in the markets, do your own work and not believe what others are saying. Most people try to take the easy way out by listening to “experts” and following them. After years of reading what experts have said I have determined that “experts” don’t always tell you the truth or what they are really doing. This shouldn’t be a surprise to anyone. “Experts” are there to make the brokerage houses look good and make you want to join the brokerage house not to give you free advice.

Legg Mason mutual fund manager Bill Miller

……Mathematician Don Saari has noted the tendency for one or two variables to dominate complex systems with many more variables that need to be ordered, to the exclusion of the rest. In the complex adaptive system that is the stock market, that means there will be
dominant narratives that most everyone agrees with and that seem to provide pat explanations for what has happened and predict what’s likely to happen.

Greedy bankers taking outsized risks caused the financial crisis, is an example. Another is that the large U.S. current account deficit, a result of chronic over consumption and under saving, means the U.S. dollar will continue to weaken. Still others are that China and the other emerging economies’ rapid growth will drive commodity prices higher, or that an over-leveraged consumer will lead to a “new normal” of subdued growth and lower-than- expected stock market returns. Finally, the only way out of the immense deficits of the government and the bloated balance sheet of the Fed is through inflation.

These narratives take highly complex, tightly coupled, interdependent systems and collapse them into a simple story that explains and influences behavior. Eyeing the deficits, Marc Faber in Barron’s this weekend concluded, “We are all doomed.” Well, maybe, but probably not this year, which ought to be a good one for stocks.

At LMCM we are no different from others in that we try to understand the environment and make investment decisions based on information, analysis, and judgment. Where we differ, though, is that we don’t make forecasts and conform portfolios to those forecasts, nor do we have theories which tell us what will be, or must be, as a result of what is or
appears to be the case. We are data driven and try to observe and understand what the data seem to indicate, and leave the theories and predictions about what will or must happen to those with privileged access to the future. We do, of course, have beliefs that shape and
influence how we interpret and weight the data, but those beliefs are in the form of provisional hypotheses, constantly subject to reformulation and change as the evidence warrants…..

The question is, what do we do now that the Dow has dropped 550 points? Well, if you look at the numbers that are being churned out by economist we are heading toward a continuation of this recession. But I have never seen a rich economist. I made a “rookie” mistake by believing what friends and the media was telling me about the market and not believing the charts that were in front of me so I took a slight loss over the past three days. The charts and statistics are your real friends they don’t put hope and emotion into their statements.

Here is Jeffrey Saut’s opinion:

Investment Strategy by Jeffrey Saut

……Speaking to the equity markets, for the first time since the March 2009 “lows” he S&P 500 (SPX/1091.76) has experienced three consecutive 1% downside days. The result has left the SPX below its 50-day moving average (1114). It has also left all of the macro sectors pretty oversold and therefore probably set for a rally attempt. That view is buttressed by the fact that the SPX is below its lower Bollinger Band for the first time since November 2008, as can be seen in the nearby chart. However, just like a heart attack patient doesn’t get right up off of the gurney and run the 100-yard dash, we think the equity markets will need time to convalesce after an initial recoil rally. As the Lowry’s service writes, “Attempting to gauge how long a correction might persist, and what losses it might entail, is generally an exercise in futility.” Plainly, we agree and merely hope we will be able to identify when the next rally “leg” begins within this ongoing cyclical bull market…..