Looking for more Downside

Yesterday we predicted that “One of these days we will get a 200- 300 point down day in the Dow followed in a few days by another. Headlines everywhere will talk about the Crash of 2009.” Thursday was not it.
 
Thursday started out as though it wanted to make that prediction come true, but by the end of the day, some strength came back in. That said, the market is overbought enough for more than a 1-day correction. We think another leg down to the 1072-1078 area in the S&P 500 is likely, but if it happens, we expect that zone (a gap zone) to hold, for now. We will show a chart of this support area over the weekend.

We are forecasting a period of oscillation, which means a phase in which the market cannot make any real progress, nor is it willing to give up the ghost and fall apart. In our view, the market will probably establish a trading range and the current correction should determine the lower boundary. It will be the area where institutional buyers judge that prices are cheap enough to add to existing positions.
 
When the market heads lower everyone starts looking for reasons. Of course there are plenty, but none of them mattered last week or last month, so why do they suddenly matter now? Our advice: don’t get overly invested in “the story of the market.” Markets are like clouds in which one ‘sees’ things like animals and faces. The images, however, are entirely projected from the mind of the beholder.
 
Stock markets are not driven by yesterday’s news, they are driven by economic expectations. Right now, those expectations are for a recovery that takes the economy back to the 'old normal'.
 
At some point, probably after the first of the year, investors will transition from a focus on earnings produced by austerity measures to a focus on whether companies can actually grow revenues. If we are facing a 'new normal,' i.e., a secular phase in which the U.S. economy gets permanently downsized, then indices will begin a secular decline as well. Right now, another more hopeful tune in still playing.

TRADE NOTES
OVERVIEW: On Thursday the Dow fell 93 points, but selling pressure was relatively light. The odds favor dip buyers coming in, but not before we endure one more down leg. The downside target in the S&P 500 is 1072-1078.