No Chicken Little, No.

The sky is not falling. The market is not collapsing, and at this point, I don't think that a double-dip recession is likely. What I do think is that the market is finally starting to show some signs of reality compared to the distortion its been portraying for the past 3-4 months.

While the markets have currently priced-in a "V" shaped recovery - economic data is showing that that isn't the reality. We're in for the consensus-stated and generally accepted for some time now "U" shaped theory. In addition to overly optimistic brokers wanting to make portfolio gains to keep their jobs and clients, the market has been pushed up by a flood of liquidity -- meaning tons of dollars or money chasing assets. Essentially, because of the dollar's decline in value against other curriencies (the euro and the British pound in particular), investors are using US dollars to fund purchases of more expensive assets around the world (mainly commodities like sugar, oil, coffee, etc). The cheap cost of borrowing US dollars allows traders to make greater returns on these commodities. This flooding of liquidity into this area of assets has caused their run-up in value and, partly, the market as a whole. For example, its partly responsible for the rise in gas from $35/barrel to now around $80/barrel.

However, this is not fundamental recovery. This is not a solution to joblessness, low business inventories, state and national deficits, or declining home values. These are all problems that have stabilized but continue to deteriorate and, once they stop deteriorating will take a long time to show any significant improvement.

Corporate earnings for the past 2 quarters have shown strong profits - but as the result of cost-cutting and layoffs, not revenue growth. That was okay for the 2Q of 2009. This quarter it just wasn't enough, which is why we saw positive earnings reports the past two weeks and the market not reacting on them.

Moreover, its the consensus among economists (and the White House itself) that the economic stimulus has made the impact its going to make. Any remaining impact will not be substantial in nature.

So the problem is: what's the good news that will rally the markets? The lack of solutions to the aforementioned problems creates a vaccuum that fosters doubt and fear among investors, especially ones that want to take and protect profits for the year. Moreover, as 2nd derivative economic reportst (such as business inventory build-ups, durable goods orders, consumer confidence, etc) continue to show minimal and modest readings of growth, if any growth, the market will react accordingly. Slowly and hopefully trudging upward --- but in a calm "U" shape... not a "V".

What's the value of the bottom of the "U"? Good question. Maybe a 20% pull back... maybe 900? I'm not sure - I think that you have to read the market momentum and sense when it shifts back to some sense of confidence like its STARTING to shift negative now (especially if the S&P 500 goes below 1050 and closes below 1050, a main support level and the 50 day moving average). But 666 or those levels? No. That was based on the idea that the entire financial industry was going to collapse and alot of stability has been put in place since then.