Market Summary

S&P 500 in Head and Shoulders Bearish Pattern, NASDAQ Weakens

The S&P 500 all but completed a bearish head and shoulders top pattern on Friday as it closed at the neckline. Theory (see here) suggests that we can expect a further decline of about 4% from this point but the economic fundamentals (more later) suggest that the bear market decline will be greater than that before we hit bottom.

The NASDAQ may also go on to complete a head and shoulders top pattern but for now it looks like a double top.

Some analysts dismissed Friday's unemployment numbers as being an out-of-trend aberration due to school-leaving teenagers joining the work force but we discount that as seasonal adjustments can account for that kind of event. We find more convincing the idea that more people are looking for work because their finances are being squeezed by higher food and energy costs. We continue to believe that Nouriel Roubini is the most accurate prophet of our economic future:

A contracting economy, falling employment for months now, the worst US housing recession since the Great Depression, collapsing home values, millions of households underwater with an incentive to walk away from their home, a shopped out and saving-less and debt burdened US consumer buffeted by falling home prices, falling HEW, falling stock prices, rising debt servicing ratios, oil at $130 a barrel and gasoline at $4 a gallon, collapsing consumer confidence and falling employment are all taking the toll on the economy, on financial markets, on banks, on the shadow financial system and on money markets and credit markets. We were in the eye of the storm rather than past the storm; and the recent events and developments suggest that the worst is ahead of us, for the economy, for equity markets, for credit markets and for money markets."

Following Friday's debacle, we would normally expect the markets to gap down on Monday. However, nothing is as it seems in the current Lewis Carroll market. Somewhat incredibly Paulson and Bernanke were actually able to talk the dollar up this week, despite downgrades of the monolines and more doubts about Lehman Brothers' liquidity, until reality prevailed. Watch out for Lehman Brothers earnings that are due on Tuesday. Although they deny it, they are rumored to be borrowing heavily from the Fed. 

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No Tip This Week