The rally remains intact after the market has weathered news of mounting unemployment, falling retail sales and the uncertain future of the domestic auto industry. There is good news in that wholesale and gas prices are falling so inflation is not  a concern, but the prospects of a deflationary spiral are becoming more real. During times of deflation what you could buy today will be cheaper tomorrow so consumption and investment falls. Add to that the need to save because of job insecurity and we have the makings of a more severe contraction than we are experiencing already. How much of this is already priced into the markets is difficult to know but we continue to believe the possible returns outweigh the downside risks.

Our market trend model is still showing a downward trend for the five indexes we follow, but by looking at the internals of the model we can see that we are getting closer to a trend reversal.

Technically, we are now in a new bull market because the S&P 500 has risen more than 20% from its lows. The markets want to move higher because there is a lot of cash on the sidelines with almost nowhere else to go to get a positive return. Hence, the bias is for the markets to rise slowly but high levels of uncertainty remain which accounts for the low volume levels we are seeing at the moment. The candlestick pattern for this weeks NASDAQ trading shows this uncertainty precisely with an almost perfectly balanced doji.

Understandably, there have been few breakout attempts lately and even fewer successes due to the low trading volume.