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The market melted down Monday and melted up Wednesday. What to make of this market action?

I have some good news and bad news for the bulls. The good news is that commodity prices, which is used by my Inflation Deflation Timer Model (pdf) to measure global growth and inflationary expectations, remains in an uptrend and is therefore is at an "inflation" reading. Given this signal, my inner trader remains bullish on the "risk on" trade.

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Secondary indicators bearish

The bad news is my secondary indicators are not confirming the bullish signal. As an example, one of my favorite measures of risk appetite - the ratio of Consumer Discretionary stocks to Consumer Staple stocks - has rolled over indicating that investor risk aversion appears to be ascendant.

Loss of market leadership a concern

This chart shows a pattern of a broken relative uptrend and a downward channel indicating a relative downtrend has begun. The same pattern can be found in a number of market leaders. Consider the chart of Goldman Sachs (GS), for example.

Other market leaders such as Google (GOOG) look positively sick.

To add to my concern, while oil prices as measured by WTI are now above $110, the Dow Jones Transportation Average is not behaving well. The Transports staged a false breakout and is now mired at minor support despite the general market strength Wednesday.

These conditions have made my inner investor extremely cautious and he has already left the bull's party. My inner trader believes in the adage that "tops are made by a process". He is staying at the party for another drink but he is standing at the door (just in case) and relying on the Timer Model to give him the signal to leave.

Source: No Time to Be a Market Hero