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As of 3:15 p.m. on Friday, we had four factors telling us the odds are increasing for the market to pull back soon (Monday or Tuesday):

FACTOR ONE: RECESSION CALL

The Economic Cycle Research Institute (ECRI) has a very good track record in terms of forecasting economic downturns. You can read the full text of one of their recent press releases here - they sum up the statement this way:

It’s important to understand that recession doesn’t mean a bad economy – we've had that for years now. It means an economy that keeps worsening, because it’s locked into a vicious cycle. It means that the jobless rate, already above 9%, will go much higher, and the federal budget deficit, already above a trillion dollars, will soar.

Here’s what ECRI’s recession call really says: if you think this is a bad economy, you haven’t seen anything yet. And that has profound implications for both Main Street and Wall Street.

The ECRI analysis aligns with our work - stocks and commodities do not perform well in the early stages of a recession. The ECRI outlook also supports our current deflationary and defensive holdings.

FACTOR TWO: RESISTANCE

click to enlarge images

FACTOR THREE: SHORT-TERM BEARISH DIVERGENCES

FACTOR FOUR: VOLUME IS WEAK

With only an hour and a half left of trading on Friday, the lack of conviction behind the intraday moves can be seen in the low volume of the following economically sensitive ETFs: silver (NYSEARCA:SLV), energy (NYSEARCA:XLE), metals & mining (NYSEARCA:XME), natural gas (NYSEARCA:FCG), small caps (NYSEARCA:IWM). If hedge funds and institutions were interested in buying on Friday, the volume numbers below would be at least headed for an average day.

Given the scope of the recent gains, you would expect higher than average volume showing confidence in the economy and “improving” situation in Europe. The volume figures shown below are abnormally low, highlighting concerns about the economy, staying power of the current rally, and situation in Europe.

The limited interest in trading silver (SLV) on Friday and the close of 31.34 leaves the deflationary door open similar to 2008 (see article). According to IBD, the volume during the entire move from the October 4 low has been weak:

But volume faded 3% on the Nasdaq and 14% on the NYSE (was lower on Friday relative to Thursday), according to preliminary data. Nasdaq’s volume hasn’t hit even an average pace since Oct. 5, while the S&P 500’s trading has been below par since Oct. 4.

Could stocks continue to move higher early next week? Sure they could, but Friday’s action clearly shows the short-term momentum to the upside is slowing.

While the current rally has been very impressive, it is not out of character for a typical bear market countertrend move. More upside is quite possible with logical S&P 500 short-term reversal points coming in between Friday’s close of 1,224 and 1,260. We mentioned back on August 12 a bear market rally could revisit 1,260. A move above 1,260, especially for more than two or three days, would put a dent in the bearish case.

We will continue to favor the long-term trends, which remain down, and maintain a deflationary bias with bonds (NYSEARCA:TLT), shorts (NYSEARCA:SH), and the dollar (NYSEARCA:UUP). We will also monitor the markets for a more observable shift to negate the longer-term bearish case. The market is rarely as good (or as bad) as it looks, especially after a vertical rally.

Disclosure: I am long TLT, UUP, SH.

Source: Impressive Rally Showing Signs Of Slowing