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How Low Can She Go

After months of transition, of watching bear flip to bull, and bulls snorting increasingly confident that we have entered a "new bull market," it would seem the time is ripe to see if they are right. As we have pointed out since the rally turned 1000 on the S&P, the market move has been defined by divergent breadth and decreasing volume. Now, as we vacillate within the range of what could be called the "expected retracement zone," we are seeing increased volume distribution, and some sure-fire warning signals.

We are also getting the timely reinforcement from sober market forecasters such as Jeremy Grantham of GMO, and specific market technicians who simply no longer like the risk/reward of the markets, even if they were bullish on a rally in March (or on Emerging Markets in general). Technically speaking, given the parameters of our old expanding range model, the market has downside to 840-850, whereas few place the upside at more than 1200 on the S&P 500.

Investors should have heeded warnings and turned cautious on the rally at the 50% retracement zone. It seems all too many are eager to forget last year. There are clearly longstanding economic issues facing us that many would prefer to simply turn a blind eye too. Technical damage (if one would call it that) has finally ruptured trends that dated back to the 1980's, and are not going to simply be erased.

For the time being however, if the market is turned back here and bearish sentiment is allowed to return -- perhaps corresponding with a dollar rally, the return of deflationary fears, the rationalization that corporate profits are going to be pinched by a reticent consumer on one hand and rising input costs (raw materials) on the other -- investor sentiment could swing back to an ambivalent level. Assuming an important top is set here, a new range on the S&P 500 could be established between 666 and 1100 (with 850-950 as fair value).