Primary Bear Market?

Talk about extreme volatility…

What to make of this market? Traders are getting jerked around like rag dolls here. Over the past month we have struggled to gain any kind of traction. In the past when we have struggled like this, hindsight has shown that we were in a downtrending market during the struggle.

Recognizing the trend when the market is in its initial stages of a downswing is one of the most difficult endeavors in the art of market analysis. We admit, we struggle in this area.

What others are saying:

Don Worden wrote in his report today: ” The market demonstrated overwhelming zeal in delivering its message. No hem-hawing around needed! The practical and safe assumption is that we are in a primary bear market."

The Kirk Report: "Be defensive, hold lots of cash, don't be complacent with your longs, protect your assets, and if you're so inclined, look for strength to short."

Alpha Trends: *summarized* There is a huge battle for control of the trend taking place on the S&P 500. $149 on the SPY is the battle ground.

How the fundamentals come into play:

We are not sure we are in a primary bear market as Worden suggests. Brian at Alpha Trends seems to have pinpointed the situation best when he shows that there is a strong battle taking place for control of the trend. Neither side has taken control yet and the reason why is due to the fact that the market is faced with a new fundamental situation.

The 1/4 point rate cut disappointed the market. There is no doubt about that. The market has determined that the credit crisis will not be eased by such a narrow cut in rates and it has projected that it expects a recession. The Fed, however, has offered up a new approach to the situation. Instead of further rate cuts, the Fed is offering to inject liquidity into the market through other means; means that are as yet untested.

The extreme volatility we are seeing may in fact be a jostling from long to short as Kirk suggests. Or, it could be that the market is trying to factor in the unknowns surrounding Fed liquidity injections.

The bottom line:

As of Tuesday's reaction to the Fed, long side trends are in question. We have continued to see some strength in the strongest sectors, such as Ag Chem, but this strength is not very trustworthy at this point.

Meanwhile, the downtrends in home building, transportation, banking, and retail are showing signs of resumption.

This has been one of the hardest markets to trade in recent memory and holiday factors and the battle for control of the trend that is taking place at this moment don't make things any easier.

It's probably best to be sitting with a good amount of cash on the sideline here and put some money to work on the short side in the downtrending sectors on days of strength.