Things are a bit anxious in Washington what with the continued FED/AIG /Goldman controversy and with the public’s discontent with politics in general.  We believe that last year’s profits can disappear quickly if this market starts to fall.  Everyone still has somewhat of a bitter taste in their mouth from last year and the memory of those assets lost is not easily forgotten.  Once the serious selling begins, there is a good chance that it will accelerate much faster than it did a year or so ago.  There is little impetus for the market to continue up.  Combine that with the continued tight credit situation, the growing concern for the commercial real estate market and the highest unemployment rate (+10%) since 1983 and we continue to see all the ingredients of a serious pullback.  May take a week, may take 6 more months, but it will occur and it will be rough. 

Truth of the matter is, as good as you might think the market has been, if you invested $100 in the DOW at the beginning of 2008, you would still only have about $75.90 as of Friday.  The NDX was up a whopping 53.5% in 2009 and you would still only have around $83.50 as of Friday.

The State of the Union address apparently did not provide much confidence to the markets with the NDX falling about 4.5% and the S&P falling a little over 2%.  Last week program-trading accounted for 25% of all the trading on the NYSE.  Come to your own conclusion as to whether the major banks and brokerage firms could control or manipulate the market if they wanted to.  The answer is pretty obvious.  Participants in the top ten most active program-trading firms last week include Goldman Sachs, Morgan Stanley, Barclay’s Capital, Deutsche Bank, Credit Suisse, JP Morgan and Merrill Lynch (now a division of Bank of America).  A serious market decline would probably have more effect on government determination to hit the banks with tough regulations right now than any amount of lobbying the banks might do.

Read the following excerpt from John Mauldin’s weekly article:

Perhaps more than anything else, failure to recognize the precariousness and fickleness of confidence - especially in cases in which large short-term debts need to be rolled over continuously-is the key factor that gives rise to the “this-time-is-different” syndrome.  Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang!-confidence collapses, lenders disappear, and a crisis hits.

It is the nature of human beings to assume that the current trend will work out, that things can't really be that bad. Look at the bond markets only a year and then just a few months before World War I. There was no sign of an impending war. Everyone "knew" that cooler heads would prevail.

We can look back now and see where we made mistakes in the current crisis. We actually believed that this time was different, that we had better financial instruments, smarter regulators, and were so, well, modern. Times were different. We knew how to deal with leverage. Borrowing against your home was a good thing. Housing values would always go up. Etc.

Now, there are bullish voices telling us that things are headed back to normal. Mainstream forecasts for GDP growth this year are quite robust, north of 4% for the year, based on evidence from past recoveries. However, the underlying fundamentals of a banking crisis are far different from those of a typical business-cycle recession, as Reinhart and Rogoff's work so clearly reveals. It typically takes years to work off excess leverage in a banking crisis, with unemployment often rising for 4 years running. We will look at the evidence in coming weeks.
The point is that complacency almost always ends suddenly. You just don't slide gradually into a crisis, over years. It happens! All of a sudden there is a trigger event, and it is August of 2008. And the evidence in the book is that things go along fine until there is that crisis of confidence. There is no way to know when it will happen. There is no magic debt level, no magic drop in currencies, no percentage level of fiscal deficits, no single point where we can say "This is it." It is different in different crises.

**John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore

The daily chart’s oscillator has dropped like a lead balloon all the way to the bottom of the chart.  The weekly oscillator turned over two weeks ago and is declining.  The price of the index broke through the support line in the upward channel and could pose a serious problem for technicians.  Remember however, that more often than not, the first break is false, but then the second oneis not. This is the first one.

There is no question that the index is still overbought.  The index has risen very consistently in the face of reality and it is definitely poised for a return to prior levels.  Be cautious with any long positions and keep a stop loss ready and close.  We continue our recommendation of stopping any buys and taking profits at this time.  We therefore recommend sitting in cash or starting to build a position in the inverse funds for the downside move that the charts continue to signal.

The Dow lost -1.04% last week and is down -3.46% YTD.

Same basic commentary as the Dow. 

Like the Dow, the weekly oscillator for the S&P 500 has turned over and is heading down.  The daily oscillator situation is the same as the Dow.  It turned over and had fallen three quarters of the way down the chart and now has bottomed out.

Despite the recent pullback, we continue to feel that the Dow and the S&P are over bought.  We think taking profits here is wise and either sitting in cash or starting to buy the inverse funds in order to profit on the way down is a prudent strategy.  As stated in the Dow commentary, you must be careful as manipulation is at its best right now and the Fed, the politicians, the big brokerage houses, etc., all want investors to feel more secure about the economy and their investments, despite the reality of the situation.  These are powerful sources however, and if they want the market to move up, they have many weapons with which to do it with.

The S&P lost -1.64% last week and is down -3.70% YTD. 

The weekly oscillator has been bouncing along the top of the chart for the last 4 months, but is now falling fast.  The price broke through the old support line of the upward channel last week and now has had a second week below the support line.  As stated above, the first break is many times false, but then after a brief rebound again testing the old support line, the price can continue its downward spiral.

The daily oscillator turned over near the top of the chart and then fell about 60% of the way down the chart and has now bottomed out much like the Dow and the S&P.  The end result is that the index is pretty much the same place where it was 3 months ago.  This pattern continues to not be a positive for the long side.  A decent fall in the NDX would be healthy for the market as the NDX has risen an incredible +63.5% since its low on March 6th.

Be cautious and patient and take profits at this time.  

The NDX lost -3.00% last week and is down -6.41% YTD.

The weekly oscillator continues to bounce along the top ¼ of the chart.  The price has been clinging to the old support line for the past 3 months and we have said if it breaks, some technicians may switch over to the downside. 

Last week the price broke below the old support line and this week it fell further below it.  The daily oscillator has fallen about half way down the chart and now has bottomed out much like the other indices.  The price on a daily chart had also been hugging the old support line but now has fallen dramatically below the old support line.

The price has been below the “support line” since so be careful.  The basic indicators are telling us from the weekly chart to take profits and to begin to purchase a base interest in the inverse funds. 

The Russell lost – 2.44% last week and is down -3.73% YTD.